Procurement contracts are essential documents that outline the terms and conditions for the acquisition of goods or services. Among the many provisions included in procurement contracts, termination clauses are particularly important. These clauses outline the circumstances under which either party can terminate the contract, the process for doing so, and the consequences of termination. In this blog post, we’ll explore some different Termination clauses in procurement contracts.
Considerations to be made
When preparing a procurement contract and considering what termination clauses to include, several key factors should be taken into account to ensure that the contract can be terminated effectively and equitably if necessary.
What are the standard termination clauses?
- For Cause: Specify conditions under which either party may terminate the contract due to the failure of the other party to meet contractual obligations, such as non-performance or breach of contract.
- For Convenience: Allow either party to terminate the contract without cause, which can be crucial for flexibility. Specify any notice requirements and potential liabilities.
- Automatic Termination: Define scenarios where the contract will automatically terminate, such as the loss of a necessary license or insolvency.
Notice Requirements
Also know as notice of termination. Detail the required notice period that the terminating party must give the other party before termination takes effect, which could range from immediate notice to several months, depending on the nature of the procurement.
Termination Procedures
Outline the steps that must be followed to enact a termination, including who must be notified, how they must be notified (e.g., in writing), and any required documentation or forms that must be completed.
Consequences of Termination
- Financial Obligations: Clarify any financial obligations upon termination, including settlement of accounts or compensation for early termination.
- Return of Property: Specify any requirements for the return of property or materials supplied under the contract.
- Confidentiality: Reaffirm any confidentiality obligations that survive the termination of the contract.
Dispute Resolution
Include provisions for resolving any disputes over the contract’s termination, potentially through arbitration or mediation, before resorting to litigation.
Transition and Handover
Provide for a smooth transition of services or goods, particularly if the termination is of a contract involving critical operations that need to be handed over to another supplier without disrupting the business.
Rights and Remedies
Define what rights and remedies are available to both parties in the event of a termination, including the right to cure a breach within a specified period after receiving notice of the breach.
Impact on Related Agreements
Consider how terminating the contract might impact other related agreements or obligations, and address these implications within the termination clause.
Regulatory and Legal Compliance
Ensure that the termination clauses comply with local laws and regulations, which can vary significantly by jurisdiction and may impose specific requirements or restrictions on contract terminations.
Force Majeure
Although typically addressed in a separate clause, it’s crucial to consider how force majeure events (e.g., natural disasters, war, pandemics) affect contract termination, particularly whether such events provide grounds for termination.
By considering these factors when drafting termination clauses, you can create a procurement contract that is clear, enforceable, and fair, providing protection for both parties involved. This thoughtful approach to termination clauses will help mitigate risks and manage the implications of ending a contract.
Clauses explained
Convenience Termination Clause
A convenience termination clause allows either party to terminate the contract without cause or penalty. This type of clause is typically used when the circumstances surrounding the procurement change, making it no longer necessary or advantageous to continue the contract. For example, if a business decides to change its procurement strategy, it may terminate a contract even if the supplier is performing well.
Termination for Cause Clause
A termination for cause clause allows either party to terminate the contract if the other party breaches a material term of the contract. This type of clause is typically used when one party fails to deliver goods or services as required under the contract. It provides the aggrieved party with the right to terminate the contract and seek damages or other remedies.
Flexible Clause
This clause provides both parties with the right to terminate the contract for either convenience or cause. This type of clause offers greater flexibility for both parties and allows for termination under a wider range of circumstances. It’s important to note, however, that this type of clause may result in greater uncertainty for both parties.
Termination for Bankruptcy or Insolvency Clause
A termination for bankruptcy or insolvency clause allows either party to terminate the contract if the other party becomes bankrupt or insolvent. This type of clause is used to protect the interests of the party that is not in financial distress and to ensure that the contract is terminated if the other party is unable to perform its obligations under the contract.
Termination with Notice Clause
These termination clauses allows either party to terminate the contract without cause or penalty, provided that they provide advance notice to the other party. This type of clause provides greater certainty for both parties and allows for termination without causing undue harm or disruption to the other party.
Subpart contract termination
Subpart contract termination clauses is a provision within a larger termination clause or contract section that specifies the conditions under which a particular segment, phase, or specific obligations of a contract can be terminated without terminating the entire contract. This type of clause allows for partial termination, providing flexibility to address issues related to specific parts of the contract while preserving the overall agreement.
Is there a standard termination clause?
Always adapt your contract clauses to the specific situation. These clauses are for educational purposes only. If you want help with a Procurement Contract we recommend contacting Jon Kihlman.
1. Termination for Convenience with 30 days notice.
“The Buyer reserves the right to terminate this Contract, in whole or in part, for its convenience and without cause, upon thirty (30) days written notice to the Supplier. In the event of such termination, the Buyer shall be liable to pay for any goods or services delivered and accepted up to the date of termination, but shall not be liable for any loss of anticipated profits or any other damages.”
2. Termination for Cause
“Either party may terminate this Contract immediately upon written notice if the other party breaches any material term or condition of this Contract and fails to remedy such breach within fifteen (15) days after receipt of written notice specifying the breach. In the event of termination for cause by the Buyer, the Buyer shall be entitled to procure similar goods or services from another source and the Supplier shall be liable for any additional costs incurred by the Buyer.”
3. Termination for Insolvency
“Either party may terminate this Contract immediately upon written notice if the other party becomes insolvent, files for bankruptcy, or enters into any arrangement or assignment for the benefit of its creditors. In the event of such termination, the terminating party shall have no further obligation to the other party, except for payment of goods or services delivered and accepted prior to the date of termination.”
4. Termination for Non-Performance
(termination of service clause).
“The Buyer may terminate this Contract immediately upon written notice if the Supplier fails to deliver the goods or perform the services in accordance with the specifications and timelines set forth in this Contract. In the event of termination for non-performance, the Buyer shall be entitled to recover from the Supplier any costs incurred in obtaining substitute goods or services from another supplier.”
5. Termination for Force Majeure
“Either party may terminate this Contract without liability if performance is delayed or prevented by circumstances beyond its reasonable control, including but not limited to acts of God, war, terrorism, civil unrest, government regulations, strikes, or natural disasters. In the event of termination due to force majeure, the terminating party shall promptly notify the other party in writing and the parties shall negotiate in good faith to determine an equitable solution, including the payment for goods or services delivered and accepted prior to the termination date.”
6. Example of a Settlement Clause:
“The Parties agree to negotiate in good faith to settle any outstanding obligations and payments upon termination of this Contract. The Supplier shall submit a final invoice detailing all goods delivered and services performed up to the termination date. The Buyer shall review and pay any undisputed amounts within thirty (30) days. Any disputes arising from the termination shall be resolved through mediation or arbitration as outlined in the dispute resolution clause of this Contract.”
Can Changes in Customs Rates Trigger a Right to Terminate a Supplier Contract?
One of the more complex scenarios in international procurement arises when there are unforeseen increases in customs duties, tariffs, or taxes imposed by a government authority. These developments, such as those that occurred during the Trump administration’s shift in trade policy (in 2025), can significantly alter the cost structure of a contract, particularly when importing goods across borders.
The critical question for buyers is: Can these changes trigger a right to terminate the contract? The answer largely depends on the type of termination clause included in the agreement.
Termination Clauses and Their Applicability to Tariff Increases
| Termination Clause | Applicability to Tariff Changes | Comments |
|---|---|---|
| Force Majeure | ✔️ Possibly | If the clause includes “governmental action” or “regulatory change,” sudden customs changes may qualify. However, many clauses only suspend performance rather than provide a right to terminate. |
| Termination for Cause | ✔️ Conditionally | Only applies if tariff-induced cost increases result in a breach of material contract terms, such as fixed pricing or non-performance. |
| Termination for Convenience | ✔️ Yes | Most flexible option. Allows the buyer to terminate without justification, though a notice period or fee may apply. |
| Material Adverse Change (MAC) | ✔️ Strongly applicable | If the clause includes regulatory changes or substantial cost impacts, it may be invoked to exit the contract. |
| Hardship Clause | ✔️ In civil law systems | More common in Europe. May provide the right to renegotiate or terminate if the new tariffs cause an excessive burden on one party. |
| Termination with Notice | ✔️ Yes, with conditions | Allows exit with advance notice, regardless of the reason. Does not require a breach or triggering event. |
Practical Implications for Procurement Professionals
Tariff and customs changes are often outside the control of both buyer and supplier. To avoid costly disputes or untenable supplier relationships, procurement professionals should proactively address this risk during contract negotiation. Specifically:
- Ensure customs and trade regulation changes are treated as material adverse events in the contract.
- Where possible, negotiate a termination for convenience clause to maintain flexibility in volatile trade environments.
- In international agreements, consider including a hardship clause to allow contract adaptation or termination under economic distress caused by regulatory shifts.
- When working under fixed pricing models, clearly define whether customs duties are included or excluded, and specify which party bears the risk of tariff changes.
Conclusion
In conclusion, a termination clause are critical provisions that should be included in procurement contracts. Different types of terminations offer different levels of flexibility, protection, and certainty to both parties. When drafting procurement contracts, it’s important to carefully consider the circumstances under which termination may be necessary and to include appropriate termination clauses that protect the interests of both parties.
Want to learn more
What are the clauses in a termination letter? Supplier contract termination is a critical process that requires a structured approach to mitigate legal risks and uphold professional relationships.
Use the Contract Clause tag in the blog to sort out more learning about clauses in procurement contracts, for example the Indemnification clause.
Learn more about the basic International sales law by Jon Kihlman or specifically about Remedies for Breach of contract.
Learn the recommended content in a relevant Purchase Order. In the course General terms and conditions you can learn from a real life example.
Note: Illustration to the blogpost “Termination clauses in procurement contracts” was created with created by Chat-GPT on April 21, 2024.
More in depth about Material adverse change and Hardship
What Is a Material Adverse Change (MAC) Clause?
A Material Adverse Change (MAC) clause—also known as a Material Adverse Effect (MAE) clause—is a contractual provision that allows one party, typically the buyer, to terminate or renegotiate the contract if a significant and unforeseen event occurs that fundamentally alters the commercial basis of the agreement.
In procurement, this clause acts as a critical risk management tool, especially in contracts that span long timeframes or involve international trade, where exposure to regulatory and economic shifts is high.
When Does a MAC Clause Apply?
A MAC clause is typically triggered by events that:
- Are not reasonably foreseeable at the time of signing,
- Have a substantial negative impact on a party’s ability to perform or the economic value of the contract,
- Are outside the control of the affected party.
Examples relevant to procurement include:
- Sudden introduction of import tariffs or export restrictions,
- Major currency devaluation or inflationary shocks,
- Political instability, such as sanctions or trade embargoes,
- Regulatory changes that directly affect product cost or supply chain logistics.
For example, if a buyer enters into a long-term contract to import electronic components from China, and new tariffs increase landed costs by 25% overnight, the buyer may seek to invoke the MAC clause to terminate or renegotiate the contract.
Key Considerations When Drafting a MAC Clause
To ensure effectiveness and enforceability, a MAC clause should be:
- Clearly Defined
The clause should specify what constitutes a “material” change—e.g., cost increases above a certain threshold, or specific regulatory events like customs rate adjustments. - Objective and Measurable
Vague language like “significant impact” can be difficult to enforce. Use quantitative thresholds where possible (e.g., “an increase of more than 15% in total delivered cost”). - Linked to Performance or Value
It should be clear whether the trigger affects the supplier’s ability to perform, the buyer’s ability to accept the goods, or the overall value proposition of the contract. - Complementary to Other Clauses
A MAC clause should align with Force Majeure, Price Adjustment, and Termination clauses to avoid overlap or contradiction.
Practical Example
Scenario:
A European buyer signs a multi-year agreement with a U.S. supplier. One year in, the U.S. imposes a 20% export tariff on the product. The supplier increases prices accordingly.
With a well-crafted MAC clause:
The buyer may argue that the tariff constitutes a material adverse change, and either terminate the agreement or initiate a renegotiation process.
Without a MAC clause:
The buyer might be locked into higher costs unless the supplier is willing to negotiate, or unless another termination clause (e.g., for convenience) exists.
Summary
| Feature | Explanation |
|---|---|
| Purpose | Protect against unforeseeable, major changes affecting contract value or performance |
| Common Triggers | Tariffs, regulatory shifts, economic crises, legal changes |
| Ideal Structure | Specific, objective, and tied to measurable impacts |
| Value in Procurement | Allows buyers to exit or renegotiate contracts in light of major market or regulatory disruptions |
What Is a Hardship Clause in Procurement Contracts?
A Hardship Clause is a contractual provision that allows a party to request renegotiation—or in some cases termination—of the contract when unforeseen events fundamentally alter the economic equilibrium of the agreement.
Unlike a Force Majeure clause, which addresses events that make performance impossible, a hardship clause deals with events that make performance excessively burdensome, but still possible.
This distinction is important for procurement professionals managing long-term contracts in volatile markets or regulatory environments.
When Does a Hardship Clause Apply?
A hardship clause is typically invoked when:
- An external event occurs after contract signing,
- The event was unforeseeable at the time of signing,
- It causes a serious economic imbalance between the parties,
- The affected party is still capable of performing, but under conditions that are financially unsustainable or commercially unreasonable.
Examples of hardship triggers in procurement include:
- Sharp increases in customs duties, import tariffs, or logistics costs,
- Significant currency devaluation in cross-border agreements,
- Changes in regulatory frameworks or tax regimes,
- Supply chain disruptions due to geopolitical or economic shifts.
How Does a Hardship Clause Work?
Unlike termination clauses, a hardship clause generally follows a more progressive path:
- Notification – The affected party must inform the counterparty in writing of the hardship event.
- Renegotiation Period – Both parties enter into good-faith negotiations to amend the contract terms (e.g., pricing, delivery timelines).
- Fallback Mechanism – If renegotiation fails, the clause may provide:
- A right to request contract adaptation by a neutral third party (e.g., arbitration),
- A right to terminate the contract.
In many civil law jurisdictions (such as France, Germany, or much of Latin America), hardship clauses are enforceable even if not expressly included—based on principles of good faith and equity.
In common law jurisdictions (like the U.S. or U.K.), the concept must be clearly defined in the contract to be enforceable.
Practical Example
Scenario:
A buyer in the EU signs a two-year fixed-price contract to import steel from Turkey. One year into the contract, unexpected EU tariffs are imposed on Turkish steel, increasing landed costs by 35%.
With a hardship clause:
The supplier may initiate a renegotiation request, citing the tariff as a hardship event. If the parties cannot agree, the contract may be amended, or ultimately terminated based on hardship provisions.
Without a hardship clause:
The buyer may be forced to choose between absorbing the increased cost or risking performance issues. Legal options would be more limited unless other clauses (e.g., Force Majeure or MAC) apply.
Summary
| Feature | Explanation |
|---|---|
| Purpose | To manage unforeseeable economic disruptions that make contract performance excessively difficult |
| Trigger Events | Regulatory changes, tariffs, inflation, currency volatility, supply chain cost shocks |
| Mechanism | Notification → Renegotiation → Adaptation or Termination |
| Applicability | Stronger in civil law jurisdictions; must be contractually defined in common law systems |
| Value in Procurement | Protects both parties from commercial imbalance and fosters fair, flexible outcomes |