Termination clauses set out the express grounds upon which a contract may be brought to an end. They're also known as "break clauses" in some circles.
In the business environment, termination clauses specify rights to bring a contract to an end for specified reasons.
These usually include by:
- breach of contract, and naming the standard of breach required to terminate the contract, whether “repudiatory breach”, “material breach”, “substantial breach” or “any breach”
- one of the parties becoming insolvent
- force majeure arising
Notice of Termination
An important distinction operates between:
- Notice of termination, and
Notice of termination is not termination. Notice of termination is a warning that the contract will terminate on some future date.
Rather leaving matters of termination to common law repudiatory breach (which must be given without notice, if the right subsists at the time), a termination clause sets up a variety of grounds which a party may rely on to end the contract in an orderly manner.
Rights of termination in a contract may be:
- mutual to each of the parties or
- different rights granted each party.
Early Termination Clauses
Grounds for early termination can be brought about:
- in a specific termination clauses such as that below, and
- easily contained in other parts of the contract as conditions subsequent, which aren't so readily identified or located.
Example: Termination Clause
Either Party may terminate this Agreement if:
- the other Party is in repudiatory breach of this Agreement and fails to remedy the breach (if capable of remedy) within 30 days of written notice of the breach being given by the Party not in breach or persistently breaches of any of its obligations under this Agreement;
- the other Party ceases to conduct business in the normal course, becomes unable to pay its debts within the meaning of Section 123 of the Insolvency Act 1986, has a receiver, manager, administrator or administrative receiver appointed over all or any part of its undertaking, assets or income, passes a resolution for its winding up, or the other Party enters into any composition or arrangement (whether formal or informal) with its creditors;
- any invoice of the Supplier is more than 30 days overdue.
Consequences of Termination Clauses are frequently used to expressly state the parties’ intentions after termination of the contract.