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What is a Termination Clause

Jennifer Tsai • January 12, 2023 • 8 minute read

What is a Termination Clause?

A termination clause is a contractual provision that sets forth the circumstances under which agreements may be terminated, including the effects of termination, such as payments and other rights and obligations of the parties. In general, agreements may be terminated under certain circumstances, including: (1) by mutual agreement; (2) due to one party’s breach of the agreement; (3) for convenience; (4) following certain events, like one party’s insolvency, or a force majeure event that persists; and/or (5) pursuant to its terms and conditions (i.e., on expiration of the term of the agreement, or if specified events or actions are completed).

Termination clauses can be found in all types of agreements, from employment agreements involving one individual to multi-billion dollar M&A transaction agreements.

Why Do Termination Clauses Matter?

Termination provisions are important in a variety of contexts because they govern contract parties’ rights and obligations in the event that the business transaction between the parties becomes unsustainable. Generally, negotiations and discussions precede termination, and therefore termination is for the most part, a last resort.

Commercial Contracts: Having a handle on what an organization’s commercial contracts say about termination is important because contracting parties need to understand what their rights and obligations are if certain unforeseen events occur–such as, a party’s failure to perform, a material breach, among other things. In order to minimize risks and losses in connection with a commercial contract, understanding the language addressing how to exit a commercial agreement is critical.

M&A Due Diligence: Reviewing a target company’s material contracts for termination provisions is a key part of the M&A due diligence process because of the impact such provisions can have on the value of the seller’s business. In representing a prospective M&A purchaser, thorough consideration of factors such as whether the counterparty may easily terminate a valuable and important agreement with a target company, and what costs may be associated with termination of certain agreements, is needed in connection with the valuation of the target company’s business, as well as with respect to risk assessment relating to the completion of the transaction.

M&A Transaction Agreements: Termination provisions are among the most highly negotiated provisions in M&A transactions. Whether due to changing global circumstances or issues in relation to a target company’s financial performance resulting in a material adverse change, failure to obtain antitrust approval, or the presence of a superior proposal, contemplating or setting the wheels in motion for the termination of an M&A transaction is significant because of the value at stake and the potential of ensuing litigation. Termination fees are also almost always included–and if an M&A transaction is not terminated mutually, identifying a breach by one party could make the difference in which party pays those fees. Accordingly, knowing what the termination provisions of the agreement say is imperative.

Real Estate: In commercial real estate, a tenant may wish to terminate its lease for any number of reasons, including outgrowing the leased space (or on the other hand, downsizing or closing the business); or in connection with an M&A transaction. Similarly, a landlord may seek to terminate a lease based on the tenant’s failure to pay rent, or the violation of other lease provisions. Either way, careful review of termination provisions is necessary to ensure that lease parties’ actions in connection with early termination are in accordance with the specific terms set forth in the lease.

How do you review termination clauses in contracts?

After locating all the termination language in each agreement, key pieces of information to focus on when reviewing termination provisions include:

  1. Who can terminate. Not all termination provisions provide for mutual termination by both parties. In some cases, termination rights may be unilateral—so one party may terminate the agreement without the consent of the other party(ies).
  2. What the consequences are. Termination provisions may also include financial penalties, other liabilities or the transfer of assets on the part of the party terminating the agreement, so it’s essential to identify and take note of such language, if present. Termination fees are highly negotiated (especially in M&A transactions), and understanding the circumstances under which fees are to be paid, and the amount to be paid, is critical. In addition, effects of termination clauses may delineate which rights and obligations will remain in effect following the termination (also see point 4 on Survival below).
  3. Termination Procedures. Termination provisions generally specify procedures a party needs to follow to terminate an agreement pursuant to its terms. Be sure to note any notification requirements, such as advance notice requirements or cure periods if termination is related to the other party’s breach, and refer to the notice section of the agreement to confirm the manner in which notice must be given.
  4. Survival language. Usually found in “Effects of Termination” or survival provisions, termination language may address contract terms that (i) inherently survive termination of the contract because of possible contemplated performance following termination, or (ii) that the parties agree will survive. It is important to take note of any such survival language to understand which, if any, obligations, will remain following the termination.

As with the review of any contractual provision, it’s also important to be aware of other provisions in the agreement that may affect the interpretation and operation of termination provisions. Some of these—such as the notice and survival clauses—are discussed above.

Examples of the Termination Clause

Here are a number of examples of termination clauses from different agreement types:

1.0 TERM/TERMINATION 3.1 The term of this Agreement shall be for three (3) years from the Effective Date (“Initial Term”). Thereafter, this Agreement shall be automatically renewed for additional one (1) year periods, unless either ABC terminates this Agreement with ninety (90) days advance written notice to Vendor as set forth in Section 3.4 or as provided herein. 3.2 Either party may terminate this Agreement for the other’s material breach of this Agreement, but only after the breaching party is given thirty (30) days’ written notice of the material breach by the other party, and is given an opportunity to cure the material breach within such time period. 3.3 If the breach is curable, and is timely cured within thirty (30) days after such notice, the Agreement will continue in full force and effect. In the event the breaching party does not timely cure a curable breach, or if the breach is non-curable, then this Agreement will terminate upon the expiration of the thirty (30) days. 3 3.4 During the Initial Term or any subsequent periods, ABC may terminate this Agreement without cause with ninety (90) days advance written notice to Vendor.
3.5 Upon termination of this Agreement by ABC, ABC shall be responsible for taking delivery of any inventory ordered by ABC, but not yet delivered and making payment in accordance with the terms set forth herein.

If within fifteen (15) days after such meeting, no such modification is mutually agreed to in writing, either party shall then have the right, notwithstanding anything herein contained to the contrary, to terminate the Agreement by giving the other party not less than fifteen (15) days’ notice in writing.

IF A PARTY BREACHES ANY OF ITS OBLIGATIONS UNDER THIS CLAUSE, THE OTHER PARTY SHALL HAVE THE RIGHT OF UNILATERAL FULL OR PARTIAL TERMINATION OR SUSPENSION OF THE AGREEMENT BY WRITTEN NOTICE TO THE OTHER PARTY AND NO LIABILITY WILL BE APPLIED TO THE TERMINATING PARTY FOR SUCH EARLY TERMINATION AND/OR SUSPENSION OF THE AGREEMENT.

1.0 Right to Terminate on Default In the event either Party breaches any material provision of this Agreement, the other Party may, at its option, provide written notice to the Party in breach to remedy such breach. If the said breach is not remedied within two (2) weeks after receipt of the written notice or such further time as may be reasonably required by the Party in breach using best efforts on a commercially reasonable basis, the Party not in breach may give six (6) months notice in writing to the other Party of its intent to terminate this Agreement, and unless such breach is remedied to the satisfaction of the Party not in breach acting reasonably this Agreement will terminate six (6) months from the date such written notice is given, subject to prior Commission approval.

From a franchise agreement:

(a) To terminate this Agreement, with an effective date of termination of ninety (90) days after Franchisor’s written notice of such election. The parties acknowledge and agree that such a termination is for good cause;

From a license agreement:

4.9 License Termination You may terminate the license for a Program on one month’s written notice, or at any time during the Programs testing period. Licenses for certain replacement Programs may be acquired for an upgrade charge. When you acquire these replacement Programs, you agree to terminate the license of the replaced Programs when charges become due, unless we specify otherwise. We may terminate your license if you fail to comply with its terms. If we do so, your authorization to use the Program is also terminated.

From a consulting agreement:

1.0 TERMINATION 8.1 This Agreement may be terminated by the Company by thirty (30) days notice in writing and the Company shall be relieved of all of its obligations hereunder on the effective date of such termination. 8.2 This Agreement may be terminated by the Consultant by thirty (30) days notice in writing and the Consultant shall be relieved of all of its obligations hereunder on the effective date of such termination.

  • Termination for Cause or Breach
  • Termination for Convenience
  • Termination for Insolvency
  • Termination Procedures
  • Termination Fee
  • Effects of Termination
  • Liability on Termination
  • Fiduciary Termination Right
  • Termination — Purchase/Merger Agreement
  • Termination for Material Adverse Effect
  • Termination of Benefit Plans
  • Termination Damages — Lease
  • Termination for Casualty — Lease
  • Termination for Condemnation — Lease
  • Unilateral Tenant Termination Rights — Lease
  • Waiver of Termination Rights — Lease
  • [ISDA Termination smart fields]
  • Termination of Shareholders’ Agreement
  • Notice for Termination Without Cause or Good Reason\n

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