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:
- 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).
- 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).
- 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.
- 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]
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