It’s often overlooked when you’re making the agreement but it’s one of the first places you look when things aren’t going well: the termination clause. This is the clause that details when a contract can be canceled, how to cancel it, and what happens when it is.
A solid contract termination clause can provide clarity and structure when things aren’t going well, and some flexibility even if they are. The level of detail and options outlined in a termination clause depend on the nature of the contract relationship and the type of contract, but below are a few examples of procedures, considerations, and structure you can include in a termination clause to avoid confusion and improve compliance.
Termination procedure when a party is in breach. A termination clause at minimum should explain what happens if a signer of the contract violates their responsibilities in it. This is known as breach or default — when someone breaks or violates the contract or fails to adhere to their obligations. For example, a client fails to pay or a contractor fails to perform the work they said they would.
What constitutes a breach or default? In contract law, there are varying levels of what constitutes a breach, and this is important to understand when drafting termination clauses because you might want to address how substantial a breach or default might be. For example, a material breach is one that is a significant failure by one party that substantially impacts the contract, whereas a partial or immaterial breach might be a slight deviation that can be accommodated and isn’t necessarily a huge issue requiring termination. It can be confusing or hard to determine how substantial someone’s breach might be (or whether they breached at all), so outlining specifically in the contract what makes something a breach and what the termination rights associated with them are is important. We’ll get more into this in a future Contract Clause blog highlighting specific remedies to breach or default. And remember, you can always be more lenient than what the contract says, but you can’t be stricter, so consider that when deciding what to include as potential breach items!
Cure period. You may want to give either party an amount of time to make things right before a party can terminate for breach, that way if they still dont fix it, it was clear they knew they were in breach.
Termination procedure when nobody is in breach (sometimes called termination for convenience). This type of termination gives someone the ability to terminate the contract with advanced notice even if nobody violates the contract. This can be helpful in some scenarios to add an “out” if circumstances change, but they don’t always make sense in every contract.
Notice requirements. You will always want to include a specific procedure for how a terminating party notifies the other contract party that they want to terminate. You’ll want it to be in some form a writing so there’s a record of the notification.
Schedule/timeline. In addition to the notice requirement, you can create a schedule of deadlines or timeline for when that notice needs to be made and how much time there should be between the notification and the actual termination. You can also get creative here and adhere to specific scheduling depending on the type of termination or the purpose of the contract. For example, in an events rental agreement, perhaps a renter can provide notice and cancel its rental up to 30 days before the event and get their money back, but 30 days or less, they’ll still have to pay, or at least lose a deposit, etc. On the other hand, for something like a contract for services, such as an independent contractor agreement, you might want a shorter notice/timeline period than 30 days where it might not make sense to continue the relationship for that long (and you can also include what that time between notice and termination should be used for so it is not unclear).
Term expiration. Contracts can also be set to terminate at a specific expiration. Sometimes this is a specified date (like an event date or last “one year”) or sometimes it’s very clear when it expires, such as upon the completion of work, like in a contract for a specific project.
Termination fees. For some contracts, it makes sense to include a fee for one’s early termination under certain circumstances or require a deposit or retainer be withheld. Your termination clause should outline how these fees work and in what situations they’ll be imposed/held.
Industry requirements. Be sure as well to account for any specific required termination rights for your industry or the type of contract. (For example, home improvement contracts in Pennsylvania must have a 3-day termination period after signature except in emergencies. Read more about that here!)
Learn more about contract clauses to be sure to have in our blog posts about clauses you’ll be thankful to have and what to watch out for.
DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation and considerations with an attorney.