1. What Is a Contract Termination Letter?
2. Difference Between Contract Renewal and Extension

A contract not renewed refers to a contract that is either actively or automatically terminated for the purpose of avoiding a renewal. In many contracts, there are terms stating when and how the participating parties can terminate their agreements to ensure non-renewal. The intention to terminate a contract is often communicated through a contract termination letter. While non-renewal seems like a straightforward process, it can get complicated if there are provisions in a contract that make termination more difficult.

What Is a Contract Termination Letter?

Generally, the purpose of a contract termination letter is to enable a contracting party to prevent an automatic contract renewal by communicating to the other party that the current agreement will terminate at its expiration date. In many cases, a contract contains terms that specify when the agreement can be properly terminated for non-renewal. If you have difficulty determining the timing or addressing any issues related to termination, you can seek the assistance of an attorney.

After sending a notice of termination, it is important to have proof of the delivery in order to prevent future allegations that the notice was not sent. In some situations, it may be a good idea to communicate the intention to terminate a contract in person or by phone before sending the official contract termination letter. You can also fax the notice. In order to provide an added layer of proof that the notice was indeed sent, you can ask your attorney to send the notice of termination on your behalf.

Usually, you are not required to give a reason for non-renewal. However, if a reason is required or preferred, your lawyer can help you achieve your communication objectives while simultaneously ensuring that your contractual rights and position will be protected. A non-renewal letter often references the section that states the terms for automatic contract renewal and the timing for termination before the occurrence of automatic renewal.

Difference Between Contract Renewal and Extension

Terminating a contract appears to be a straightforward process. In general, a contract can either expire on its own or be terminated by the participating parties, with or without cause. There is often a provision that allows renewal. While the process is usually straightforward, issues may arise if the contract contains provisions that survive termination.

The importance of having a clear understanding of the difference between contract renewal and extension was illustrated in the decision of the Tennessee Supreme Court in BSG, LLC v. CheckVelocity, Inc. After the expiration of their original contract, BSG filed a lawsuit against CheckVelocity, alleging that it committed a breach of contract because it failed to pay fees allegedly owed under the provision for survival under their former contract.

According to the contract, payment of a referral fee, which was referred to as “fee residual” in the contract, survived the termination of the contract and continued until the expiration of customer agreements as they may be renewed. The referral fee resulted from an agreement between CheckVelocity and a customer who was referred by BSG while their agreement was still in effect.

There was a need to determine whether the agreement between CheckVelocity and the customer, which was formed after the expiration of CheckVelocity's contract with BSG, was a renewal of the initial agreement and consequently subject to fee residuals or a whole new contract that replaced the initial agreement. The Court concluded that the contracting parties' use of the term “renewed” made the contract ambiguous. It noted that the word “renewal” has multiple meanings, including:

  • Recreation of a legal relationship by creating a new contract to replace an old contract
  • Creation of a contract to add more time to an existing contract while maintaining the same contractual terms and obligations and without conferring new rights or obligations

Therefore, the Court concluded that the phrase stating that the customer agreements may be renewed can be ambiguous because it may suggest the creation of a new contract or a contract extension. In the end, it decided that the second agreement, which involved the addition of new services and changed the initial contract's material terms, was not a “renewed” contract. Therefore, there was no residual fee owed.

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