Default Clauses in Contracts: What Triggers Them
What Is a Default Clause?
A default clause defines what constitutes a breach serious enough to trigger specific consequences under the contract. When a party "defaults," the other side gains rights they would not otherwise have — such as terminating the agreement, accelerating payments, or calling on guarantees.
Not every breach is a default. Contracts typically distinguish between minor breaches and events of default that trigger escalated consequences.
Common Events of Default
- Payment default: Failure to make a required payment by the due date
- Performance default: Failing to deliver goods, services, or milestones as promised
- Representation breach: A representation or warranty turns out to be materially false
- Bankruptcy or insolvency: Filing for bankruptcy or becoming unable to pay debts
- Covenant breach: Violating an ongoing obligation, such as maintaining insurance or financial ratios
Cure Periods
Many default clauses include a cure period — a window of time (commonly 10 to 30 days) during which the defaulting party can fix the problem before consequences kick in. Key questions to ask:
- Is there a cure period for all types of default, or only some?
- How long is the cure period, and is it reasonable?
- Does notice have to be given before the cure period starts?
- Can the cure period be extended?
Consequences of Default
Once an event of default occurs and is not cured, the non-defaulting party may be entitled to:
- Terminate the contract immediately
- Accelerate all future payments
- Exercise security interests or call on guarantees
- Pursue damages and other legal remedies
When to Consult a Lawyer
Before signing a contract with detailed default provisions, consider having an attorney review the triggering events, cure periods, and consequences to ensure they are balanced and proportionate.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.