Termination for cause clause: defining material breach before you need it

Sample clause

Written for a managed services agreement between Copperleaf Technology and Northgate Cleaning, a fictional commercial cleaning business in Geelong.

20. Termination for cause 20.1 A party may end this agreement immediately by written notice if the other party commits a material breach and, where the breach can be remedied, does not remedy it within 14 days after receiving written notice describing the breach and what is required to fix it. 20.2 Each of the following is a material breach: failure to pay an undisputed invoice within 30 days of the due date; a breach of clause 8 (Confidentiality); a breach of clause 12 (Work Health and Safety); and a failure to meet the same service level in three consecutive months. 20.3 A party may end this agreement immediately, with no remedy period, if the other party commits a breach of clause 8 that has caused Confidential Information to be published, or is convicted of an offence involving dishonesty connected with this agreement. 20.4 A notice under this clause must identify the clause breached, the facts relied on, and the date by which the breach must be remedied, and must be given under clause 21 (Termination notices). 20.5 Termination under this clause does not affect any right that accrued before the effective date.

Sample wording, not legal advice.

Variants

What to negotiate

• What counts as material

  Leaving material undefined means the question is answered later, by whoever is most willing to litigate. Suppliers want a short closed list; customers want an open definition plus named examples. The common settlement is an open test with a list of failures that are deemed material, which gives certainty for the cases that matter without excusing everything else that goes wrong.

• The length of the remedy period

  Fourteen or twenty business days is usual for commercial breaches, but a single period rarely fits every failure. Suppliers ask for longer where a fix needs a subcontractor or a part; customers ask for zero where the harm is immediate. Tiered periods solve most of it: a standard window, a shorter one for payment, and no window for confidentiality and safety.

• Whether repeated minor breaches count

  A supplier can fail small and often, remedy each time, and never trigger the clause. Customers ask for a repeat breach rule so that three notices in a period allow termination. Suppliers want the rule limited to the same failure rather than any failure, and want a chance to deliver a remediation plan first. Both features usually survive.

• What happens to the exit obligations

  Customers want transition help even after terminating for cause, because they still need the service to keep running. Suppliers argue that a party at fault should not also control the handover. The practical answer is that transition assistance applies however the contract ends, paid at the standard rate, with the customer's right to claim damages left untouched.

The risk of leaving it out

Without the clause the party wanting to leave falls back on the general law, and must show the breach went to the root of the contract or was a repudiation. That is a high test and an uncertain one. Ending a contract without a sufficient right is itself a breach and can be treated as repudiation, although the High Court in DTR Nominees v Mona Homes (1978) showed that the answer turns on the party's conduct as a whole, so a business with no clear cause right often keeps performing while it takes advice.

What material breach actually means

There is no fixed legal definition, which is why the drafting matters more than the label. At general law a party can end a contract for breach of an essential term, for a sufficiently serious breach of an intermediate term, or for repudiation, which the High Court restated in Koompahtoo Local Aboriginal Land Council v Sanpine (2007). There, serious and sustained failures in administering a joint venture were enough to justify termination even though no single term breached was essential. A contractual cause clause sits on top of that and can be narrower or wider than the general law allows. The useful pattern is a general test combined with a deemed list: failures to pay undisputed invoices, breaches of confidentiality, breaches of safety obligations, loss of a licence. Each is easy to prove from documents, which is exactly what a party needs when it is about to send a notice.

A contractual right does not always carry full damages

Ending a contract under an express cause right is not the same as accepting a repudiation. In Shevill v Builders Licensing Board (1982) a lessor ended a lease under a clause allowing termination for unpaid rent, but could not recover the rent it would have earned over the rest of the term, because the covenant to pay rent was not an essential term and the tenant had not repudiated. The drafting response is to say which obligations are essential, commonly the payment obligation, or to state that loss of bargain damages are recoverable on a termination under the clause. How the notice itself must be written and signed belongs in the termination notice clause, and delivery belongs in the notices clause, so this clause should point to both rather than repeat them.

Choosing the deemed list for a services contract

The deemed list works only if every item can be proved from records the parties already keep. Non payment shows in the ledger. A confidentiality breach shows in the disclosure itself. A safety breach shows in an incident report or a regulator notice. Service level failures show in the monthly report, which is why the sample counts three consecutive months rather than using a word like persistent. Avoid items that need an opinion, such as poor quality or unsatisfactory performance, because they return the parties to the argument the list was meant to prevent. When the agreement is drafted with the document generator, naming the deemed breaches in the description produces them as numbered items that a notice can quote.

Documents that carry this clause

Employment contractA full time ongoing contract for an operations coordinator on $86,000 plus $10,320 of superannuation. Eleven numbered clauses, a leave table drawn from the National Employment Standards, and a notice table that scales with service.Master services agreementA data consultancy and an insurer sign this once and then buy work under it for three years. It is the rare contract whose whole purpose is to make the next twenty contracts short.Subcontractor agreement template that flows the head contract downA subcontract exists to pass the head contract's obligations down one level and move the money back up on time. This one names the scope by drawing, sets the progress claim dates against the security of payment rules, holds retention and states the insurances, so the trade knows exactly when it is paid and for what.Rent to own agreement template with credits, price and defaultA rent to own agreement is a hire with an option to buy at the end, so the goods stay with the supplier until the last payment. This one covers a $2,400 sofa and dining set paid off at $62 a week for 52 weeks, with a table showing what has been credited and what the payout figure is at four points in the term.

Questions people ask