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Termination Clause Defined
Termination clauses, also called severance clauses, authorize parties to terminate an agreement without breaching the contract under early termination and mutual termination. Parties can avoid a dispute by allowing a termination clause to trigger for a previously agreed upon reason.
Types of termination clauses include:
- Type 1. Termination for convenience
- Type 2. Termination for cause
Incorrect use of the termination clause can also result in a legal conflict. General contract principles still apply regardless of the terms and conditions.
Here’s an article about termination clauses for more information.
Termination Clause Explained
Termination clauses set the terms and conditions surrounding a contract cancellation that doesn’t result in penalties. These rules typically address who may cancel the contract and for what reasons.
Negotiate these terms carefully with an attorney to ensure that they are enforceable and fair.
Purpose of Termination Clause
The purpose of termination clauses is to remove issues surrounding breach of contract claims and termination. Not all contract breaches are created equally, and termination clauses provide guidance.
Termination Clause Examples
Examples of termination clauses include:
- Example 1. Negotiating severance pay for the supposed termination of employees
- Example 2. Performing M&A due diligence when considering a new venture
- Example 3: Counterparties buying and selling an asset with limitations
Many projects can benefit from a termination clause. However, get legal advice from attorneys to prevent mistakes that can affect your future.
Termination Clause Samples
Sample 1 – Softare and Service Agreement
Termination. Either party may terminate this Agreement prior to the beginning of the Renewal Term by providing one hundred twenty (120) days written notice to the other party prior to the end of the then-current term. If notice of termination is provided by Client but TRAVELTRAX services provided by TRX extend past the termination date of the then-current term, then pricing for such TRAVELTRAX services shall be, at Client’s option, either (a) a *; or (b) a *. In the event; that Client exercises its option for a * renewal, the TRAVELTRAX services shall not be extended past December 31, 2012. If Client does not notify
TRX in writing of its choice of option (a) or (b) by December 1, 2011, then Client shall be deemed to have chosen option (b). Either party may terminate this Agreement and the rights granted herein if the other party materially breaches any of the provisions of this Agreement and fails to remedy such breach within thirty (30) days after receiving written notice thereof, provided the breach does not relate to a monetary obligation (in which case TRX may exercise its rights under Section 6(a)) or breach of confidentiality (in which case the non-breaching party may exercise its rights under Section 7(f)). Termination of this Agreement does not constitute either party’s exclusive remedy for breach or non-performance by the other party and, subject to the other provisions of this Agreement, each party is entitled to seek all other available remedies, both legal and equitable, including injunctive relief.
- Insolvency. Should either party (i) admit in writing its inability to pay its debts generally as they become due; (ii) make a general assignment for the benefit of creditors; (iii) institute proceedings to be adjudicated a voluntary bankruptcy; (iv) consent to the filing of a petition of bankruptcy against it; (v) be adjudicated by a court of competent jurisdiction as being bankrupt or insolvent; (vi) seek reorganization under any bankruptcy act; (vii) consent to the filing of a petition seeking such reorganization; or (viii) have a decree entered against it by a court of competent jurisdiction appointing a receiver, liquidator, trustee, or assignee in bankruptcy or in insolvency covering all or substantially all of such party’s property or providing for the liquidation of such party’s property or business affairs; then, in any such event, the other party, at its option and without prior notice, may terminate this Agreement effective immediately.
- Effect of Termination. Upon termination of this Agreement for any reason other than the insolvency of TRX or TRX ceasing to conduct business in the ordinary course and its obligations hereunder are not assumed by a third party: (1) all rights and licenses granted to Client hereunder shall immediately cease; (2) TRX shall terminate Client’s access to the Services; (3) Client shall immediately cease use of the Services (including all Software) in any manner whatsoever, and delete and return all copies of Software, Documentation and other related materials to TRX; and (4) all payments owed to either party shall be immediately due and payable. Should TRX become insolvent and cease to conduct business in the ordinary course without its obligations hereunder being assumed by a third party, *.
- Survival. Where the context or wording of a section indicates, the terms of this Agreement shall survive its termination, including, without limitation, Sections 5(c), 5(d), 6(a), 7, 8, 9, 10, 11,and 12 hereof.
Security Exchange Commission - Edgar Database, EX-10.4 5 dex104.htm SOFTWARE AND SERVICE AGREEMENT, Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1103025/000119312510258839/dex104.htm >.
Sample 2 – Service Agreement
TERMINATION. This Agreement may be terminated at any time by the written agreement of the Parties as provided in Section 1 hereof. Notwithstanding the foregoing and any other provision contained herein, the following Sections of this Agreement shall remain in effect and shall survive the termination of this Agreement: Section 5, Billing; Section 6, Limitation on Liability; Indemnification; Section 9, Confidential and Proprietary Information; Section 10, Cooperation and Dispute Resolution; Section 13, Successors and Assigns; and Section 14, No Third Party Beneficiaries.
Security Exchange Commission - Edgar Database, EX-10.36 2 d395429dex1036.htm SERVICE AGREEMENT, Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/109177/000119312512482298/d395429dex1036.htm >.
Sample 3 – Service Agreement
4.1 Term. This Agreement shall commence on the Effective Date and shall continue for a period of one (l) year from the Effective Date (the “Initial Term”), unless earlier terminated pursuant to Sections 4.2, 4.3, 4.4, or 4.5 or extended as provided in this Section 4.1. Following the Initial Term, this Agreement shall automatically renew for subsequent one (l) year periods (each, a “Renewal Term”), unless earlier terminated pursuant to Sections 4.2, 4.3, 4.4 or 4.5 or unless Tenet provides written notice to IMaCS at least one hundred eighty (180) days prior to the expiration of the Initial Term or then current Renewal Term.
4.2 Termination for Cause. If either Party materially defaults (including but not limited to the willful, material and wrongful disclosure of Confidential Information) in the performance of any of its duties or obligations under this Agreement (except for a default in payments by Tenet) which default is not substantially cured within thirty (30) days after written notice is given to the defaulting Party specifying the default, or, with respect to those defaults which cannot reasonably be cured within thirty (30) days, if the defaulting Party fails to proceed within thirty (30) days to commence curing said default and to proceed with all due diligence substantially to cure the default, but in any event does not substantially cure the default within ninety (90) days, then the Party not in default may, by giving written notice of termination to the defaulting Party, terminate this Agreement as of a date specified in the notice of termination (the “Termination Date”) such Termination Date being subsequent to the date of the notice of termination.
4.3 Termination for Nonpayment. If Tenet defaults in the payment when due of any amount due to IMaCS and does not, within thirty (30) days after being given written notice, either: (a) cure such default; or, (b) indicate that the payment is in dispute and provide a detailed explanation of such dispute and deposit the disputed amount in escrow in a major U.S. commercial bank reasonably designated by IMaCS, with interest to be allocated to the Party entitled to the principal upon resolution of the dispute, then IMaCS may terminate this Agreement. In the event Tenet deposits any disputed amount in escrow, such amount, together with any accrued interest, shall be released by the escrow agent only upon (a) receipt of written instructions signed by both IMaCS and Tenet or (b) receipt of an order from an arbitrator or court of competent jurisdiction.
4.4 Termination for Convenience. Tenet may terminate this Agreement in its entirety on or after the first anniversary of the Effective Date upon at least one hundred eighty (180) days’ prior written notice to IMaCS.
4.5 Termination of MLSA. Tenet may terminate this Agreement upon the termination by either party of the MLSA or expiration of the MLSA.
4.6 Obligations Upon and After Termination. Notwithstanding anything in the Agreement to the contrary, whenever the Agreement is terminated or expires, in addition to any rights or remedies of the Parties under the Agreement, Tenet or its designee shall have the right to obtain the services provided for under this Agreement from a third party. IMaCS agrees to cooperate with any third party so as to accomplish the transaction without an interruption or disruption of the business operations of any Clients. Upon termination or expiration of this Agreement, for a period of one (l) year following such termination or expiration, Tenet shall have the right, but not the obligation and IMaCS shall fully cooperate with Tenet and/or its designee, if any, to facilitate the transfer of the IMaCS System, operations, Hardware, Documentation, licenses for use of all related materials pertaining to the operation of the Data Center to Tenet or its designee for a fee computed as follows: the greater of either (i) 25% of IMaCS’s actual initial purchase costs or prepaid license fees or (ii) the purchase costs or prepaid license fees, less straight line depreciation over sixty (60) months following the date of purchase license by IMaCS. Notwithstanding anything contained in the Agreement to the contrary, Tenet shall pay no additional fees to IMaCS under this Section 4.6 for any software provided pursuant to the Master Software License and Service Agreement. IMaCS shall provide the services at its then-prevailing commercial rates. IMaCS shall provide other transition services as requested by Tenet as Additional Services under the terms of this Agreement for a period of sixty (60) days following the transfer of the IMaCS System to Tenet, or its designee, at IMaCS’s then prevailing commercial rates.
Security Exchange Commission - Edgar Database, EX-10.17 10 dex1017.htm SERVICES AGREEMENT, Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1424217/000119312508048821/dex1017.htm >.
Sample 4 – Service Agreement
18.1 Termination of Agreement
(a) For Cause by WSI. If IBM (i) materially breaches this Agreement, and (1) does not cure such breach within thirty (30) days of receipt of a notice of default or (2) with respect to a breach that cannot with due diligence be cured within thirty (30) days of notice thereof, IBM fails to proceed promptly and diligently to correct the breach and develop within thirty (30) days of notice of breach a complete plan for curing the breach acceptable to WSI, (ii) commits numerous breaches of its duties or obligations which in the aggregate constitute a material breach and continues to commit breaches of this Agreement during the sixty (60) days after IBM’s receipt of notice from WSI that IBM is in jeopardy of WSI terminating under this Section, then WSI may, by giving notice to IBM, terminate this Agreement, in whole or in part, as of the termination date specified in the notice.
(b) For Failure to Meet Service Levels. WSI may, by giving notice to IBM within 90 days of such event, as its sole remedy terminate the agreement in the event of a Service Level Termination Event as set forth in Schedule B without payment of the Termination Fee, and WSI will pay IBM’s actual Wind-Down costs.
(c) For Cause by IBM. If WSI (i) materially breaches this Agreement and (a) does not cure such breach within thirty (30) days of receipt of a notice of default or (b) with respect to a breach that cannot with due diligence be cured within thirty (30) days of notice thereof, WSI fails to proceed promptly and diligently to correct the breach and develop within thirty (30) days of notice of breach a complete plan for curing the breach acceptable to IBM, then IBM may, by giving notice to WSI, terminate this Agreement in whole or in part, as of the termination date specified in the notice.
18.2 For Convenience by WSI. Subject to the time restrictions and other terms and conditions set forth in Schedule C, Part 1, Part 8.0(b), WSI may terminate this Agreement in whole (or in part only as set forth herein) for convenience by giving IBM 90 days prior written notice. WSI may terminate the Service Categories for convenience as described in and according to the terms set forth in Schedule C, Part I, Section 8.0.
18.3 Calculation of Termination Charge. Set forth in Schedule C are the termination charges that would be payable to IBM if WSI terminates this Agreement pursuant to Section 18.2.
18.4 Partial Termination: Termination Charge Adjustment. If WSI terminates a portion of the Services pursuant to Section 18.2, the Termination Charge applicable to the remaining Services as a whole shall be adjusted in accordance with Schedule C.
18.5 Termination Charge. Except as otherwise specifically set forth in this Article, no termination fee shall be payable by WSI in connection with the expiration or a termination for cause of this Agreement.
18.6 Effect of Termination. In the event WSI terminates this Agreement, IBM shall stop all work as of the date of termination set forth in the notice of termination. WSI shall owe IBM for all Services performed and all Travel and Incidental Expenses incurred up to the effective date of termination set forth in the notice of termination. WSI shall not be obligated to pay for Services, Travel Expenses, or Incidental Expenses after the effective date of the termination to IBM unless WSI is obligated to pay additional Charges or Travel or Incidental Expenses in exercising its option under Section 19.1. Upon any termination of this Agreement each party shall also promptly return to the other all Materials owned by the other (except for copies authorized under this Agreement), all Confidential Information of other Party and provide to the other written confirmation that all such items have been returned or destroyed.
Security Exchange Commission - Edgar Database, EX-10.1 2 dex101.htm SERVICES AGREEMENT, Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/719955/000119312504210939/dex101.htm >.
Common Contracts with Termination Clauses
Common contracts with termination clauses include:
- Service contracts
- Commercial contracts
- M&A transaction agreements
- Real estate contracts
- Insurance contracts
- Construction contracts
- Employment contracts
- Severance agreements
- Master swap agreements
Here’s an article about drafting termination clauses.
Termination Clause FAQs
Termination clauses are essential to any contract. The termination clause FAQs below will help you understand them better:
What happens if there is a no termination clause in a contract?
You should determine if you have the right to termination if no termination clause exists in a contract. Contract lawyers will help you understand your legal options.
What is an exit clause in a contract?
Exit clauses, also known as escape clauses, in a contract allow one party to leave the agreement without having to follow through on their obligations.
Is a termination clause necessary?
Yes, termination clauses are necessary when drafting a contract. Using them in your agreements ensures that parties cannot arbitrarily abandon their obligations.
This article also addresses termination clauses.