Termination of Agreement Clause: Everything You Need to Know
A termination of agreement clause provides details in which parties can end their legal relationship and discontinue the fulfillment of their obligations.3 min read
A termination of agreement clause provides details of the circumstances under which parties can end their legal relationship and discontinue the fulfillment of their obligations. Common law dictates that parties may terminate an agreement for a fundamental or a material breach of the agreement.
Under a standard agreement, parties can terminate for the following reasons:
- Mutual consent
- Breach or failure of a set precedent or condition
- In the event one of the parties becomes bankrupt
- A legal order that prohibits the agreement
When creating a clause for termination of an agreement, it should be stated whether it can be mutual or unilateral, and you might want to consider including a right to cure. You might want to include such termination clauses as:
- Termination on notice
- Termination on breach
- Termination on insolvency
- Termination on a change of control
- Termination on an event
You can also include a fee in your termination clause, which will be paid in the event that a party terminates the contract.
When a contract does not contain a termination clause, you will still be able to dissolve an agreement under certain conditions. In some states, contracts such as door-to-door sales and real estate transactions can be terminated within a small timeframe from the signing of the agreement.
In a typical contract termination clause, there is the anticipation of certain events, including:
- The sale of a company
Additionally, some contracts will allow parties to seek termination if the contract becomes too burdensome to continue the operations in the agreement.
Termination for Cause
A provision for termination for cause allows one of the parties to end the contract, as well as collect damages from the other party in the event that they failed to fulfill their contractual obligations. An example would be a contract that is created to perform a migration of a database into a new system. They can allow their customer to terminate for cause since they did not meet their obligations, but the customer can seek penalties.
Termination for Convenience
When a party decides to not go through with a deal even if there is no fault on either side, it is referred to as termination for convenience. When this occurs, the clause will cover how to calculate the amount that the canceling party owes to the non-cancelling party and the limits that can be put on that amount.
These types of contracts are often used in construction agreements that will allow the owner to terminate the contractor's work at the owner's convenience. These types of contracts first came about in the use of federal government procurement contracts.
A termination for convenience clause provides the owner with an option to terminate the balance of work for reasons that are not due to the contractor's fault. When this occurs, the owner can also delete a portion or all the remaining scope of work.
What Does a Termination for Convenience Clause State?
A termination for convenience clause will include:
- The actual costs of the work that are completed within the terms of the agreement.
- Costs that will be incurred by the contractor or permitted by the owner in the contract.
- The amount that will be paid for termination of the contract over the actual costs.
- A section that states the contractor can no longer lay any other claim for damages against the owner.
It is important to word these sections correctly, as they will have an effect on the profit the contractor makes. Simply put, when a contract is canceled early, a contractor will lose out on some of the profits they expected to make as a result of the job.
Certain contracts can be established to terminate after a certain timeframe. An example of this would be a teacher's contract, which may be completed after the school year has concluded. In a fixed-term contract, there can be a set term established for the contract and a stipulation for automatic renewal for subsequent terms unless one party informs the other of their intent to not renew the contract.
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