Termination clauses: What are they and how do they work?

Termination clauses allow people to end contracts without breaching the terms of their contract. 

These clauses are an essential part of contract management and need to be understood by many stakeholders across your organization. The legal team, business ops, sales and C-suite all need to understand the intricacies of contract termination to ensure contracts are watertight and enforceable. 

The consequences of poor termination clause management are significant, as contract risk, liability and legal disputes could all come into play. 

This article explores what exactly a termination clause is, the common grounds for contract termination, the different types of termination of contract clauses and finally, how to manage those in a fast-paced business. 

Termination of contract clause vs termination clauses in employment contracts 

One important distinction to be made when it comes to termination clauses is between termination of contract clauses and termination clauses in employment contracts.

What is a termination of contract clause?

A termination clause is a written section within a contract that outlines the circumstances in which the agreement can be terminated. 

Termination clauses allow a contract to be legally ended by a party before the duties outlined in the agreement are fulfilled. Termination clauses are included in most contracts as a standard, though these clauses vary in type and purpose. 

Termination of contract clauses can be found in contracts across a variety of sectors. For example, they could be found in vendor agreements, supplier contracts and service contracts. 

Due to the wide range of contracts termination clauses can be found in, they differ considerably in extent and detail level depending on the industry, parties’ objectives and contract type they are used in. 

What do termination of contract clauses include? 

A typical termination of contract clause will include:

• Grounds for termination. This is bread and butter for a termination clause, it outlines the conditions on which the contract can be terminated. These can range from a breach of contract or nonperformance to a mutual agreement or change in circumstances. This element gives each party guidelines for terminating.
  
  
• Dispute resolution. This outlines the dispute resolution process when it comes to terminating the agreement, this could include mediation, arbitration or negotiation.
  
  
• Requirement of notice. Most termination of contract clauses will include a section on the notice period needed to terminate. This usually outlines how long one party has to communicate their intention to terminate and gives the other party a chance to resolve any outstanding issues.
  
  
• Consequences. This section outlines the consequences of terminating the contract, for example, it may outline assets that need to be returned to one party or state the continuation of a non-compete clause after termination. 

What are termination clauses in an employment contract?

A termination clause in an employment context is created to control the termination of an employment relationship between an employee and an employer. These clauses are only found in employment contracts and make express references to employment law, such as employer duties and employee rights. 

What does termination in an employment contract include? 

As these clauses only appear in employment contracts, they include some specifics: 

• Grounds for termination. The grounds for terminating employment are set out here. They depend on the intention of the parties and the nature of the exact job role that person has. Common grounds for termination include nonperformance, change of circumstance or breach of contract.
  
  
• Severance pay. This is the compensation given to an employee upon termination. This section will outline the amount or method of calculating severance pay based on various factors, such as position or length of service.
  
  
• Notice period. Termination clauses in employment contracts usually include a period of notice, tied to the length of service. It will also depend on the relevant legal requirements set out in the contract.
  
  
• Restrictions. Termination clauses may restrict the right to terminate the contract. This is usually in the best interests of and for the protection of both party's interests. For example, it may prevent termination without dispute resolution to protect the employee. 

Types of termination clause 

Termination of contract clauses are not one-size-fits-all. Each varies based on the party's intent, needs, and industry. The most common types of termination clauses are listed below: 

Termination for cause 

A ‘termination for cause’ clause describes when one party will be able to terminate the contract without the explicit consent of the other. These are the most common types of termination clauses and are found in a variety of contracts. 

The non-breaching party can either terminate the contract immediately, with some notice or give the other party time to put things right. You can see this clause in action in our free Employment Termination Agreement. 

Force Majeure 

A force majeure clause is included in contracts to remove liability for unforeseeable and unavoidable circumstances that prevent contractual obligations from being met. In the case of termination, this would be for events such as war, lockdowns, shortages of energy supplies, or natural disasters. 

For example, if an earthquake destroyed the one factory that supplied your product, leading to long-term delays that could lose you valuable customers, a force majeure clause may be used. 

Termination for convenience 

A termination for convenience refers to when a contract lets one or more parties terminate it without giving a reason. This might only be allowed at specific times, for example, a month before renewal, and might also include a notice period or a fee of some kind. 

If you’re in this situation you can use our free Termination Agreement template.

Using a CLM to manage contracts and clauses 

Termination clauses help to mitigate contractual risks but they have to meet specific criteria to be liable. If they fall short in this regard, they’re of little value to your business.

This means that solid drafting is essential when it comes to termination clauses. For businesses with smaller legal teams, this may be difficult if your legal team is bogged down in old-school contract practices. 

Overdependence on legal support can introduce friction and delays in the contract workflow - this is where Juro comes in.

Juro is an intelligent contract management platform that facilitates the streamlined creation, execution, and management of routine contracts at scale for all teams.

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When it comes to creating clauses your team can rely on, Juro allows teams to independently navigate contracts using pre-approved templates. 

Legal teams can set up templates that embed specific clauses into these templates when predefined conditions are met,  using Juro’s conditional logic feature. This functionality enables legal teams to retain control over contracts and their contents without needing to draft each one individually. 

It also means that complex clauses, like termination clauses, can be automatically inserted into a contract with a certain contract value, or in a certain template.

To find out more about how Juro helps businesses automate routine contract admin and keep control of contract risk at scale, fill in the form below.