Business Law Series: Contracts – Termination

Key Contract Terms Part 5: Understanding the importance and mechanics of termination provisions in your contract

Breaking up can be hard to do, but breaking a contract doesn’t have to be! During the past few months, we’ve been discussing key terms in a business contract, starting with the importance of a well-defined scope, followed by precise pricing provisions, establishing time for performance and finally how and when a contract can be modified. Now, we will discuss what happens when a partnership or agreement is just not meant to be, and a contract must be terminated.

When it comes to negotiating contract terms, contracting parties tend to spend much of their time detailing terms concerning services and compensation. However, parties shouldn’t neglect the also-vital terms regarding the contract’s termination. Termination provisions establish the framework for concluding the contractual relationship during the term of the contract and offer clarity by defining the circumstances, methods, and consequences of contract termination. Thoughtfully drafted, termination provisions can prevent disputes, mitigate risks, and save both parties time and money.

In this blog post, we will delve into contract termination provisions and highlight key considerations for drafting and enforcing these provisions.

Creating Termination Rights

Under North Carolina law, contracting parties do not have statutory rights to unilaterally cancel a contract except in very specific and limited circumstances. Still, parties can elect to grant one or both parties the contractual right to cancel by including express termination rights in their agreements. These provisions allow parties to define specific events or conditions that trigger the right to terminate the contract. Common examples of triggering events include a party’s:

  1. Failure to meet specified performance milestones.
  2. Material changes in circumstances.
  3. Nonpayment of fees or expenses.
  4. Bankruptcy.
  5. Illegal activity or willful misconduct.

The foregoing examples are often referred to in contracts as “termination for cause” because they usually arise out of the non-terminating party’s fault or misconduct. “Termination without cause” occurs when a party elects to terminate the contract for reasons that are not the non-terminating party’s fault. A contract can expressly allow for the parties to terminate the contract both with or without cause; however, as described later, the contract should account for these scenarios differently. 

Contracts frequently include timing provisions in guiding termination protocols as well.  For example, the parties may allow for consequence-free termination for up to 30 days after executing the contract but add certain penalties for termination after 30 days.  The right structure for any specific contract will depend on the specific circumstances of the transaction. Having an attorney review or create your contract is the best practice to ensure your contract properly addresses these considerations, particularly if your contract does require one of the statutory rights for termination.

Timing, Notice Requirements & Cure Periods

Termination provisions often encompass notice requirements, which specify the method and timeframe for providing notice to the non-terminating party. Clearly outlining notice obligations is crucial to ensure compliance and avoid disputes. Parties should consider factors such as the preferred mode of communication (e.g., written notice or email—never oral) and the length of notice period required for termination.

In certain cases, contracts may also include cure periods, allowing the breaching party an opportunity to rectify the breach before termination. Consider the following scenario for example.  If you order 100 items and 50 arrive damaged, a cure provision would require you to give the seller a reasonable opportunity to replace the damaged items before you terminate the contract. Notably, a well-drafted cure provision won’t absolve the party at fault of all consequences.  For example, if you suffered substantial costs as a result of the delayed delivery of the 50 items in the above example, the seller may still be held liable to you for those costs.

Additionally, the obligation to cure should have exceptions.  So, if the 100 items from the example were for an event, and the 50 items can’t arrive until after the given event date, the purchaser should have no obligation to cure the error and be able to cancel the contract for the 50 items (as well as potentially recoup other damages you may have endured for what is now a breach of contract).

While there are many contingencies to consider in implementing a cure-requirement, including a properly drafted cure provision can encourage issue resolution and preserve the contractual relationship while still providing an option for termination if the breach remains unresolved.

Consequences of Termination

Contracts should address the consequences of termination.  Whether it’s the opportunity-cost of pursuing one venture over another, the cost of labor or materials to complete a project, or some other detriment, parties typically make certain investments upon entering into a contract.  Accordingly, terminating the contract comes with costs to the non-termination party, and termination provisions should safeguard the interests of both parties involved.

To ensure fairness, termination provisions should account for these costs and the presence of cause.  For example, if a party terminates a contract due to the non-terminating party’s misconduct (cause), perhaps the non-terminating party can fairly be made to eat its losses.  However, if the terminating party ends the contract without cause, then perhaps that terminating party should account for the non-terminating party’s losses.  A more complex scenario occurs when neither party is at fault.  Consider the following three scenarios, exemplifying each of these scenarios:

Scenario #1: Termination for Cause

You contract with a builder to build a deck, which the builder is supposed to begin within 30 days of signing the contract. The builder orders lumber for your deck but triple books himself and announces that they will not begin actual construction until after they complete the other projects in a minimum of 90 days.

Scenario #2: Termination without Cause

You contract with a builder to build a deck, which the builder is supposed to begin within 30 days of signing the contract. The builder orders lumber for your deck, foregoes two other bids, and is ready to begin.  You encounter a less expensive builder and want to cancel the current contract and instead contract with the new builder.

Scenario #3: No-Fault Termination (Force Majeure)

You contract with a builder to build a deck, which the builder is supposed to begin within 30 days of signing the contract. Shortly thereafter there is a quarantine and a supply shortage and neither party knows when supplies will become available or when the builder will be able to resume labor.

In each of these scenarios, the termination provisions should ensure that the cost burden falls on one or both parties as necessary to preserve fairness. In Scenario #1 the contract would likely determine that you bear the burden, in Scenario #2 the builder, and in Scenario #3 ideally provide for the parties to share the burden. Negotiating the terms for each scenario is essential to balance the need for flexibility while also maintaining accountability.

In all scenarios, the termination provisions should account for the payment of outstanding fees or expenses, the return of confidential information, and the disposition of intellectual property. Additionally, provisions regarding post-termination obligations, such as non-compete or non-solicitation clauses, may be included depending on the nature of the contract and the parties involved.

Enforceability of Termination Provisions

North Carolina courts typically uphold termination provisions that are clear, unambiguous, and negotiated between the parties. However, certain provisions may face closer scrutiny if the law has already established specific requirements.  For example, attempting to contractually waive liability for intentional misconduct or gross negligence or failing to provide a cure period when required could result in the provision being held to be unenforceable. It is crucial to know and ensure that termination provisions adhere to the requirements of the applicable state’s law.

Given the complexities and potential legal ramifications of termination provisions, it is advisable to consult with a knowledgeable attorney when drafting or reviewing contracts. The business law attorneys at Skufca Law can provide guidance based on specific circumstances and ensure compliance with relevant and industry-specific regulations.


Having a clause for termination in your contract is critical as it eliminates uncertainty in the event a termination event occurs.

If you need to ensure your contract properly covers termination options or you need a new contract drafted, please contact the business law attorneys at Skufca Law at (704) 376-3030.

Up Next: Contract Dispute Resolution

In our next blog in our Business Law Series on contracts, we will discuss the Dispute Resolution process used to settle disagreements between parties that have entered into a contract. Stay tuned!