What is a termination clause?

A termination clause is a written provision in an agreement that defines the circumstances under which said agreement can be terminated. Termination can happen before the duties outlined in the agreement are fulfilled. Termination clauses can always be customized but standard ones are included in almost every agreement.

Grounds for termination

Generally speaking, an agreement can only be lawfully terminated if there is a legitimate reason to do so. This can be one of the following:

Mutual agreement - both parties reach an understanding and agree to nullify the agreement and all duties defined by it.

Fulfillment - an agreement dissolves when all the parties involved have performed their duties as required by the agreement.

Impossibility of performance - due to unforeseeable and uncontrollable circumstances, it can become impossible for the parties of an agreement to perform their respective tasks.

Mistake, fraud or misrepresentation - if the agreement does not include all necessary information or misrepresents certain circumstances that are important to its completion, this represents a valid reason for termination.

Breach of contract - if one of the agreement’s parties does not perform their contractual duties, this constitutes a breach. As a result, the non-breaching party is entitled to recover their losses.

Termination clause - if the agreement includes a termination clause, it can determine special circumstances under which the agreement may be terminated.

Common applications for termination clauses

Termination clauses are commonly used in master swap agreements, for example. In this case they define certain circumstances under which a party is no longer financially able to complete the swap transaction.

Another common instance of termination clauses are employment agreements. Here, they are used to define what misconduct or violation can lead to the termination of an employee. Such behavior may include unexcused sick leave, being late repeatedly or delivering unsatisfactory work. It also explains under which circumstances an employee can terminate employment before the contractually determined notice period.

Examples of a termination clause

Here are some examples of what a termination clause can look like:

1. This contract shall be for an initial period of 24 from the commencement date. Either party will have the right to terminate the contract by giving written notice to the other party at least 3 months before the end of the initial period of the contract or at least 30 days at any point after the end of the initial period.
2. Either party may terminate this contract by written notice to the other at any time  if the other party:

1. commits a breach of this contract and, in the case of a breach capable of remedy, fails to remedy the breach within 14 days of being required to do so in writing; or
2. becomes insolvent, or has a liquidator, receiver, manager or administrative receiver appointed.