Termination clauses

How BC law treats it

In commercial contracts, the parties are largely free to agree how the contract ends. Common provisions allow termination for convenience on notice, termination for material breach after written notice and a cure period, and termination if the other party becomes insolvent. Without a termination clause, a party can generally end a contract only if the other side repudiates it, for example through a breach that deprives it of substantially the whole benefit of the deal, or if the contract is frustrated. A contract of indefinite duration may be terminable on reasonable notice where a court finds that was the parties' implied intention. Ending a contract without a right to do so is itself a repudiation and exposes the terminating party to damages. Contractual discretion must be exercised in good faith. The Supreme Court of Canada held in Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District that a discretionary power must be used for the purposes for which it was granted, and in Bhasin v Hrynew and C.M. Callow Inc v Zollinger that parties must not lie to or knowingly mislead each other about performance, including in the run up to termination. Employment is different. No law requires a termination clause, but if there is none, an employee dismissed without cause is entitled to reasonable notice at common law. A clause that gives less than the Employment Standards Act minimums is void, because the Act cannot be contracted out of (s. 4), and the employee then receives common law notice (Machtinger v HOJ Industries Ltd). The Act's compensation for length of service under section 63 is capped at eight weeks. BC courts interpret employment termination clauses strictly against the employer.

What it means for your business

A well drafted termination clause lets a business leave a failing supplier, software or service relationship cleanly and predictably. A poor one can trap a company in a long contract or leave it owing damages for wrongful termination. In employment, a defective clause can turn a few weeks of statutory pay into months of common law notice. Review notice periods, cure rights, payment on termination and survival clauses before signing. Example: A Victoria retailer signs a five year IT support contract that allows termination only for material breach. When service declines without amounting to a fundamental breach, the retailer cannot exit without paying for the remaining term, a problem a termination for convenience right would have avoided.

Risks and common mistakes

Terminating for breach without giving the written notice and cure period the contract requires. Drafting an employment termination clause that could, in any scenario, give less than the Employment Standards Act minimum. Using a discretionary termination right for a purpose unrelated to why it was granted, contrary to Wastech. Forgetting to state which obligations, such as confidentiality and payment, survive termination. Misleading the other party about whether the contract will be renewed or continued while planning to terminate.