Supply Contract Termination

Breach Consequence

Financial penalties or liquidated damages often apply when one party ends the relationship without cause. A supply contract termination might require the buyer to pay for raw materials already purchased by the supplier or to cover the remaining value of the contract. These clauses protect the party that has invested in specialized equipment or inventory to fulfill the order.

If the termination is for cause, the non-breaching party may be entitled to seek damages for the cost of finding a replacement partner. The calculation of these damages often follows a pre-set formula to avoid long disputes over lost profits or secondary costs.

Transition Period

Wind down schedules ensure that the end of the agreement does not cause an immediate halt to the operations of either company. During a supply contract termination, the parties may agree on a phase-out period where volumes are gradually reduced over several months. This allows the buyer to qualify a new source of parts and the seller to find new customers for their production capacity.

Confidentiality and non-solicitation obligations typically survive the end of the supply relationship for several years.

Force Majeure

Unforeseeable events outside the control of either party can provide a legal basis for ending an agreement without penalty. A supply contract termination may occur if a natural disaster or political upheaval makes performance impossible for an extended period. Once the force majeure event exceeds a certain duration, either party usually gains the right to walk away from the deal.