termination clause

Termination clauses are provisions in contracts which give rise to an express right to terminate a contract, usually for a number of reasons. The significance of termination is that once a contract has terminate (as opposed to merely issuing notice of termination), the rights of the parties to insist on performance end, subject to any obligations expressly or impliedly continue in force after termination.

Types of provisions in Termination Clauses

Termination clauses usually list the reasons for which a contract may be terminated, which include:

1. Termination for material, substantial or repudiatory breach where the breach is remediable, after a fixed period after receiving written notice of the breach and a demand to remedy the breach;
2. Termination without notice where the breach is not remediable;
3. Upon persistent breaches of contract, whether breaches of conditions or warranties set out in the agreement;
4. Failures to pay sums due under the agreement when they fall due and payable;
5. Upon insolvency or  bankruptcy of a party, and further where (1) a petition is presented for the winding up of a party to the contract, (2) it has an administrator or liquidator appointed, or (3) a party makes an arrangement with its creditors;
6. ending the contract on a short period of notice of say 30 days or 3 months, after a fixed initial period (termination for convenience or “without cause”);
7. termination where some matter which was not able to be agreed at the outset of the agreement was not able to be agreed during the course of the contract; and
8. Other reasons for termination which are important to the parties which are specifically listed in the contract, which might include failures to meet sales targets or sales quotas within a period of time.

Consequences of Termination

In addition to this, well-drafted contracts set out the consequences of termination such the things which are to take place after termination. These by and large depend upon the nature of the contract, including whether the services to the customer are to be continued through another supplier (such as hosting of a website or outsourced services), or equipment and materials are likely to remain the possession of another contracting party as at the date of termination.

In addition, words to the effect that termination shall not affect any accrued rights or liabilities of either party are designed to prevent argument that exercising an express right to termination is not the sole remedy of the party terminating, so as to extinguish a right to damages.

Compliance with Contract to exercise right to Terminate

Issuing notice to terminate validly under a contract may also be dependent upon compliance with methods of giving contractual notices under the provisions of a notice clause, which usually require such notices to be given in a particular way. Likewise the termination clause or other provisions of a contract may require that some dispute resolution process must be complied with prior to issuing notice to terminate.

Example Termination Clauses

Examples of termination clauses:

1. The Agreement may be terminated forthwith by either party giving notice in writing if the other is in material breach of the terms of this Agreement has failed to remedy the breach (where the breach is capable of being remedied) within 30 days’ notice in writing requiring it to do so;
2. The Agreement may be terminated on 30 days’ notice given in writing, save that such right shall not be exercised within 12 months of the date of this agreement.

No Express Right to Terminate

In the absence of an express right to terminate in the contract, common law rights usually apply in the absence of a contract with a fixed term, to allow a party to give notice to terminate an agreement on reasonable notice. Factors which may be taken into account is deciding a reasonable period for terminating an exclusive agency or distribution agreement include:

1. The degree of formality in the relationship;
2. The amount of time which would be required to locate and approve a new supplier
3. The length of the period of the relationship contractual relationship;
4. The percentage of turnover of the supplier attributable to the contractual relationship;
5. The initial capital and expenditure required to establish the relationship (such as the investment required to establish a new market for goods, for instance to establish warehousing facilities, ) which is out of the ordinary would point towards a lengthier period of notice at the outset of the contract;
6. Existence and extent of non-competition provisions in the contract preventing a supplier from selling competing products to those supplied; and
7. The seasonal fluctuations of trade in the sector in question, if any.

The moment in time for deciding what is a reasonable time for notice of termination is at the time notice is given. Failure to comply with the provisions of termination clauses is likely to amount to a repudiatory breach of contract, even where the right to terminate was well-founded in the first instance.

This is turn may lead to litigation in English Courts, assuming that the contract contains a jurisdiction clause designating English law as the lex fori, or choice of law clause nominating English law as the lex contractus. Solicitors regularly review and provide legal advice on such clauses to ensure that the parties' intentions are reflected in contractual documentation.