Termination clause

What is a termination clause?

A termination clause sets out how and when either party can end the contract before it naturally expires. It defines the grounds for termination, the notice required, and what happens afterwards.

Without one, you're stuck with common law rules on repudiatory breach, which means you can only walk away if the other side commits a serious enough breach. That's a high bar and an uncertain one. A termination clause gives you defined exit rights with clear triggers.

Relevant legislation

Termination is mainly governed by the contract itself, but statutory rules apply in certain contexts:

• UK: common law repudiatory breach allows termination for a breach that goes to the root of the contract. The Sale of Goods Act 1979 and the Consumer Rights Act 2015 imply termination rights in sale and consumer contracts. Employment contracts have statutory notice periods under the Employment Rights Act 1996.
• US: UCC Article 2 governs termination of sale of goods contracts. Most states follow the common law "material breach" standard for other contracts. Some states require specific notice provisions.
• Australia: common law repudiation plus the Australian Consumer Law, which implies warranties and termination rights in consumer and small business contracts.

What to look for

Check whether both parties have termination for convenience. This is the right to walk away without cause, typically with 30 to 90 days' notice. It's standard in service agreements but creates risk if only one side has it. A customer with termination for convenience and a supplier without it holds all the bargaining power.

Look at the termination for cause triggers. Most clauses allow termination for material breach that isn't cured within a specified period (commonly 30 days). The key questions: what counts as "material"? Is there a cure period? Can the breaching party fix the problem in the time allowed? A 30-day cure period for a data breach is meaningless if the damage is already done.

Check the insolvency triggers. Most commercial contracts allow termination if the other party enters administration, liquidation, or makes an arrangement with creditors. Be aware that in some jurisdictions (notably the UK under the Corporate Insolvency and Governance Act 2020), certain insolvency-related termination rights are restricted for suppliers of goods and services.

Read the post-termination provisions carefully. These cover payment for work already done, return of confidential information, transition assistance, and survival clauses. A contract that's silent on post-termination obligations creates disputes about what's owed after the relationship ends.

Common pitfalls

Termination for convenience with no notice period, or a short one, gives the terminating party the ability to walk away overnight. If you're the supplier, that means lost revenue with no time to replace it. Push for a notice period that reflects your commercial reality.

Automatic renewal combined with narrow termination windows is a common trap. The contract renews for another year unless you give notice during a 30-day window six months before expiry. Miss the window and you're locked in. Check renewal terms and set a calendar reminder.

Contracts that allow termination for cause but define every breach as "material" set the bar too low. A minor payment delay shouldn't trigger the same consequences as a data breach. Good termination clauses distinguish between breaches that justify immediate termination and those that trigger a cure period.

Survival clauses that are too broad can keep obligations alive indefinitely. Confidentiality and limitation of liability should survive termination. But if "all obligations" survive, the contract hasn't ended.

Example clause

"Either party may terminate this Agreement: (a) for convenience, on 90 days' written notice; (b) if the other party commits a material breach and fails to remedy it within 30 days of written notice specifying the breach; or (c) if the other party enters administration, liquidation, or makes any arrangement with its creditors. On termination, the Customer shall pay for all services delivered up to the termination date. Clauses 7 (Confidentiality), 10 (Limitation of Liability), and 12 (Governing Law) survive termination."

Frequently asked questions

Can you terminate a contract without a termination clause?

Yes, but only for repudiatory or material breach under common law. The breach must be serious enough to go to the root of the contract. This is a higher threshold than most contractual termination rights, and the outcome is less predictable. A termination clause removes that uncertainty.

What is the difference between termination for cause and termination for convenience?

Termination for cause requires a reason, typically material breach, insolvency, or a specific triggering event. Termination for convenience requires no reason at all, only notice. Convenience rights give flexibility but create exposure for the other party, which is why notice periods matter.

What happens to obligations after termination?

Only obligations listed in the survival clause continue. Everything else ends. If the contract doesn't specify which clauses survive, courts will imply survival for obligations that make sense only if they continue (like confidentiality and payment for work done), but this is uncertain and varies by jurisdiction. Spell it out.

Can termination be backdated?

No. Termination takes effect from the date specified in the notice or the date the triggering event occurs. Backdating termination would create uncertainty about the period during which the contract was in force and is unlikely to be effective.

How Clara helps

Clara identifies termination clauses and flags asymmetric convenience rights, missing cure periods, automatic renewal traps, and weak post-termination provisions. It highlights which obligations survive termination and whether the survival scope is appropriate.