Basics of Contract Cancellation
At its most basic form, a contract is a legally binding agreement between two or more parties. Though the term "contract agreement" is often used for redundancy, it is possible to enter into a contract agreement that is not legally binding. In such cases, mitigation of risk and dispute resolution (mediation or unilateral withdrawal) are typically outlined in a memorandum of understanding (MOU.) When a contract is legally binding, the terms and stipulations governing the contract can usually be found within its clauses and sections. The contract terms set specific parameters on what each signatory is or is not allowed to perform, deliver, or receive.
Under specific circumstances, a "cancellation" provision, or clause that allows one or both parties to withdraw from the contract may exist. Generally, however, cancellation of a contract is considered a legal breach of said contract. This is actually reflected in Common Law, where a valid legal contract will often stipulate a period at which affected parties can cancel without penalty or liability when certain conditions are met . This could be anything from a mandatory initial term of 3 or 6 months to a right to terminate without cause or liability after 90 days once service has been up and running with standard or contract-period renewals. With this type of clause, the termination policy is stipulated in the original contract and thus enforceable by law. Both parties must, therefore, honor the terms of the contract and failure to do so would generally be considered legal breach of contract.
In other cases, a written notice delivered (in accordance with the contract terms,) to affected parties, a stipulation that communication is also considered effective with electronic delivery, may be the only action required to cancel a contract. Verbal contracts are also generally unenforceable in court and can easily lead to protracted litigation. Contract cancellation, in one of the forms mentioned above, might be necessary and/or even taken as necessary (unilateral) when: Force majeure events, pre-existing material breach, fundamental defect in consent (i.e., misleading representation or false facts), or prior inability to perform (i.e., lack of maturity) are all examples of mitigating circumstances that could guide a judge to cancel a contract if so requested by an affected party.
Components of a Cancellation Letter
A properly drafted cancellation letter should include the following elements:
- A reference to the contract in question. Your letter should cite the specific contract number and date of agreement so the other party knows exactly which agreement you are canceling. If the contract in question has previously been modified, it is also a good idea to cite the modification reference number and date as well.
- The reason for cancellation. It is not necessary that you provide the other party with a reason for your cancellation, but providing one can help prevent the other party from disputing the validity of your cancellation letter.
- Obligations of the parties. In most cases, obligations of the parties will be outlined in the contract itself. Even so, referring to these obligations in the cancellation letter can help ensure that your obligations are fulfilled and create a stronger paper trail.
Most contracts include a section that provides specific details for cancellation. You should always review this section before sending a cancellation letter to make sure that you have followed the proper procedures.
How to Write a Cancellation Letter
First, while your contract may be with a company, you will want your cancellation letter to be addressed to a specific person. If there’s a contact person or someone you have been communicating with, address the letter to them. If no one person is named, do not address the letter to "to whom it may concern." Customer service is not going to get it to the right place.
Second, the letter must include all of the details that are provided in the contract as to how to cancel. Any directions in the contract must be followed and the best way to insure that it is done correctly is by actually following the contract terms.
Third, the letter should clearly and concisely state its purpose. Some companies will have a form that states that it should be conscious in clear language but do not include anything but a blank form with no instructions.
Fourth, you need to include an effective date. Without that, the company isn’t going to ask you when you want the cancellation to take effect. For some companies, they may not cancel the agreement because they did not know when to have it take effect.
The best way to ensure this is to either call the company or to communicate with them by email and then using that as a reference in your letter.
Important Legal & Practical Considerations
Before proceeding with writing a letter intending to cancel a contract, there are a number of legal considerations that have to be kept in mind. It is essential to examine both the nature of the penalties and the contract clauses that are part of the contract itself, as these could deter an individual from being able to cancel a contract or make them liable for damages. For example, if an individual contracts with a service provider for a yearlong relationship, yet decides after two months to send a letter of cancellation, the contract could contain a provision that the individual must pay penalties and damages to terminate the agreement. Furthermore, if a contract has a "no cancellation clause," this can prohibit a person from proceeding with cancelling a contract agreement. These clauses are often seen in leases or real estate contracts where a tenant or homebuyer tries to break a contract off early.
It is important to note the type of contract being cancelled, as this can influence the wording or the method of cancellation. For example, for healthcare, a simple written notice may be all an individual needs to do to cancel a healthcare service agreement. However, some services that are directly related to public policy issues, such as an employment contract with the U.S. Department of Defense or contracts with workers providing services in the child welfare system , may require cancellation via the U.S. Department of Defense’s General Counsel or the attorney general.
In addition to the consideration of penalties and clauses that a contract may have, letter writers should also keep in mind that there is a difference between terminating a contract and cancelling a contract. For example, a termination of a contract is essentially a ‘quit’ of an agreement prior to the end of its term and can result in penalties under the clause for breaching the contract. Meanwhile, cancellation is a previously agreed upon termination of the contract which usually does not come with penalties. The purpose of a contract cancellation is to free both parties from the obligations usually specified in the contract.
The letter that is sent to cancel the contract should be clear, precise and unambiguous. It is best to include some kind of clear form of communication – whether it be to sign, rearrange a time, set an appointment or issue a writing so that there are no misunderstandings about what is meant by the letter. It is also best to put the date and reason for contacting the other party, such as wanting to change dates or times of service, the amount of time the person intends to give them to rework their agreement (if any) and how they can be contacted for further discussion or how the cancelling party can be reached for further clarification.
Sample Cancellation Letter Template
It is impossible to underscore the importance of writing a letter that is polite and succinct when you want to cancel a contract agreement. Below is a simple sample cancellation letter template that can be customized for your specific needs.
[Your Name]
[Your Address]
[City, State, ZIP Code]
[Email Address]
[Phone Number]
[Date]
[Contractor/Service Provider’s Name or Company Name]
[Their Address]
[City, State, ZIP Code]
Dear [Contractor/Service Provider’s Name],
I hope this letter finds you well. I’m writing to formally cancel my [service/product] contract with you as of [termination date] following the contract’s standard terminator clauses.
Though I appreciate your continued efforts in ensuring that my [service/product] requirements were met during my contract term, I kindly ask that you reimburse the amount of [$xxx] as required by the contract’s provisions.
This letter is my formal notice as stipulated in our contract. Henceforth, I will no longer be utilising your services. I would appreciate if you can confirm the cancellation of my contract with you.
Thank you for your understanding. I look forward to your punctual response.
Sincerely,
[Your Name]
[Your Signature (if sending a hard copy]
This letter is appropriate for both product or service contract agreements. It is important that you are respectful of the other party vendor or service provider and its employees.
Common Cancellation Mistakes
A common error is not following the cancellation provisions or "termination for convenience" clause. A termination for convenience clause allows either party to cancel the agreement for any reason or no reason at all. Of course, depending upon the circumstances, you may need to give a specified amount of notice. However, the cancellation needs to be in writing, signed and dated by a person with authority under the contract.
Another frequent mistake is failing to reference the specific provision(s) which create the right to cancel the agreement. You want to make sure you have addressed the specific provision under which you are relying to cancel the contract. As mentioned above, the clause will usually say something like termination for convenience or termination without cause . In some commercial contracts, a party may have the right to cancel if the other party does not achieve a certain milestone or fails to cure after the other party provides a notice of default. (Sometimes referred to as a material breach.) In some contracts, a party might be entitled to cancel if the other party gets sued or its financial condition deteriorates. There can be numerous reasons under a contract why someone might be entitled to cancel, but you need to be very careful you are invoking the correct reason. If you are not, the contract will remain in effect and the person who did not sign the cancellation letter might pursue a breach of contract claim.