A termination clause (or “severance clause”) is clause in a contract that specifies how and when the agreement can end. It “sets forth the terms and conditions surrounding a contract’s cancellation”, telling the parties what happens when the working relationship ends. Termination clauses typically detail required notice periods, payments (like severance or final fees), and any duties on termination (such as returning property or confidentiality). In effewdct, they provide a pre-arranged exit plan so that if one party exercises the clause, the contract can end without a breach. Courts note that well-drafted termination clauses minimize disputes by spelling out agreed triggers and procedures for ending the agreement. In short, a termination clause is a roadmap for winding up a contract: when triggered, the contract is discharged.
Types of Termination Clauses
Contracts may include various kinds of termination provisions, tailored to the relationship. Common types include:
1. Termination for Cause:
This clause lets a party end the contract if the other breaches a fundamental term or misconducts. Typically, the aggrieved party must give written notice of the breach and an opportunity to cure. For example, a vendor agreement might state: “Either party may terminate this agreement upon written notice if the other party materially breaches any provision of this agreement and fails to cure such breach within 30 days after receiving written notice of the breach”. In a termination-for-cause clause, the notice will specify the grounds and give a cure period. If the breach isn’t cured in time, the contract ends and remedies follow.
2. Termination for Convenience
Also called a “no-fault” termination, this clause allows one or both parties to walk away without any breach. It usually requires advance notice but no specific reason. This gives flexibility if circumstances change. The clause may simply say a party can terminate at will (with notice) or require notice plus an effective termination date. Even though no cause is needed, courts expect the terminating party to honour the agreed notice period and any payment obligations.
3. Mutual Termination
This clause allows both parties to end the contract by mutual agreement. Often, the parties must sign a separate termination agreement. The clause might say simply that the agreement may be terminated by mutual consent, effective on a date agreed by the parties. Because termination is by agreement, there is no dispute the contract ends amicably. The parties should still clarify the date of termination and any post-termination obligations.
4. Automatic Termination
This provision terminates the contract automatically when certain events occur, without either party having to give notice. Common examples include expiry on a fixed term or force majeure events. An expiry clause sets a specific end date: e.g. “This contract terminates automatically on December 31, 2025”. A force majeure clause might terminate the agreement if performance becomes impossible (e.g. a natural disaster or legal change). Upon automatic termination, the contract ends immediately; the clause should specify any wind-up steps (e.g. return of materials). These clauses provide certainty by defining triggering events beyond anyone’s control.
Other specialized clauses can appear (for example, termination upon insolvency, death, or change of control). In each case, the clause should be clear about the trigger and the required actions. Ambiguities can defeat enforcement, so it is critical that these different types of termination clauses are drafted precisely and in context of the overall contract.
How Termination Clauses Work
Termination clauses function as pre-agreed rules for ending a contract. When a party properly invokes a clause, it effects a lawful termination rather than a breach. For example, if an agreement says “Party A may terminate on 60 days’ written notice,” then providing that notice ends the contract as of the effective date; afterwards, neither party has future obligations, though any accrued rights or damages up to that point remain. The contract is considered “discharged”: future duties fall away while obligations that arose before termination (like unpaid work or accrued salary) still must be honoured.
However, the parties must strictly follow the clause’s requirements. If notice must be written and given to the other party, then the terminating party must do exactly that or else it risks breaching the agreement. For instance, a termination-for-cause clause typically requires written notice to the other party, clearly outlining the breach and setting a cure period. Similarly, a for-convenience clause will spell out exactly how much notice to give. Failure to comply with these procedures (for example, giving only verbal notice when written notice is required) can be a contract violation.
If a party refuses to honour the agreed procedure, the clause itself may be enforceable against them. The party seeking to terminate could either insist the clause still binds and demand proper execution of it, or potentially sue for breach if notice was not given. Conversely, the terminating party who follows the clause has a strong defense that the termination was lawful and consented (as prearranged).
If no termination clause exists, or if the clause invoked is invalid, then parties must rely on default contract law. In general-commercial contracts, this often means termination is only possible by mutual agreement, by repudiatory breach, or by frustration. If there is no express termination right, courts may imply a term allowing termination on reasonable notice.
In employment contracts, lack of a valid termination clause means the employee is entitled to common-law reasonable notice (or pay in lieu), based on the so-called Bardal factors. The Bardal factors are key legal factors used in Canadian employment law to determine the appropriate “reasonable notice” period an employee is entitled to when dismissed without cause. That notice period is often far more generous than statutory minima.
In summary, a termination clause essentially replaces the open-ended common-law termination rights with a specified regime. If invoked correctly, it sets the contract to end on agreed terms. If a clause is absent or invalid, the default legal rules take over.
Termination Clauses in Employment Contracts
In Ontario employment law, termination clauses face special legal rules. The Employment Standards Act, 2000 (ESA) prescribes minimum notice and severance for terminations without cause, and expressly prohibits contracting out of these standards. In practice, this means any termination clause must at least meet (or exceed) the ESA minimums. Section 5(1) of the ESA makes any attempt to waive or lessen an employment standard void. For example, if the ESA requires an employee to be paid all “regular wages” during the notice period (including vacation pay), a clause that promises only base salary clearly violates the ESA and will be struck down.
Because of the ESA and case law, Ontario courts apply an “exacting standard” to employment termination clauses. Even minor drafting defects can invalidate the entire clause. A leading principle (from Waksdale v. Swegon 2020 ONCA 391) is that a defect in one part of the clause (for example, a for-cause provision or benefit entitlement) voids the whole clause. This means employers must be very precise.
Key issues that courts have focused on include:
1. Payment of all entitlements
The ESA requires employers to provide all regular wages (including vacation pay and bonuses) during the notice period. Clauses promising payment of only base salary or excluding vacation pay have been invalidated. In Dufault v. Township of Ignace (2024 ONSC 1029), the contract promised “termination pay” equal only to the employee’s base salary for 60 days, omitting vacation pay. The court held this failed the ESA requirement (since “regular wages” include vacation), and thus the clause was void. (Because the clause was void, the terminated employee in Dufault was ultimately awarded full salary and benefits for the unexpired contract term.)
2. Scope of “cause” term
Ontario’s ESA limits cause terminations to serious misconduct (“wilful misconduct, disobedience or neglect of duty” that is not trivial). If a contract tries to broaden this (for example, by listing poor performance or breach of policy as cause), courts will void it. In Baker v. Van Dolder’s Home Team Inc. (2025 ONSC 952), a clause listed vague grounds like poor performance as cause. The court struck it down because it expanded beyond ESA’s narrow cause definition.
3. Timing and discretion language
Phrases like “at any time” or “at its sole discretion” have been deemed problematic. The ESA prohibits firing an employee on certain grounds (e.g. during a statutory leave, or for asserting an ESA right). Language allowing termination “at any time” in sole discretion could imply firing even in those prohibited situations. In Dufault, the clause allowed the employer to fire the employee “at any time” by its “sole discretion,” and the Ontario Superior Court found this language offended ESA protections. Although the Ontario Court of Appeal (ONCA) in Dufault ultimately did not decide the “any time” issue (because the for-cause defect already voided the clause), it is notable that Baker reached the same conclusion: “at any time” without cause violates the ESA. In short, courts warn employers that “at any time” or unconditional discretion clauses are risky and likely unenforceable.
4. Strict compliance & severability
Courts have refused to save defective clauses by severing invalid parts. For example, Waksdale v. Swegon established that even if an employee was actually dismissed without cause, the presence of any non-compliant for-cause provision voided the whole clause. a termination clause must be clear, complete, and free of any ESA-violating terms.
5. Consequences of an invalid clause
If a termination clause is found unenforceable, the employee gets the common-law entitlements. This usually means reasonable notice or pay in lieu based on length of service (often months of salary). In several recent Ontario cases, courts have awarded far more than the ESA minimums when clauses failed. In Timmins v. Artisan Cells Inc. (2025), a Superior Court awarded 9 months’ notice where the employer had promised 3 months in the contract but only paid ESA minimums without fulfilling the contractual promise.
Case law examples:
Baker v. Van Dolder’s Home Team Inc. (2025 ONSC 952):
Ontario Superior Court held that a termination clause allowing dismissal “at any time” was contrary to the ESA and thus unenforceable. The court also invalidated vague cause language (e.g. “just cause” without defining it properly) and noted that even savings clauses often couldn’t save such defects.
Li v. Wayfair Canada Inc. (2025 ONSC 2959)
This case is the first Ontario decision to uphold a clause with “at any time” language. The key difference was that the Wayfair contract repeatedly guaranteed the employee his exact ESA entitlements. The clause said the company could terminate “at any time and for any reason” but would provide “only the minimum statutory amount of written notice required by the ESA” (plus severance, benefits continuation and all other ESA entitlements). Importantly, the contract defined “Cause” using the ESA’s own standard. The court found this satisfied the ESA in form and substance, and therefore enforced the clause holding that the plaintiff got only ESA minimum notice and no common-law damages.
Conclusion
Termination clauses are vital parts of any contract, they define how a business or employment relationship will end. A well-drafted termination clause provides certainty and can spare both sides from costly litigation. However, in Ontario (especially in employment agreements) termination clauses are subject to strict legal scrutiny. The courts emphasize that ESA standards cannot be contracted out of, and any language contradicting the ESA will likely render the clause void.
In sum, effective termination clauses require careful drafting. Companies should regularly review their contracts and seek legal guidance to ensure compliance with Ontario law. With proper legal advice termination clauses can truly serve as the safety net they are meant to be, providing a smooth, predictable path when relationships end.
How Pacific Legal Can Help
Pacific Legal is a Canadian law firm with lawyers in Ontario who draft and review termination clauses in both employment and commercial contracts. Our team monitors Ontario case law and statutory requirements to ensure termination provisions are drafted with clarity, compliance, and enforceability. We also review existing agreements to identify provisions that may be unclear, overly broad, or inconsistent with legal requirements.
Contact Pacific Legal today to schedule a confidential consultation with one of our lawyers and ensure your contracts are strategically designed to protect your interests.
