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Contract Termination Letter

Contract Termination Letter

A contract termination letter is used to legally terminate an existing agreement/contract between two parties. This article throws a light on the method of drafting and legal facts of a contract termination letter.
Scholasticus K
Premature termination of contracts are likely to create controversies or legal issues. To do away with this, most legal contracts specify terms and conditions regarding their termination. It is recommended that a termination letter be drafted in accordance with these terms and conditions to avoid any legal loopholes. Here is a general sample of contract termination letter. It may be tweaked to suit your own requirements.

Some Useful Hints
  • Contract termination letters are business letters and should be written only on company letterheads.
  • The language used in a contract termination letter should portray politeness, apologetic tone and regret for sudden termination of a contract.
  • It is essential to mention the contract number at the beginning of the letter, preferably in the subject/reference line.
  • Mention the names and specific details of all the parties to the given contract.
  • Mention the notice period for termination of the contract.
  • The writer must specify the reasons for termination of a contract. e.g. breach of contract, fraudulence, misrepresentation, impossibility to perform terms of the contract, etc.
  • Include the terms and conditions of the contract that empower the parties to terminate the contract. If the contract is silent about termination terms, you will have to follow the common procedure which has been prescribed by the law.
  • When termination takes place with a monetary penalty, mention the mode of payment that you plan to use.
  • Besides the date at the beginning of the letter, you need to mention the date of the original contract and specific dates of performance/delivery mentioned in the contract.
  • The best way to end this letter is by indicating that you are willing to do business with the party in future.
Letter Sample
Radium Services Ltd
88, Bella Vista,
Cross Ave.,
Santa Fe, New Mexico

Date: November 15th, 2012

Mr. David Allonzo
Legal Department,
Sonata Manufacturing Inc.
Santa Fe, New Mexico
Re: Contract no: ACXZ/442244 dated May 28th, 2009

Dear Mr. Allonzo,
In accordance to Clause 7 of the above mentioned contract between our companies, we wish to terminate the contract with effect from December 1st, 2012. The contract is being terminated as we are unable to deliver services and meet the performance standards as stated in our contract. We regret the inconvenience caused to your organization on account of this. As per Clause 8 of our contract, we shall be depositing a monetary compensation in your bank account by November 30th, 2012. A computation of this compensation is given below:

Particulars Compensation Amount
Basic Penalty (As per Clause 8 of the contract) ...
Compensation for Logistics ...
Compensation for Advance Payment ...
Compensation for Business Damages (Goodwill, etc) ...
Compensation for Urgent Reorder cost and time ...
Damages ...
Liquidated Damages ...
Contract Price (prepaid amount reimbursed) ...
Total Restitution ...

We again apologize for the inconvenience caused.

Ms. Bridgette Adams
Radium Services Ltd.
Some Legal Facts
  1. Contracts may be bi-partite or tri-partite in nature. Common parties to a contract are:
    • Manufacturers
    • Service providers
    • Customers
    • Vendors
    • Creditors
    • Organizations and NGOs
    • Contract employees
    • Consultancy firms
  2. Legally, presenting a contract termination letter is not viewed as a breach of contract. It is just an indication that either of the parties would not be able to perform or execute the terms of the original contract.
  3. A contract termination letter is as important as the contract itself. It is a proof that parties to a contract have accepted the contract termination. For this, both the parties must have authentication rights, original termination letter and its copies, and other related documents.
  4. If a proper termination of contract cannot be reached, arbitration process might be initiated by holding joint meetings. This demands a lot of negotiation skills.
Termination of a contract tends to harm the reputation and goodwill of a company in the business world. The best way to avoid such a problem is creating a perfect draft for the contract itself.