Termination of Contract Clause

Termination or exit clauses allow parties to terminate or end an agreement without breaching the contract. Legal professionals, business ops, and the C-suite must have a solid understanding of termination clauses to navigate the complexities of contract termination and ensure their contractual relationships are legally sound and enforceable. Otherwise, they may expose themselves to potential legal disputes, financial liabilities, and contractual risks.

Continue reading to learn about the differences between a termination of contract clause versus a termination clause in employment, as well as the different types of termination of contract clauses. You will also learn how to manage contracts with termination clauses.

Although termination clauses have many similarities across industries and circumstances, it’s vital to differentiate between a termination of contract clause versus a termination clause in an employment setting. Both have distinct purposes and address different needs.

Termination of contract clauses

A termination of contract clause is found in contracts across different sectors and industries. It isn’t specific to employment contracts and can be found in many agreement types, such as supplier contracts, service contracts, and vendor agreements.

Termination clauses can differ greatly in detail level, extent, and intricacy, depending on the particular industry, contract type, and parties’ objectives. However, they typically include the following components:

• Termination grounds: A termination clause outlines the conditions or grounds under which parties can terminate the contract. These grounds may include failure to meet performance expectations, contract breach or nonperformance, mutual agreement, insolvency, and change in circumstances. This section gives parties guidelines for terminating and helps prevent unilateral or arbitrage terminations.
• Notice requirements: Most termination clauses contain provisions about the notice parties must give before ending the contract. The notice period allows one party to communicate their intent to terminate and gives the other party a chance to resolve the breach and other outstanding issues. The notice period may range from days to months, depending on the parties’ intentions, the nature of the contract, and the industry.
• Dispute resolution mechanisms: Some termination clauses include provisions for dispute resolution methods that parties must pursue before terminating the agreement. These methods may include arbitration, mediation, or negotiation.
• Remedies and consequences: Termination clauses may outline the consequences and remedies arising after terminating a contract. For example, the clause may require the parties to pay outstanding damages or fees, return assets, or continue following stipulations that will survive the contract termination, such as non-compete clauses and intellectual property rights.

Here is an example of a termination clause:

“Party A and Party B have the right to terminate the Contract under material breach, change in circumstances, insolvency, and mutual agreement. To terminate the Contract, the terminating party must provide 30 days of written notice to the other party. They must also attempt negotiation — and, if unsuccessful, mediation and arbitration — before deciding to terminate the Contract. After Contract termination, the parties must settle outstanding damages or fees, return assets and documents to the City, and continue to acknowledge the Contract’s non-compete and intellectual property rights clauses.”

Termination clauses in employment contracts

On the other hand, a termination clause in an employment contract is created to govern the termination of the employment relationship between an employer and an employee. This clause is unique to employment contracts and addresses employment law considerations, such as employee rights and employer duties.

Employment termination clauses usually include the following provisions:

• Grounds for termination: Employment termination clauses specify the reasons or grounds for justifying contract termination. These grounds vary depending on the intentions of the parties and the nature of the agreement, but common examples include nonperformance, a material breach of contract, and a change in circumstances that renders the contract commercially unreasonable or impracticable.
• Notice periods: Most employment termination clauses outline the notice requirements that must be fulfilled by the party who wants to terminate the contract. The duration of the notice period varies depending on relevant legal requirements and the agreement.
• Severance pay: Termination clauses in employment contracts may include stipulations about severance pay, the compensation provided to an employee upon termination. These provisions may outline the amount or way of calculating the severance pay based on various factors, such as the position or length of service.
• Restrictions on termination: Employment termination clauses may restrict the right to terminate the contract. These restrictions promote stability, protect both parties’ interests, and prevent unjustifiable and arbitrary terminations. For example, a termination clause in an employment contract may require parties to undergo alternative dispute resolution before resorting to termination to prevent brain drain.

Here is an example of a termination clause in an employment contract:

“The Company may terminate the Employee’s employment for any reason during the Term, and the Employee may voluntarily resign for any reason during the Term. In each case, each party must give no less than thirty (30) days notice to the other party before deciding to terminate. Upon termination of the Employee’s employment with the Company, the Employee shall be entitled to any Base Salary earned but unpaid until the termination date and any unused accrued paid time off.”

Termination of contract clauses vary in their provisions and scope depending on the parties’ intent, needs, industry, and specific circumstances. Common types of termination of contract clauses include the following.

Termination for cause

Termination for cause clauses allow parties to terminate an agreement due to the other party’s inaction or actions or a breach of contract.

For example, suppose a software development project depends on parties completing their contractual duties by May 30, 2026. To ensure everything is completed on time, the parties could include the following termination for cause clause:

“If any of the parties to this Contract do not complete their duties under this Contract by May 30, 2026, any non-breaching Party may terminate this Contract.”

Termination for convenience

A termination for convenience or “T for C” clause enables either party to end a contract without penalty, even if there is no specific reason for termination. This is an effective risk reduction strategy, particularly in industries where circumstances change quickly, leaving no time for contract amendments. Many construction firms use it to end agreements without costly disputes.

Here’s what a termination for convenience clause might look like:

“This Contract may be terminated by the State at any time by giving at least fifteen (15) days notice in advance. The State will pay the Contractor under the terms of this Contract for all services provided and accepted by the State before the effective termination date.”

Force majeure

Force majeure is a termination clause that relieves a party from performing their contractual duties if performance is extremely difficult or impossible due to an event that the parties could not reasonably anticipate or control. Such events include war, prolonged shortages of energy supplies, lockdowns, and “Acts of God” like earthquakes, pandemics, and typhoons.

Here’s an example of a force majeure clause:

“If either party is unable to perform its obligations under the terms of this Contract due to strikes, transmission failure, “Acts of God,” such as pandemics and earthquakes, and other reasonably unforeseeable events, such party shall not be liable to the other for damages resulting from the failure to perform.”

Termination of contract clauses are found in industries ranging from software development and finance to construction and marketing. They are not specific to the employment context and can be found in many agreement types. There are many types of termination of contract clauses, including force majeure, termination for cause, and termination for convenience.

In contrast, termination clauses in employment contracts are specifically designed to terminate the employer-employee relationship. They address employment concerns, such as employer duties, severance pay, and employee rights.

Termination clauses can be challenging to manage, edit, and negotiate, especially if your company deals with many contracts simultaneously. Consider using contract lifecycle management (CLM) tools to streamline the contract management process.

Powerful, intuitive, and streamlined CLM platforms let users store, search, create, and launch contracts and approval processes in minutes. They also come with codeless contract templates that comply with legal requirements and company policies.