Termination for cause

A termination for cause clause lets a party end a contract early because the other side breached it or another listed event occurred, like insolvency.

What it means

Termination for cause lets a party end a contract before its term is up because the other side did something wrong. The clause usually lists the triggers, such as a material breach, non-payment, insolvency, or a violation of law. Many clauses require the breaching party to get a chance to fix the problem first.

Say a bakery signs a two-year supply contract and the supplier keeps delivering late and short. If the contract allows termination for material breach after a 30-day cure period, the bakery sends written notice describing the problem. If the supplier has not fixed it after 30 days, the bakery can end the contract and buy elsewhere.

Getting the process wrong is costly. If you terminate for cause and a court later decides the breach was not serious enough, or you skipped a required notice step, your termination can itself be treated as a breach. Also note that a right to terminate just because the other side files for bankruptcy may not be enforceable once a US bankruptcy case begins.

What to watch for

  1. Read the list of triggers closely. “Any breach” lets a party terminate over trivial issues, while “material breach” sets a higher bar.
  2. Check whether a cure period applies and whether it covers every trigger or only some of them.
  3. Follow the notice requirements exactly. A termination notice that is late, vague, or sent to the wrong address can be challenged.
  4. Look at what happens after termination, including refunds, payment for work already done, return of data, and whether damages can still be claimed.
  5. Check whether both sides have the same termination rights or whether only one party can terminate for cause.

Example clause

Either party may terminate this Agreement upon written notice if the other party materially breaches this Agreement and fails to cure the breach within thirty (30) days after receiving written notice describing it in reasonable detail. Either party may also terminate immediately upon written notice if the other party becomes insolvent or makes a general assignment for the benefit of creditors.

You can end the contract for a serious breach only after warning the other side in writing and giving them 30 days to fix it.

Legal glossary