Effective Contract Termination: Guidelines for Writing a Termination Letter

Understanding Contract Termination

The act of terminating a contract is essentially the legal process of bringing that contract to an end. This is usually done when one or more parties believe that the terms of the contract are not being met, either implicitly or explicitly. In theory, a contract termination should be as simple as one party stating that they are no longer entering into the contract. However, in practice, the process tends to be convoluted due to underlying conditions. This is why it is crucial to understand the legal reasons to terminate a contract.
A breach of contract is a typical reason for termination, where one party will not meet the requirements outlined in the terms. When this is the case, the other party will have to determine whether the offending party should be given an opportunity to rectify the situation or if they are entitled to damages due to the breach. For example, if party A agrees to use party B’s plumbing services and provides them with an advance payment, but party B fails to show up to provide the services, party A can either demand a refund or proceed with a breach of contract case to receive compensation for the services failing to be rendered. It is common for the party in A’s position to prefer the former option since they seek to receive services from the party they originally entered into a contract with. However, there could be circumstances where party A would rather seek damages so they can use the funds to retain a different plumbing service.
A contract termination is also common in the event that the one party fails to pay fees or meet other conditions. For example , a contract termination could be issued as a result of delayed payments, lack of communication, or repeated failure to meet deadlines. In these types of circumstances, it does not matter whether or not payment or communication from the other party is still being rendered. What matters is that deadlines and obligations are not being met. These are the conditions which will allow one party to end a contract objectively.
Terminating a contract without a legal basis pretext can still lead to possible legal ramifications, including lawsuits from the other party to claim damages. Parties also typically agree to performance requirements; once the contract is signed, those requirements typically must be met. For example, a lawyer or other professional legally agrees to render services, and if they fail to do so satisfactorily, their certificate could be revoked, they could face other disciplinary action or otherwise be held liable for the services not rendered. Of course, the damages which could be claimed by the harmed party depend on a variety of factors, such as whether any compensation is explicitly identified in the terms, whether there were damages, how long the contract was originally intended to last, etc. The court will use all of this information to determine what amount of damages are warranted, if any.
For any termination, it is ideal to clearly indicate why the contract is being terminated in a well-written letter to avoid any confusion about the purpose. It is likewise advised to seek legal counsel to assist you in crafting an appropriate termination request, or to help you respond to a termination request that you may receive.

Key Components of a Termination Letter

A well-crafted termination letter contains essential elements that must be addressed. It must unequivocally express the intent to remove the subject from the agreement, and make clear that all obligations under the contract have now been severed. The language used should be straightforward and concise, avoiding legalese to the extent possible. While the tone should be diplomatic in most cases, it also must be firm. As with other legal communication, a Court will often look to the purpose behind a termination letter in determining whether the termination was justified; if it detects animus or malice, or finds that a party lacked an adequate reason for terminating the agreement, it may give a party a second bite at the apple. Therefore, the tone of a termination letter tends to be objective rather than personal. Finally, insurance producers and other entities must be mindful of any required information or notice in the letter. For example, if a contract requires the sender to inform the recipient about a right to cure any alleged contract deficiencies before an agreement can be terminated, the letter must include that information (or the recipient may claim the termination was improper).

Step-by Step: How to Write a Termination Letter

Developing a contract termination letter is a significant step toward a more expedient conclusion to your contract. It can be very beneficial to follow a disciplined process to avoid overlooking the details that can lead to errors that prolong your ability to conclude the contract and may even lead to further damages.
Gather Documents
When you develop a contract termination letter, it’s critical to have all relevant documents on hand so that you can review them while drafting the document. When you have all the relevant documents easily accessible it makes it much easier to craft a comprehensive and persuasive document that helps you to terminate your contract without creating unnecessary conflicts or resulting disputes.
Identify the Reason for Termination
It’s always important to have a clear understanding of the reason for your contract termination. Once you have determined the reason it will be much easier to enlist the help of legal counsel who can help develop a strong termination letter that confidently ends your contract and prevents further conflict. There are many reasons for terminating a contract, some of the more common reasons include:
Outline the Contract Terms
Once you have access to the relevant documents and fully understand the reason behind your contract termination it’s time to draft an outline of the contract terms. The outline will give you an unambiguous and precise understanding of the contract and the termination letter’s required terms. Your outline should include information about the signers and dates, payment terms, warranties, duration, and any additional clauses. This outline may then be customized and developed into a strong contract termination letter by legal professionals.
Draft a Contract Termination Letter
Your first draft is not likely to be the final draft, but it can help you to understand any weaknesses in your letter and make adjustments before anyone else sees it. It’s critical that your letter is typed up and delivered by certified mail so there will be a record of its delivery and when it was sent out.
Get Legal Help
In most cases, the process of creating an effective contract termination letter requires the assistance of an experienced attorney unless you have clearly defined procedures for the termination of contracts. Make sure you receive help from a qualified and knowledgeable attorney to ensure that your letter is effective and does not cause any further problems.

Legal Requirements and Compliance

The legal considerations for a contract termination letter are necessary for the protection of both contracting parties. The first item to consider is whether termination is even allowed under the agreement. Multiple terms in a contract could include grounds for termination. For example, you might be able to terminate on notice and without cause or you could only terminate for cause. If you can only terminate for cause, make sure it exists before writing the letter. Additionally, provisions could be violated prior to the termination date that would allow you to terminate. In any case, read the agreement; even if you believe you have grounds to terminate, you should not proceed until after reading the contract.
Next, the termination letter needs to comply with the notice requirements contained in the contract. Most agreements contain a provision regarding notice. This provision may state how the notice must be given (letter vs. e-mail) and how far in advance you need to send the termination letter. Below, we will take a closer look at how these provisions will likely read; however, the important thing to remember is that compliance is a must. You cannot save yourself by saying the termination letter had the same effect as complying with the notice requirements.
In most agreements, the termination letter must be sent a designated period of time before the end of the agreement. Even if you are terminating without cause, read the contract carefully to determine if a notice period exists. If it does, follow the termination and notice requirements contained in the contract, or you may find yourself defending a breach of contract claim. In most cases, the notice under the contract will simply be "X days" prior to the termination date. A few contracts may have more detailed termination notice requirements. For example, some agreements contain specific instructions on how the notice must be sent (i.e., it must be sent as certified mail). Some contracts may require an executable copy of the termination form to be returned in conjunction with regular notice provisions.
The termination letter must generally provide the grounds for the termination. Omission of this important aspect of the termination letter may be construed as a waiver of the ground for the termination. Accordingly, the letter should clearly provide the reason for the termination.
If the contract in question refers to a force majeure event, a termination letter may be sent to avoid breach that might otherwise occur. If your business is not functioning and there is widespread impact on the business world related to an influx of short-term workers, you should send a force majeure termination letter.

Best Practices: Formality and Tone

Keep a Professional Tone and Be Clear
Always remain on point, do not add emotional language of any sort. Be very clear and specific as to reason for the termination . It is best to get directly to the point and not beat around the bush. Remember the goal is to terminate your agreement without any issues.

A Sample of a Termination Letter

Dear [recipient name]:
Per your contract dated [insert date of agreement] and the grounds for termination set forth therein, this letter serves as formal notice that the [services provided, or items made, or both] covered under the terms of our agreement and under the laws of the State of [name of state], is hereby terminated.
Please ensure that all [time-sensitive or important conditions or items, such as, "any shipments of parts" or "any late payments"] are provided to us on or before (date).
Unless otherwise specified in our [agreement or contract], no additional action will be required by either party.
Best regards,
[Your name]
[Your position]
[Your company]
[Contact information]

Common Errors to Avoid

In a previous post, we highlighted some of the right ways to write a termination letter. In this post, we’ll do the opposite. While it could be argued that almost every termination letter is a "bad" termination letter, even the good ones have their shortcomings. The most common mistakes found in termination letters are:
Timing Issues Many employers don’t have a uniform termination time. Instead, they have employees clock in and out at certain times. As a result, many termination letters will have the wrong termination date or time listed. Employers should take care to enter the correct time, and time zone when necessary, on their termination letters. A helpful practice is to have an HR representative block out a certain amount of time each month to voluntarily check the employee’s records. If an employer terminates an employee at 11 p.m., but the letter states that the termination occurred at 5 p.m., there is a problem. The difference of just a few hours could have a major impact on unemployment benefits, last paychecks, and health care coverage. Also, check the postmark date on termination letters that are mailed from the employer. Rarely, do employees open their mail immediately. If an employer gives an employee 14 days to find a new job, and the termination letter is not postmarked until 14 days after the termination date, then the termination letter will be potential evidence in an unemployment claim or lawsuit. For failure to pay overtime claims , you need to check to ensure the termination date is on the date shown on the payroll records. If an employer terminates the employee on August 5 but the payroll records show August 8, then you need to change your termination date or modify your records. Otherwise, you’ll have a clear basis for a lengthy penalty period.
Neglected Clauses Although most employers know to pay wages through the end of the pay period, many forget to pay for the date of termination. While California law is forgiving on this point — an employer can pay through the date of termination, through the next day if the employee requests, and pay for the full month if fired on the last working day of the month — Washington does not have similar provisions. The failure to pay through the termination date will likely be a violation of wage claim laws, the penalty for which increases over time.
Doing a Termination Without Recording It, Including Union Negotiations Too often, an employer lists too many facts in a termination letter. The recommended practice is to provide the date of termination, details regarding final pay, and unique information related to the employee’s circumstances. If an employee requests more facts or an explanation, the employer should provide that information in a separate document. For example, if the termination letter refers to a grievance, it should not summarize the grievance negotiations. These four mistakes are not exhaustive. Rather, these mistakes are just a few that are commonly found in termination letters.