Term and Termination

You need to know about…

Term

The term of a contract is the period of time for which the contract is valid. It means the same as the duration of the contract. The term of contract is usually stated at the beginning of a written contract. However, it is also often mentioned again in the termination clause.

Termination

Almost all contracts contain a clause that specifies the circumstances under which a contract can be brought to an end before the agreed expiry date. This means that the agreed term of the contract will be shortened. Under what circumstances might a contract be terminated by one of the parties? The most common reasons are:

• Agreement. The parties agree that either of them can terminate the contract by giving an agreed period of notice to the other.
• Breach of contract. One party can terminate the contract if the other party commits a material breach of one or more of the terms and conditions of the contract. However, it usually needs to be material or significant breach for a court to allow the injured party to terminate rather than accept damages for the loss. The party in breach usually has an agreed period of time to remedy the breach before the injured party can insist upon termination.
• Insolvency of a party. Most commercial contracts contain a provision in the termination clause that allows one party to terminate the contract if the other party becomes insolvent or goes into liquidation.

A lawyer has been asked to explain the reasons why it is important to include a termination clause in a commercial contract. Here is his first reason. Read what he says and complete his explanation by filling the gaps with the words from the box below.

agree	run	enter
giving	states	negotiate

“It is absolutely essential to include a termination clause in a contract. There are several reasons for this.

The first reason is a very simple one. Let’s imagine that you (a) a retail business, such as a shop that sells luxury chocolate, in the centre of London. You (b) into a contract with a supplier of chocolate in Belgium. The contract (c) that the supplier in Belgium will deliver a certain quantity of goods to you every month. Both parties expect the contract to continue for a certain period of time before it has to be renegotiated and they (d) upon the term of the contract as 12 months. What will you do if no one buys your chocolate and after three months your business is in trouble? You do not want to be obliged to go on with the contract for another nine months! Therefore, when you (e) the terms and conditions of the contract it is essential to say that either party can terminate by (f) notice to the other. A reasonable notice period in a situation such as this is probably four weeks”.

Answers

1. run
2. enter
3. states
4. agree
5. negotiate
6. giving