What is Termination of Contract? Examples and Reasons

Subscribe to our Newsletter

When you sign a contract, you expect to see it through to the end. But things happen, circumstances change, and sometimes, you need to pull the plug earlier than planned.

After all, it’s better to kill a contract earlier than to start your day with an email from Finance asking why you’ve been paying a vendor that hasn’t delivered anything six months in.

But terminating a contract can be tricky. You need to tackle these situations delicately to avoid burning bridges or facing harsher consequences.

Keep reading to learn how to approach a termination of contract and the steps to follow to avoid the challenge altogether.

Defining Contract Termination

When you terminate a contract, you end the agreement before all parties have fulfilled their obligations. Once you terminate the contract, parties are free from fulfilling those obligations, but penalties may still apply depending on the contract’s terms.

Reasons for Terminating a Contract

Frustrations can build. It takes control and professionalism to handle a contract termination with grace. But you need legal grounds to terminate. So, before you throw in the towel, make sure that at least one of the following applies.

1. Illegality

If either party signed the contract under coercion or the contract terms break local or federal law, then the contract was never valid to begin with. Since there are elements of illegality, you have every right to terminate it.

2. Breach of Contract

You are often within your right for a termination of contract if the counterparty breaches the agreed-upon terms. It’s important to note that even if you terminate your contract with the offending party, you can still require them to face the consequences of the breach.

3. Poor Performance

Some contracts, such as Master Service Agreements, include clauses that allow for termination if one party is not performing to a certain standard. You can terminate your contract if your service provider is not meeting their obligations.

4. Mutual Desire to Terminate

Sometimes, things simply don’t work out as expected, and you realize a deal isn’t working in your favor a few months in. If both you and your counterparty want to terminate the contract, you can break the deal and walk away early.

5. Automatic Termination

In some cases, contracts include automatic termination clauses that end a deal after a certain amount of time. Whether you decide to renew the contract or allow it to end depends on whether the deal serves your business.

How you approach terminating your contract will depend on the reason.

Conditions for a Termination of Contract

There are two main conditions that can lead to and allow for contract termination.

Termination for Cause

This applies when the contract breaks down because of a party’s actions during the contract lifecycle. This often occurs due to a breach of contract or unfulfilled contract obligations. That’s contract value leakage you can’t afford to lose.

It’s important to include termination for cause clauses in your contracts so both parties explicitly know when, under this condition, a party can terminate the contract without the other’s agreement.

Termination for Convenience

A less formal condition, termination for convenience, doesn’t assign blame to either party when terminating a contract. Instead, it allows one or both parties to end the contract on good terms when the deal no longer serves them.

Similar to termination for cause, you’ll want to include a contract clause that allows for this type of termination. For example, you may include a clause allowing either party to terminate the contract as long as they give 30 days’ notice.

If you decide to pursue a termination of the contract, you’ll need to follow several steps to execute the termination properly.

How to Terminate a Contract

In most cases, you can’t simply decide to end a contract early. You need to approach the situation with the proper evidence and documentation.

Here is the process you’ll want to follow to successfully terminate a contract and free yourself from obligations.

Check for Grounds to Terminate

First things first: do you have the right to terminate the contract? Review the contract terms and identify the conditions that need to apply for termination. You’ll also want to note the contract’s terms relating to the notice period and requirements for notice.

You may need to gather additional documentation depending on why you want to terminate. For example, if you have grounds and aim to terminate based on poor performance, you’ll need to get data showing the other party was not fulfilling their contract obligations.

Draft a Termination of Contract Letter

Next, you must notify the other party of your intent to terminate the contract. Draft a letter that includes:

Your express decision to terminate
Your reason for termination
The grounds for termination
When you intend to terminate
The process you’ll follow for termination

In cases where the termination of contract is due to a breach, you’ll also need to define what the breach was, why you can’t resolve it, and any damages you’ll seek regardless of termination.

Deliver the Termination Notice

Once you’ve written your termination notice, you’ll need to get it to the other party. The contract should have language that explains who to serve the notice to and how it serve it. Follow those instructions carefully unless you want to risk wrongful termination.

Track Financials to Ensure Completion

Especially if the contract did not end on good terms, make sure the termination was successful and that you’re free from any obligations. Track your finances to ensure the other party is not still billing your enterprise or receiving services from you past the termination date.

Contract termination may be ideal in some cases. In others, you don’t want the relationship to end. No matter the case, a surprise termination is the last thing you’ll want to deal with. Let’s make sure you don’t.

How to Prevent the Termination of Contracts

You don’t want to get caught with a surprise notice of termination — or find out too far down the line that you were better off terminating a contract on your own. It’s a good thing there are ways to avoid both scenarios.

1. Draft Contracts To Avoid Issues

Every contract you draft should include provisions and clauses that minimize risk as much as possible. Your language should support your business, reduce the chances of issues, and create a safety net in case of trouble.

2. Store Agreements In a Central Repository

You need to know precisely what is in your contracts to use them to support your business. By housing your entire portfolio in a central contact repository, you can refer back to deals post-signature and use that data to ensure everyone is holding up their side of the contract.

3. Leverage AI to Search Through Agreements

When you need to find a specific clause to see if you have grounds to avoid termination, you don’t have time to manually sift through pages upon pages of contract language. AI lets you search your repository using plain language so you find what you need instantly.

4. Track Contract Obligations and Performance

Don’t let it be months before you realize someone isn’t meeting their contract obligations. Establish performance dashboards that let you track obligations, enterprise-specific KPIs, and compliance levels in real-time.

5. Set Alerts for Key Contract Dates

Most teams miss termination or renewal periods because they simply don’t know when they’re happening. Automate alerts and notifications for key dates so you have plenty of time to decide whether you want to continue the relationship and strategize how you’ll move forward.

Know Your Terms and Maintain Relationships With AI CLM

Whether you’re looking to avoid a contract termination or keep an eye on agreements that may warrant one, your contract administration and management processes make all the difference.

Sirion offers CLM software that redefines how you approach contracting. With our AI-native platform, you can seamlessly collaborate with internal teams to monitor obligations, identify areas for strategic improvement, and build stronger relationships with suppliers and partners. Plus, you can do it all at a 60% lower cost of governance than manual work.

Explore the ways our contract suite helps you build relationships beyond signature.

Additional Resources

Overhead view of a businessman and businesswoman having a discussion.

Contract Negotiation