Termination Clause in Contract: How to Get Them Right

Subscribe to our Newsletter

CLM with Enterprise Integrations Header Banner

While termination for convenience provides flexibility, it’s typically subject to contractual limitations such as minimum commitment periods, notice requirements, and termination fees. Courts may also impose implied limitations of good faith, particularly if one party has made significant investments based on the contract’s expected duration.

Material breach definitions should be specific enough to provide clarity but not so narrow that they exclude unanticipated serious violations. Best practice is to list examples of material breaches while including a broader definition encompassing failures that substantially deprive a party of the agreement’s expected benefits.

Courts generally enforce reasonable termination fees that approximate the non-terminating party’s actual damages or investments. However, excessive fees may be deemed unenforceable penalties. Structure fees to reflect unamortized costs or reasonable compensation for lost business rather than punitive amounts.

Automatic renewal provisions (“evergreen clauses”) can complicate termination rights if not carefully drafted. Always specify the window during which termination notice must be given to prevent renewal (e.g., “either party may terminate by providing written notice at least 60 days before the end of the current term”). Failure to provide notice within this window typically results in renewal for the specified period.

Common surviving obligations include confidentiality (often indefinite or for a specified period), indemnification for claims arising during the contract term, limitation of liability, non-solicitation/non-compete provisions, and warranty obligations. Always explicitly list which provisions survive in your termination clause.