Contract Termination Letter

A contract is a legally enforceable agreement between two parties for goods or services. Contracts can be oral or written, although it is generally recommended that contracts be in writing, and are signed by both parties.

A contract is formed when there is an offer to do something, acceptance of that offer, and consideration. Consideration is the agreed upon exchange between the parties. An example of this would be how when a person contracts with a carpenter to build a bed, the carpenter builds a bed in exchange for payment at the agreed upon price.

Once the parties have come to an agreement regarding the terms of the contract, they are both legally obligated to fulfill their obligations as detailed in the contract. If they fail to do so, they have breached the contract, and can be held liable in a court of law.

Terminating a contract refers to legally ending the contract before both parties have fulfilled their obligations under the terms of the contract. When and how the contract is terminated will largely determine whether either party has any liability for breach of the contract before it was terminated. After a contract is terminated, the parties to the contract do not have any future obligations to each other. However, the terms of the contract might also determine what happens after the contract is terminated.

In the absence of language in the contract clarifying what will happen if the contract is terminated, the parties have the option to seek a legal remedy for any breach. Examples include:

• Monetary Damages: Compensatory damages are awarded in an attempt to put the innocent party in the position they would have been in if the contract had been performed. This generally means awarding the innocent party an amount of money that gives them the “benefit of the bargain,” or allows them to enter into an agreement with someone else for the same service. Punitive damages might be awarded in order to punish the breaching party, but they are much less common;
• Restitution: Restitution is intended to put the innocent party in the position that they were in before they entered into the contract. The court considers what the party who breached the contract gained prior to the breach, and orders it returned to the other party. In the previous example in which a customer enters into a contract with a carpenter to build a bed, after the carpenter builds the bed, the customer refuses to pay and breaches the contract. Restitution would require the customer to return the bed to the carpenter; and
• Specific Performance: If monetary damages are insufficient to compensate the innocent party, the court may order specific performance. The breaching party would be required to perform their obligations under the contract, or else face contempt of court charges. However, specific performance is rarely awarded for breach of contract, unless the subject of the contract was so rare or unique that no amount of compensatory damages could put the innocent party in the position that they would have been in had there been no breach.

Are Contract Termination Letters Legally Enforceable?

A contract termination letter, or “termination of contract” letter, effectively ends a contract agreement. They can be made for several different types of contracts, including:

• Employment contracts;
• Sales contracts; and
• Construction contracts.

They are intended to help the parties avoid situations involving breach of contract. In order to be enforceable, contract termination letters must follow the requirements of contract laws as stated by the laws in the area. Additionally, the contract termination letter should follow the termination requirements as stated in the original contract, when such exist. In many cases, the contract termination is treated as if it were a new contract, and as such should be executed with all the proper contract formalities.

Generally speaking, contract termination letters will contain the following vital pieces of information:

• Names, contact info, and relationships of all the parties involved in both the original contract and the termination;
• Terms and conditions of the original contract as they associate with contract termination;
• The basis on which the contract is being terminated, such as fraud, mistake, misrepresentation, impossibility, prior agreement, etc.;
• Issues involving monetary compensation or penalties for early termination of a contract;
• Confirmation that all parties were notified of the termination; and
• Important dates, such as the date of the original contract, dates for performance, and dates associated with the termination agreement.

In general, it is best if an attorney drafts and reviews the contract termination, so that the parties can be assured that the document follows contract laws and does not violate any provisions in the original contract.

When Can You Terminate A Contract?

Parties to a contract can legally terminate their agreement in the following circumstances:

• Impossibility of Performance: If it is impossible for one or both parties to fulfill their obligations, the contract can be terminated. It must be impossible for anyone to perform, which is called objective impossibility; as such, if someone else could perform the duties in the contract, there is no impossibility. An example of impossibility of performance would be when someone has agreed to paint a house, but the house burned down before it could be painted;
• Fraud, Misrepresentation, or Mistake: If the contract was formed under circumstances that constitute fraud, misrepresentation, or mistake, the contract can be terminated. There could not have been a “meeting of the minds” regarding the terms of the contract, which is required for a contract to be legally enforceable, because the true facts were not known to the parties;
• Illegality: The subject of the contract may become illegal because a law was passed after the contract was formed. This “supervening illegality” means that the contract cannot be legally performed, and as such can be terminated;
• Breach of Contract: Under the terms of any contract, both parties have an obligation to perform according to the contract. When one party fails to perform, blocks the other party from performing, or otherwise violates the terms of the contract without a legal justification, they have breached the contract and the contract can be terminated. The non-breaching party can pursue a claim for damages caused by the breach, as was previously mentioned; and/or
• Prior Agreement: The parties may agree to allow termination under certain specific circumstances; however, those specific conditions must exist, or else there is a breach of the contract. This prior agreement is known as a termination clause and is enforceable so long as both parties agree to its terms.

What Else Should I Know About Contract Termination?

The first step in terminating a contract should be to check the contract for a termination clause. In addition to including the potential reasons why either party can terminate their agreement, it should include instructions for how to notify the other party that you wish to end the contract.

The contract could detail how and when notice must be given. An example of this would be how a contract with a termination clause could state that the agreement can be terminated by either party, in writing, within seven days of signing the contract.

Generally speaking, notice to terminate a contract should always be in writing. Any conversation associated with terminating the contract in person or over the phone should be followed up in writing. Additionally, you should always check the contract for instructions, including where and to whom to send the notice.

Rescission is the legal term for canceling or overturning a contract where there has been:

• Fraud;
• Misrepresentation;
• Mistake;
• Duress; and/or
• Undue influence.

Rescission essentially voids the contract from the beginning, while termination means that the parties are under no obligation to perform in the future.

Do I Need A Lawyer For Help With A Contract Termination Letter?

Contract termination letters can help prevent costs and legal penalties associated with a breach of contract. You should consult a contract attorney for assistance in writing, reviewing, or enforcing a contract termination letter.

Should any legal issues arise in association with the contract termination letter, your attorney can also represent you in court, as needed.