What is a Termination Letter?
A termination letter is a formal, legal document that ends a contract between parties. It is an important aspect of contract formation and closeout since it is how it is only through a termination letter that all parties are formally notified to what extent the contract has been terminated and to what extent the contract still exists. For example, in the case of a "Termination for Convenience," the contract is generally terminated at the time when the notice is sent. However, in the case of a "Termination for Default," there is usually a period of time beforehand in which the contractor has the right to "cure" and "mitigate." In those instances, it is essential that both parties understand when the contract is terminated and whether there are obligations that will survive past the termination date .
As such, a termination letter should be clear and unambiguous regarding: (i) the contract that is being terminated, (ii) the reasons for the termination, and (iii) the date the termination is effective. The last item, the effective date, may vary depending on whether the termination is a termination for convenience, a termination for default, or a termination by mutual consent. Other items that may be included in a termination letter are: (i) description of the contract at issue; (ii) a statement of the specific default(s); (iii) a reference to any and all clauses or statutes that give rise to the termination; (iv) the effective date of the termination; (v) whether the default(s) can be cured and thereby the contract avoided; (vi) any obligations that are to survive the termination; (vii) the process through which the contract closeout will proceed; and (viii) a clearly drafted release clause that addresses: (a) what will be released and when; and (b) future claims.
Types of Contract Termination Letters
Three major categories of termination letters exist for terminating a contract: mutual termination letter; termination for cause letter; and termination for convenience.
Mutual Termination: For multiple year contracts, the parties may agree to the mutual termination of the contract. In many cases, when the parties have performed under the contract for some time, matters will have developed that have caused each party to want to sever the relationship. An example of mutual termination can occur when the parties realize that the venture is no longer viable, or the parties are in disagreement over how the relationship should be conducted. The mutual termination letter should be negotiated by the parties and the terms should be clear with respect to the scope and timing of the termination.
Termination for Cause: A termination for cause letter is a letter that one party sends to the other party advising the other party of a default or an excuse for not having performed under the contract and advising the other party that all or part of the contract is being terminated. Many contracts have a default provision that provides a procedure for termination for default and then provides a time period for the defaulting party to cure the default. Both the default provision and the termination for cause letter should be reviewed and analyzed carefully to determine if the proper notice and cure periods are present. Without a properly worded default provision and a properly worded and timed termination for cause letter, the party claiming a default and trying to terminate for that default may find the effort to terminate will be ineffective and could be a material breach of contract if the other party materially complied with the contract.
Termination for Convenience: Many contracts have a termination for convenience clause. Basically, a termination for convenience clause allows a party to unilaterally terminate the contract without giving any cause or justification. Essentially the contract can be terminated for no reason at all.
Legal Considerations for a Termination Letter
Deciding upon a termination letter requires that you consider what types of statutory provisions may affect your decision. Any contract may contain implied or explicit terms covering termination rights and the consequences of termination. It is therefore important to establish early in the termination process whether your proposed actions will meet any contractual requirements.
For example, you may have a contractual obligation to give a minimum period of notice before the termination will take effect, or the contract may contain an express termination clause which sets out the exceptions to the right of your company to terminate. You should also check if your contract of employment references ACAS Codes of Practice. If your contract does not refer to the Codes, then it may be prudent to conduct yourself in a way which demonstrates that your organisation has followed an ACAS Code of Practice, whether or not your contract refers to it expressly.
Some common issues to consider when drafting are:
Ultimately, when it comes to determining the process or procedure to follow, and making the decision as to how to develop a letter of termination, you should always refer back to the above.
Termination Letter Structure
While there is no "one size fits all" approach to writing a termination letter, there are some universally important elements of a termination letter which, if followed, will ensure that the termination letter is lawful and is less likely to expose residual legal liability. A termination letter should be structured to include the following, or something similar:
· Introductory language. As stated above, you should always start a termination letter with an introductory statement, such as: "This letter is to notify you that your employment with [name of company] is terminated effective as of [date]."
· Agreed upon reasons for termination. It is generally a good idea to reiterate the reasons for the termination as agreed to verbally or in writing with the individual, especially if those reasons are not exactly the same as those stated in a letter of reprimand or other disciplinary letter. Be careful that you do not use this section to contradict your earlier position and/or to provide the individual with information supporting his or her claim of discrimination or retaliation, if that exists. However, if the individual’s job performance was poor, you should state that the poor performance led to the termination.
· Effective date. As with a resignation, it is generally preferable to set the effective date at a greater period of time than the employee actually works. For example, you could legally say that the individual was working through December 31, 2008, but actually terminate his or her employment on August 1, 2008. In this case, the immediate impact of the termination may be softened. With a resignation, it is generally advisable to make the last day worked be the last day the individual can enter the building, so there is no confusion about which date is the actual last day worked or the start of the individual’s constructive discharge.
· Notice period. Depending on the circumstances and the sensitivity of the individual, it may be useful to provide the individual with advance notice that his or her position has been terminated. This should only be done if it is otherwise consistent with the decision to terminate, however. For example, avoid telling a high-performing individual that his or her position is being eliminated and the termination is effective in six weeks with full pay. At that point, you run the risk that the individual will relax his or her performance and be unproductive in the final weeks of employment.
· Severance. If you are terminating the individual in exchange for a severance package, such as a severance of more than what the law requires (e.g., laid off due to a reduction-in-force), you should state the severance amount as being contingent upon execution of a separation agreement and general release, unless the release is a required term of the collective bargaining agreement.
Avoiding Common Errors
When dealing with cancellation of contracts I’ve reviewed several letters that have been poorly drafted or simply lacking in the detail necessary to accomplish the task at hand. A few examples of these errors include:
- Parties incorrectly believing oral termination is sufficient.
- Relying on a 3rd party to provide a termination notice.
- Not sending by post and email, and some people only rely on email without using other forms of sending.
- Termination has to take place while contract is still active.
- Assuming you can get away with something for a breach of contract.
- Not providing exact dates for termination to take place .
- Not sending first legal notice letter to end contract or not even sending one at all.
- Terminations that are legally unenforceable without going through proper legal channels.
- Not following company or local courts policy or procedures.
Terminations need to happen while contract is active. Writing cancellation letter also needs to be worded precisely. Breach of contract also can be used for significant delays in payments or just a lack of response to letters sent. The failure to provide by contract terminologies too can lead to a termination that is also required on the legal aspect.
Termination Letter Sample
Dear [Contractor’s Name/Service Provider’s Name / Supplier’s Name / Employee’s Name/etc.],
We refer to our agreement dated [insert date of the agreement] concerning [insert brief description of the subject matter of the agreement such as the supply of services or goods, employment relationship or, as the case may be, any other contract]. We confirm that this letter serves as [a notice to terminate / a notice of intent to terminate] the agreement as of [insert the date of termination as may be required under the agreement or the law applicable to the agreement, or state that the applicable notice period set out in the agreement has expired].
We reserve our rights under the agreement and at law, including without limitation our right to assert any claims we may have against you.
We would like to take this opportunity to thank you for the [insert brief description of the services or goods you have supplied or provided to the other party or, as the case may be, any other contractual matter] for and on behalf of [insert relevant name], and wish you all the best in the future.
Yours sincerely,
[Insert signature]
[Insert name of signatory]
[Insert title of signatory]
Binding Obligations After a Termination
Many contracts do not simply terminate with no further obligations applying. Common obligations after termination include: Final payment – where a contract consists of the provision of goods or services, there may be an obligation to make a final payment for those goods or services, or refund any pre-payments made. Returning property – the parties may be required to return or account for any property they received from the other party. Confidentiality – the duty of confidentiality may still apply after termination in relation to any confidential information received by one party in the course of the contract. Return of documents containing confidential information – even if there is no duty of confidentiality, the party receiving the information may be required to return that information to the disclosing party or destroy copies of it. Return of company property – where an employer-employee relationship exists or intellectual property has been provided, the contract may require either or both parties to return copies of it or destroy it. Indemnities – indemnities that survive termination of a contract will be enforceable and will generally relate to actions, claims or damages arising prior to termination. Restrictive covenants – post termination restrictive covenants, such as non-compete or non-solicit covenants, may be enforceable by injunction or damages.
Frequently Asked Questions on Termination
How much notice do I need to give?
The correct amount of notice required from either you or the other party is usually set out in the contract. If it is not, there are a few options. If you properly end the contract by performing your obligations under the contract, for example, providing the person with the goods, or managing the contract for the specified time, and then provide the person with written notice that the contract is at an end, you will have let them know you are no longer party to the contract or arrangement.
The normal rule, though, is that unless the contract says otherwise, you must give reasonable notice. This can be quite a tricky thing to determine. The backdrop is a 1956 case where the person giving notice didn’t give sufficient notice effectively to cancel rental agreement. The court said "under the statute of the contract, we consider that what is reasonable notice is a question of fact and not of law."
In other words, the circumstances of each case give rise to different requirements as to notice. As a general guide, a court or tribunal saying what constitutes reasonable notice would have regard to:
In your situation, think of how much notice you would want to receive if you were in the position of the person you want to cancel the contract with, what period of time they would reasonably want to make alternative arrangements and what would be fair in the circumstances .
What if I have already paid money?
You may have a right to get the money back.
If you have given that person a deposit, you need to check what the contract says about returning the deposit upon termination. Once the contract terminates, you may have a right to terminate the contract, which means you can ask for the deposit to be returned. The unusual aspect of this is that giving notice of termination does not mean the contract is over. The contract ends only when the time for which the original contract was entered into has expired, so you might be required to still pay for goods or services under the rest of the contract period. You may be entitled to set off the deposit against the amounts you owe the other person under the contract. However, there are many factors which govern whether or not you are required to pay a sum of money at the time of termination. It’s better to get some advice before taking action.
There may also be some circumstances where the other person must return the money to you rather than you returning the money to them. But for sales of goods, once the contract is over, you can’t require the person to return the money to you. You are simply regarded as obtaining the benefit you intended to obtain from entering the contract in the first place.
What if the contract is part of something larger?
This is a tricky area. The answer is likely to rely on the circumstances of the matter, but one possibility is that you can end the entire contract.