Last Updated: June 19, 2020
Is your contract complete? It may not be if it is missing a termination clause. A contract is an important legal document because you are bound by its terms. Every contract should include a termination clause because it controls the cancellation or termination of a contract. A termination clause specifies the duration of the contract and the procedures for terminating the contract. When you initially sign a contract, it is hard to imagine any issues. However, this is a common misconception.
A termination clause, or cancellation clause, details how the parties plan to end their business relationship and specify each party’s obligations once the contract ends. If an agreement does not include a termination clause, the parties could face legal action.
Nailing down the termination clause will ensure you are protected in the event of a breach of contract. There are several reasons why an agreement may come to an end. Sometimes it can be as simple as the end of the contract’s duration. However, other times it can be terminated because of another party’s material breach of a contract.
Why is a Termination Clause Necessary?
A termination provision aims to protect the innocent party if the other party breaches the contract. A termination clause allows the other non-breaching party to automatically and legally terminate the contract. However, not all termination clauses are the same. It is essential to review the termination clause to be sure you have covered your bases.
It is crucial to seek legal advice to discuss what can and cannot be included in a termination clause. If a termination clause is unreasonable or has other improper terms, it may be deemed unenforceable in a court of law, potentially converting you into a breaching party. A clear termination clause can protect you from unnecessary lawsuits, competing businesses, and your company’s reputation.
Top 3 Reasons for Terminating a Contract
There are several reasons why a contract may come to an end. Sometimes it can be as simple as the end of the contract’s duration. However, other times it can be terminated because of another party’s material breach of a contract.
A termination clause protects you in the event the other party breaches the contract. It allows you to terminate the agreement based on legal grounds. These legal grounds should be detailed in the termination clause.
- Cause – A contract may be terminated for cause, also referred to as termination for default. You do not want to be trapped if the other party fails to hold up either end of the deal. Termination for cause provision allows the non-breaching party to legally end the contract and collect damages if the other party fails to perform their duties under the contract.
A termination clause protects you in the event the other party breaches the contract. For example, a breach may include the other party not paying an invoice and accruing an outstanding balance. The agreement should list the consequences for unpaid invoices as well as your right to terminate the contract.
Another essential consideration for properly ending a contract is determining if the other party caused the breach. Sometimes the other party does not have control of an unforeseen issue. For example, many contracts include a force majeure or “Act of God” provision. This provision protects the parties from performing under the agreement in the event an incident occurs that is out of the parties’ control, such as a natural disaster, pandemic (COVI-19), or other reason included in the clause. This concept is also referred to as the “impossibility of performance.”
- Convenience – Termination for convenience occurs when one party decides not to go through with a deal. It is important to note that this is not a result of the other party. A termination for convenience provision creates a way to calculate what the canceling party owes to the other party while limiting the canceling party’s liability to the final amount.
For example, in a freelancer contract, a client who decides to terminate the contract for convenience may be obligated to compensate the freelancer for the work performed before the contract was canceled. Generally, the client would not be obligated to pay for work that had not been completed or for lost opportunities for the freelancer as a result of the cancellation.
- Expiration – Some agreements implement a fixed term for the contract. For example, a lease agreement typically specifies a duration, usually one year. A lease agreement may also include an option to renew or extend the lease.
Termination Clause in Construction Contracts
A common mistake is not including a termination clause in a construction contract. A termination clause is vital in a construction contract. Many elements come into play, such as materials, subcontractors, deadlines, and sufficiency of work.
Termination Clause in Employment Agreements
Employment agreements typically include termination provisions. It covers what happens upon the dismissal of an employee and details both the employer’s and employee’s responsibilities after the termination of the employment relationship. Parts of an employment contract that are usually enforceable at the end of employment typically include the employee’s responsibility to honor the confidentiality clause and non-compete provision.
Notice of Intent to Terminate a Contract
If a party to a contract intends to terminate the agreement, they must provide written notice to the other party with a termination notice. The contract should include the number of days, the “notice period,” the party is required to give to the other party. If a notice is not provided, the party failing to provide notice is in breach of the contract. If both parties violate the agreement, the breaches may cancel each other out, meaning neither party can rely on a court to enforce the terms of the contract breached by either party.
What Happens After the Contract is Terminated?
Termination clauses do not always mean a clean break. Some termination clauses include elements that survive the end of the contract. This typically applies when the parties exchanged confidential and protected information. The termination clause may require the parties to keep the proprietary information confidential for a certain period of time or indefinitely. Termination clauses may also incorporate a non-disparagement agreement. This means the parties are prohibited from making any statements that may negatively affect their reputations.
So, it is important to review the contract even after it has ended because you may still be bound by its terms.
How to Get Your Contract Signed
At the end of the day, termination clauses safeguard your company and preserve the parties’ contractual obligations. An effective termination clause can also allow for monetary damages or other remedies if the other party breaches important terms of the contract.
Now that you have drafted your agreement, it is time to get it signed! ApproveMe offers practical contract templates to get you started. But, ApproveMe also offers a powerful E-Signature tool, ensuring you get your business contracts signed faster. ApproveMe’s state of the art convenient WP plugin simplifies the signing process and increases client satisfaction. What are you waiting for? Let’s get your contracts signed today!
This Article is Part of ApproveMe’s Contract Guide for Beginners:
Sec 1: Contracts 101: Contracts Intro
Sec 2: Contract Definition & Importance
Sec 3: Are Agreements & Contracts Different?
Sec 4: The Elements of a Contract
Sec 5: Contract Terminology & Glossary
Sec 6: Free Contract Template Insights
Sec 7: How to Draft a Contract
Sec 8: Is Your Contract Enforceable?
Sec 9: Contract Review Checklist
Sec 10: Contract Negotiation Tips
Sec 11: Signing Contracts Online
Sec 12: How to Read a Contract
Sec 13: Contract Amendments
Sec 14: Contract Termination
Sec 15: Breach of Contract