Guide to Writing a Contract Termination Letter to a Supplier Contract Termination Contract termination is a procedure governed by a contract’s terms and conditions and the relevant law in many jurisdictions. When this step is ended, it negates the obligations of both parties under the contract. Because there are several ways to terminate a contract, it’s important to follow the requirements specified within the contract itself, or risk a dispute. There are different types of contract termination, such as: Termination for convenience ("contractual termination") Termination for breach Mutual termination Termination by party with equitable rights Termination due to frustration The most typical way to end a contract with a vendor is by mutual agreement (also known as "termination agreement" or "contractual termination"). Rescission (when a contract is cancelled before it goes into effect) is also possible.The most common reasons for terminating a vendor contract include:A new law , such as a statute or an ordinance, may prohibit an agreement — for example, a program may be discontinued as a requirement to balance the budget. Changes in an organization’s needs can make a contract unnecessary (for instance, if a new staff member with the same skills you contracted for has been hired). You could also run into trouble if the vendor is not fulfilling their part of the agreement, or takes longer than expected to provide a good or service.Unfortunately, issues that were not anticipated when making the contract may arise. Things like market fluctuations, changes in risk assessment procedures, financial considerations and new laws may make fulfilling a contract impossible. For example, if a product originally ordered is no longer manufactured, a contract may need to be terminated.To minimize potential conflict, it’s crucial to write clear termination clauses in your contract. If the requirements for ending an agreement are convoluted or unclear, this may result in a dispute between the parties. Items to Include in a Contract Termination Letter A contract termination letter to a vendor, like any letter of contract termination, must specify the following: (i) the reason for the termination, (ii) the date of termination, (iii) cite the specific terms of the contract that are the basis for termination, and (iv) any follow-up that is required by the vendor. Without these four elements, your contract termination letter risks being improperly written, and exposing you to vendor retaliation. Legal Issues and Considerations It is essential to understand the legal landscape before drafting a termination letter to a vendor. Businesses must adhere to the contract’s terms relating to termination and may need to comply with other requirements, even if the vendor has not. First, businesses should carefully review their contract agreements to determine specific termination procedures. While providing written notice may be a "best practice," such a requirement may be explicitly required in the contract. For example, in an agreement that includes a contract term but with no other provisions concerning termination, a business may still be required to provide advance written notice of non-renewal pursuant to the terms of the contract. However, certain laws may require or suggest that some requirements be followed only for certain types of contracts. For instance, while a contract for the sale of goods requires the seller to produce goods free and clear of any security interest, a loan agreement may require the lender to notify the customer prior to repossessing its collateral under an Article 9 security interest. Accordingly, if a business’s relationship with a vendor is partially secured by collateral personal property, the lender may still need to notify the customer prior to repossession, even if the loan agreement does not explicitly state such a requirement.Second, a termination letter should also consider other laws and regulations that may apply, such as those that apply to consumer protection, product safety, data privacy, environmental protection, employee or contractor misclassification, and other requirements unique to the specific industry or location involved. Adding these considerations into the termination letter may also be an essential step in avoiding liability on the part of both the business and the vendor. For example, the sale of defective or dangerous goods to consumers may trigger notification requirements to customers under certain state and federal consumer protection laws. Moreover, in addition to the sale of defective (or later recalled) goods, sellers of food and beverage products may have obligations to issue a food recall if their products are sourced from or cross-contaminated with a source that deemed to be hazardous. In another example, the applicable laws and regulations concerning a business’s use of personal information (PII) may have been subject to change during the course of the relationship with the vendor. The termination letter should address the return and proper disposal of PII to mitigate risks to the business.Finally, like the broad reminder above to consider industry-specific laws, it is important to remember that the termination letter is a good opportunity to remind the vendor of their continuing obligations to the business, including with respect to indemnification, confidentiality, and any other applicable provisions of the contract that survive the termination of the relationship. To this point, it is prudent to consider the following suggestions when the termination letter is drafted and sent to the vendor:The above suggestions only briefly address the legal considerations and best practices when drafting a termination letter to a vendor. Sample Contract Termination Letter Template To assist in your contract termination letter, here is a sample letter template providing the basic structure and language necessary to smoothly terminate the contract. This sample letter provides placeholders for you to insert the parties’ names, addresses, and the contract name and termination date. Specifically, it provides the base language necessary to provide notice to the vendor of the termination of the agreement and the effective date of termination, and provides you a terminable format to be inserted in the event you need to have a buy-out, an offer to settle, or a release, etc.(Date)(Vendor)(Vendor’s address)(Dear Vendor)Re: (Termination of)(Agreement)(Description of Agreement)(Effective Date of Termination)This letter (is)(is not) a formal legal notice of termination in connection with the (Agreement) between (name of entity) (Company) and (Vendor). This notice is for reference purposes only, and does not constitute a final contract for termination .(NAME AND ADDRESS OF THE VENDOR)(ADDRESS OF TERMINATION)This letter serves as formal notice that contract number (______) dated (______) entered into between (Company) and (Vendor) is hereby terminated, effective immediately. If you do not agree with the terms of this termination, then you must immediately agree in writing to rescind from your acts, agreements, and promises stated herein.We are providing you with this letter, which shall be deemed an offer to settle the claims we have against you, contained within the provisions of the (Agreement) identified above, with the exception of those rights detailed below, which will survive this termination:(Describe rights that will survive contract termination)Failure to provide us with a written acceptance of said settlement, within ten (10) days from the date of this letter, will result in our interpretation of this letter, to be a full and comprehensive release of any and all rights we have against (Vendor), except those listed above.We sincerely appreciate the service (Vendor) has provided to (Company). We look forward to continuing working together in the future.Sincerely,(Name, Title, Company) Delivering the Contract Termination Letter When it comes to dealing with a vendor, once you’ve decided to write a contract termination letter, what are the steps you need to take to deliver it?TimingWell, first things first, as always, when it comes to vendors (or any other contract)YOU need to follow the deadline you have for giving notice, even if it’s shorter than what your vendor otherwise has to give to you.Barring any different deadline specifically stated in the contract, when it comes to termination notice, most of the time, you’ll find that contract stipulates:Take a look at the contract to see if that was the case. If it isn’t, it’s a good idea to set the deadline you’re going to abide by in your contract termination letter as a reminder to the vendor of what they need to do when it’s their turn to terminate the agreement.DeliveryOnce you’ve followed the deadline you have for giving notice, a couple things to think about here when it comes to delivery:First, get confirmation in writing that the vendor has received your termination letter. A lot of contracts have requirements for delivery, including email, certified mail and/or fax.Second, be sure that your employee who delivers the termination letter puts it into the respective method that they’re required to use in the contract. Remember, if delivery is ever challenged, you want to be able to show the judge that you followed the contract and that the vendor had legal notice (and enough time to respond) of the termination date. Responding to Vendor Reply and Negotiate Once the termination letter or notice has been delivered, a vendor may respond in a variety of ways. The potentially inevitable fact that a termination can lead to a dispute over the consequences can trigger renegotiation at the most opportune time -before the deal starts unraveling. When disputes arise in these types of situations between vendors and the company, the parties can have bystanders – i.e., customers, partners and investigators – watching closely. Technology procurement contracts may also be been seen as particularly troublesome to negotiate. If negotiations stall on contract terms such as warranties , remedies, protection of confidential information, and service levels, customers can then want to renegotiate those clauses not just for the vendor whose contract is being terminated, but potentially for all its technology contracts. In general, the best approach for the company when negotiating a termination is to reinstate the negotiations with a focus on amicable resolution at minimal expense to either party. In today’s world, it is more important than ever to move forward into implementation of the contract with favorable relations in tact.