Procurement Glossary
Right of termination for good cause: definition and application in Procurement
November 19, 2025
The right to terminate for cause enables companies to terminate contracts for cause in the event of serious breaches of contract or unreasonable circumstances. In procurement, this right is a key instrument for minimizing risk and ensuring quality. Find out below what the right to terminate for cause entails, which methods are used and how you can use it strategically.
Key Facts
- Extraordinary termination in the event of serious breaches of contract without observing regular notice periods
- Legal basis in Sections 314, 543 BGB for continuing obligations and tenancy agreements
- Requires objectively unreasonable continuation of the contractual relationship
- Must be exercised immediately after becoming aware of the good cause
- Written documentation and justification are required for legal protection
Contents
Definition: Right of termination for good cause
The right of termination for good cause represents an extraordinary termination option for contractual relationships if continuation has become unreasonable for one of the contracting parties.
Legal basis and requirements
Sections 314 and 543 of the German Civil Code (BGB) form the legal basis for termination without notice for good cause. The prerequisites are
- Serious breach of duty by a contracting party
- Objective unreasonableness of the continuation of the contract
- No milder means of solving the problem available
- Immediate exercise after obtaining knowledge
Differentiation from ordinary termination
In contrast to ordinary termination, the regular notice periods do not apply to extraordinary termination. The burden of proof for the existence of good cause lies with the terminating party.
Importance in Procurement
For purchasing organizations, this right offers protection against supplier defaults, quality defects or other business-critical problems. It supplements contract management with an important risk instrument.
Methods and procedures
The proper exercise of the right of termination for good cause requires structured procedures and careful documentation.
Examination of the conditions for termination
A systematic review is required before an extraordinary termination is issued:
- Documentation of the breach of contract or the disruptive event
- Assessment of severity and impact
- Examination of alternative solutions
- Legal assessment of the prospects of success
Notice of termination and formal requirements
The notice of termination must be in writing and specifically state the good cause. A blanket reference to "good cause" is legally insufficient. The contract negotiations should include appropriate clauses.
Post-contractual processing
Once notice of termination has been given, settlement arrangements must be made, including the return of materials, invoicing for services rendered and possible claims for damages. Digital contract management supports systematic tracking.
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Key figures on termination rights for good cause
The systematic measurement and monitoring of key figures enables effective management and risk minimization in the event of extraordinary terminations.
Cancellation rate and success rate
The number of extraordinary terminations in relation to the total number of contracts shows the frequency of critical contract disruptions:
- Cancellation rate by supplier category
- Success rate in legal disputes
- Average duration of proceedings until clarification
Cost impact and damage limitation
The financial impact of extraordinary terminations must be systematically recorded. This includes direct termination costs, replacement costs and lost savings.
Effectiveness of prevention
Key figures on the effectiveness of preventive measures help to continuously improve supplier management. Audit rights and regular assessments contribute to the early detection of problems.
Risk factors and controls for termination rights
Exercising the right to terminate for cause entails legal and business risks that must be minimized by means of suitable control mechanisms.
Legal risks and burden of proof
An unjustified extraordinary termination can lead to considerable claims for damages. The burden of proof for the existence of good cause lies with the terminating party:
- Insufficient documentation of the breach of contract
- Delayed exercise of the right of termination
- Lack of proportionality test
Business impact
Extraordinary terminations can disrupt supply chains and lead to supply bottlenecks. Careful risk assessment and alternative planning are required. Framework agreements can offer flexibility when changing suppliers.
Preventive measures
Regular supplier evaluations, clear performance standards and service level agreements reduce the likelihood of situations requiring extraordinary terminations. Early warning systems enable timely interventions.
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Practical example
An automotive supplier has been supplying components with significant quality defects for months, leading to production downtime at the customer. Despite repeated warnings and requests for improvements, the quality does not improve. Procurement systematically documents all defects, communication and damage incurred. After setting a final deadline that expires without success, the company issues an extraordinary termination for cause. The comprehensive documentation enables successful legal enforcement, while a replacement supplier is activated in parallel.
- Systematic documentation of all breaches of contract
- Legal review before giving notice of termination
- Parallel activation of replacement suppliers
Current developments and effects
The application of the right to terminate for cause is subject to current legal and technological developments that purchasing organizations must take into account.
Digitization of termination processes
Modern contract management systems enable automated monitoring of termination requirements and deadlines. AI-based systems can identify breaches of contract at an early stage and generate recommendations for action.
ESG compliance as a reason for termination
Violations of sustainability standards and circular economy principles are gaining in importance as important reasons. Suppliers must increasingly fulfill ESG criteria, the violation of which can trigger termination rights.
International contract drafting
Cross-border supply contracts give rise to complex legal issues regarding applicable law and jurisdiction. Force majeure clauses and international trade rules have a significant impact on the exercise of termination rights.
Conclusion
The right to terminate for cause is an indispensable tool in strategic Procurement for minimizing risk and ensuring quality. Proper application requires careful legal review, systematic documentation and clear contract design. Modern contract management systems support the efficient monitoring and enforcement of termination rights. Companies should implement preventative measures and train their procurement teams accordingly in order to use this important legal instrument successfully.
FAQ
What constitutes good cause for extraordinary termination?
Good cause exists if the continuation of the contractual relationship is unreasonable for one party. Typical examples are serious quality defects, repeated delays in delivery, insolvency of the contractual partner or breaches of material contractual obligations. The severity of the breach of duty must justify immediate termination.
What deadlines must be observed when terminating for good cause?
Notice of termination must be given immediately after becoming aware of the good cause. The law does not specify a concrete deadline, but a longer period of inactivity can be considered a waiver of the right of termination. As a rule, notice of termination should be given within a few weeks.
How can a company protect itself against unjustified dismissals?
Preventive measures include clear contract design with defined performance standards, regular communication with contractual partners and systematic documentation of contract fulfillment. If an extraordinary termination is received, legal advice should be sought immediately and the justification checked.
What role do termination clauses play in purchase agreements?
Contractual termination clauses can specify and extend the statutory right of termination. They define specific grounds for termination, procedures and legal consequences. Well-formulated clauses create legal certainty and facilitate the practical application of the right of termination in the event of contractual disruptions.
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