Updated November 4, 2020:

A termination agreement is a document formally stating that all contractual parties agree to the cancellation of a contract. A termination agreement is also called the following:

  • Termination of contract
  • Notice of cancellation of contract
  • Notice of termination of contract

Purpose of Termination Agreements

Sometimes, contractual duties and obligations simply don't work out. You might be dissatisfied with the way the other party is fulfilling their duties, or you might not need their services any longer. In these situations, you can send a termination agreement to make it clear that the contract is canceled. Termination agreements set forth obligations that survive the termination. Parties in the original contract must sign a termination agreement.

These agreements specify that the involved parties have come to a mutual conclusion to end the contract. They may include an optional mutual release of claims. A business termination agreement formally ends a business relationship. It usually involves a business and an individual or two enterprises.

In a termination agreement, you'll include information such as:

  • The involved parties
  • The relationship between the contractual parties
  • The results of the termination
  • Any consequences arising from the termination

In many cases, termination agreements are mutually agreed upon between the involved parties. These agreements are part of good business practice and should protect the best interests of all involved.

There are different reasons for terminating a business relationship, such as:

  • Irreconcilable differences
  • A new provider enters the picture, offering better services and/or prices

You should use a notice of contract termination to notify the other contractual party that you're terminating your agreement. Give them an effective date of termination in this notice, as well.

Details in Termination Agreements

Termination agreements specify who's involved in the termination, the reasons for the cancellation, and how and when the termination takes place. When applicable, you may also include a detailed scope of severance pay. The agreement sets a date for termination. It also includes the parties involved and the signing date of the original contract.

A notice of contract termination contains terms under which you can cancel the agreement. When you send a notice of contract termination, it creates a record that you provided notice to the other contractual party about the termination and the date it becomes effective. This gives you proof of notice, which may be needed if the other party says something different in the future.

You can also use a notice of contract termination as a courtesy to others to thank them for their service. This is one way you can preserve your relationship with them. Note that contractual parties are only obligated for duties intended to survive the end of the contract's term.

Do You Have Time to Back Out of a Contract?

Just because you sign a contract doesn't always mean it goes into effect immediately. A lot depends on the specific terms and conditions contained in the agreement. You may have a set period of time to back out of the contract.

In some states, this is known as a “cooling-off period.” It often applies to canceling transactions that take place somewhere other than the seller's permanent location. This includes trade show sales and door-to-door sales.

Your state may have different rules pertaining to cooling-off periods. You need to know what your state's contract regulations are because certain types of contracts don't recognize cooling-off periods. Seek professional legal advice if you have questions about this.

An Effective Date on a Termination Agreement

In general, termination agreements become effective on the date that the involved parties specify. Sometimes, these agreements are triggered by other means, such as:

  • Delivery by an agent
  • Hand delivery
  • A set number of days after being mailed

Contractual parties may agree to postdate termination agreements so that the effective date falls on a specific future date.

Sometimes, you have the option to back out of a contract within a certain window. It's important to understand your contractual obligations before you sign an agreement. If you have any questions about a contract's terms, conditions, provisions, and language, consult with a legal professional first. This can protect you from legal repercussions in the future.

If you need help with a termination agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.