Contract Termination Overview
Terminating a contract is one of the most common and important responsibilities faced by attorneys and their business clients. It is critical that notices of termination and related documents be clearly written and legally sound. For that reason, the following FAQs about termination are provided to help facilitate the completion of this necessary task.
Q: What does the term "contract termination" mean?
A "contract termination" has a specific meaning under certain laws that regulate the performance of contracts. At its most general level, it refers to the process of ending a contract prior to its completion or expiration.
Q: Why is it important to properly perform contract terminations?
Contract terminations may have a material impact on both the legal and financial interests of a business. If not performed correctly , it can expose a company to liability for breach of contract and lead to exposure on other costs, including:
Q: What are the requirements for contract terminations?
The usual requirement for a proper contract termination is a written "notice of termination for cause" (or similar term) that describes the reasons for the termination and establishes the date when the contract will exhibit expiration. Different states and types of contracts may have different requirements for a valid termination, and corporations are often held to higher standards than other types of businesses. Therefore, it is recommended that an attorney be retained to prepare a notice of termination and other required documents.
Core Components of that Cessation of Contract
A notice of termination is a written document that communicates either:
(a) an intention by the party to whom the obligation to render the material or service is due to terminate the contract and/or order (i.e. the principal); or
(b) a like-intention by the party who has undertaken that obligation (i.e. the contractor).
There are certain elements, which require careful consideration when drafting the notice, to ensure that there is no confusion as to against whom the notice is directed, the basis for the notice and the applicable date of termination. Failure to provide any one of these elements may result in litigation.
Key elements include:
(a) Specific reference to the contract, order or other document that is being cancelled.
(b) Parties. The party issuing the notice and the party the notice is directed to must be both clearly identified within the notice.
(c) Date. The effective date of the cancellation; unless otherwise qualified within the context of the contract, order or other document referenced above, the date of cancellation is the date the notice is served.
(d) Reason. The contract, order or other document may be terminated for convenience or default. The basis of the termination should be clearly identified within the notice.
Circumstances for Terminating Contract
Terminating a contract can happen in several ways and can be initiated by either party. The most important thing to remember is that contractual obligations must be honored even if only one side wishes to prematurely terminate the contract. Until the notice of termination is received, you retain full contractual rights and obligations.
Breach of Contract
The most common reason a contract is terminated is as a result of one party’s failure to adhere to its terms and conditions. Typically this is alleged by the non-breaching party against the party who, it believes, breached the contact.
Mutual Agreement
In some cases, both parties will agree to terminate a contract. This is the preferred method as it ensures that all parties have a clear understanding of what is going to happen moving forward.
Fulfillment of Terms
Perhaps the work described in the contract has been completed. This is another reason that a contract can come to a close without any alarms being set off.
Termination for Convenience
Depending on the specifics of the contract, you may be able to avoid contractual obligations by terminating for convenience. This is a unilateral termination made at will, usually by a letter to the other party.
Reaching a Certain Date
Sometimes a contract is set for a particular end date. When the date is reached, the parties no longer have obligations to each other.
With a contractual relationship, someone has to be willing to walk away when the contractual relationship is terminated. However, until a notice of termination has been received and acknowledged, you have to comply with terms included in the contract. Failure to do so is likely to result in the necessity of the other party filing suit for damages.
Drafting a Notice of Contract Termination
For the drafting of a notice of termination to be effective, it must contain certain information. This information required is based on both contractual obligations and statutory minimums.
As concerns the contractual obligations, a notice of termination should set out:
- The type of termination: The notice should specify if it is a notice of (immediate) termination of the contract, or if it is a notice of expiry of the contract after expiration of a notice period. Notice periods are usually prescribed in the contract; in case the contract does not provide for notice periods, they can be determined based on statutory provisions.
- The timing of termination: For a notice of immediate termination, the reference date generally will be the date of receipt of the notice by the other party. For a notice of expiry of the contract, the specific date should be mentioned.
- The reason(s) for termination: In absence of a contractual stipulation, the reason(s) for termination usually will not be required to be stated.
As concerns the statutory obligations, a notice of termination should answer following questions:
1) Who has sent the notice (a company or a natural person) and who they are authorized to send the notice (a board member or an employee).
2) Whether the person sending the notice represents a legal person, other special regulations apply. For instance, if the termination has any financial consequences for the employer, the consent of a supervisory board or works council may be required.
Template: Notice of Termination of Agreement
To give you a better idea of what the termination process involves, here’s an example of a notice of termination. The notice below is for a private contract, in which an individual submitted a letter to terminate the agreement with a flooring company. Note: Be sure to edit and update these details according to your specific contract and situation.
[Insert Sender’s Name][Insert Sender’s Address][Insert Sender’s Date]
[Insert Recipient’s Name]
[Insert Recipient’s Address]
Dear [Insert Recipient’s Name] ,
I am writing to formally notify you that I wish to terminate our recent contract for [Description of Contract]. I am terminating this contract under clause [Insert Clause Number] within the contract.
I have enclosed documents supporting my reason to invoke the clause and terminate this contract. I request that you confirm this receipt and document my reasons for terminating the contract. I appreciate your cooperation in this matter and look forward to your response.
Sincerely,
[Insert Sender’s Name]
Enclosures: [List of Enclosures]
Legal Aspects and Adherence
The legal requirements around notices of termination vary, often depending on the particularities of the contract in question, the jurisdiction, and the potential legal consequences of issuing an invalid notice. As a practical matter, a notice of termination can be sent before the end of the contract term. However, it is essential to review whether any additional requirements need to be satisfied prior to termination, such as the provisions of any applicable termination notice period or the obtaining of any necessary waivers of exclusivity granted to the other party. Proper consideration of these provisions at the outset of a contract will significantly reduce the risk of having to deal with significant business interruptions or legal disputes.
Additionally, it is important to remember that issuing a notice of termination, whether rightly or wrongly, can give rise to a number of claims and associated liabilities under the contract or under applicable laws. Even with contractual termination provisions, depending on the circumstances, a non-defaulting party can sue for lost future profits, wrongful dismissal, damages, mitigation requirements, etc. Absent a valid termination clause, a party that terminates a contract without sufficient cause may not only be required to provide reasonable notice of termination, but also to justify its reasons for doing so. Depending on the circumstances, this can involve more than simply notifying the counterparty the contract is being terminated. The failure to provide sufficient notice and justification across all jurisdictions can expose a terminating party to uncertain and potentially significant liability.
Informing the Other Party of Termination
Once the decision to issue a notice of termination has been made, whether unilateral or mutual, thought should go into communication of the notice. A notice of termination is not a mere administrative step; it is a message which communicates to the other party the fact that the contract is coming to an end and can also preemptively manage their response to the termination. It conveys the message that, on the basis of the contract and the circumstances of the contracting parties, no further contractual relationship should be expected between them after the notice period expires. Whether the notice is sent unilaterally or by agreement between the parties, it is important to consider the possible effects of the notice itself. In the case of a one-sided termination, there is always a risk of causing friction (or outright antagonism) between the parties to the contract if the notice is not correctly received. The risk is significantly mitigated where the parties mutually agree to the termination and give a notice together. However, even in the case of mutual termination, excessive emphasis on the contract being at an end can be counterproductive. Efforts should be made to keep the language of the notice as neutral as possible, from the outset, to avoid inevitably awkward conversations on the last days (or even hours) of the contract. In the process of giving notice, it may become apparent that one of the parties has moved on without telling the other. The parties should be calm and collected about this, as the obvious underlying message may be upsetting to some. Sensible minds should prevail; both parties should have the same priority: cutting all contact with each other while respecting the contract terms.
Terminating Contract FAQ
"The contract doesn’t terminate itself right?"
"There’s a contractual obligation, isn’t it?"
"Can I terminate the contract even though that’s not the other party’s fault?"
"I need to give the other party a prior notice to terminate a contract , is that correct?"
"What do I do if I receive a notice of termination of contract?"
"The contract doesn’t say anything about damages for breach of contract. Can I still claim them?"
"The other party seems to have breached the contract. Can I terminate the contract?"
"The other party has breached the contract. Do I have to go to court if I wish to terminate it?"
"Are there any requirements for terminating a contract?"
"What needs to be mentioned in a notice of termination of contract?"
"What do I do if I receive an inadequate notice of termination of contract?"
"Do I need one month’s notice to terminate the lease for my apartment?"
"Are there any grounds for demanding damages for breach of contract?"
"There was no contractual penalty for breach of contract. Do I still have the right to seek damages for breach of contract?"
"The other party has not complied with the contract. Do I have the right to terminate it?"
"The other party does not wish the contract to be terminated. Does that prevent me from terminating the contract?"