Building a termination clause

Most disputed terms WCC ranking: 

13

Most important terms WCC ranking: 

14

Most negotiated terms WCC ranking: 

5

What is termination for cause?

Usually, when terminating for cause something went wrong. For example, the party did not perform under the agreement and the specific obligation that was not performed is material.

There are other situations (causes) that can also entitle a party to terminate for cause, for example, the financial position of the other contracting party deteriorates to a certain extent.

What is termination for convenience?

Termination for convenience (sometimes referred to as no-fault termination) provides a party with a right to terminate an agreement even if the other party has not breached the agreement. In other words, the party can terminate the agreement for any reason (or for no reason). 

Components of a Termination Clause

Termination for cause – material breach

Generally, an aggrieved party can terminate an Agreement if the defaulting party commits a material breach of the agreement.

If a breach of the agreement can be cured (in other words, it can be fixed), there is usually a time provided to the defaulting party to remedy the breach. The aggrieved party can terminate the agreement if the defaulting party cannot cure the breach within the provided time.

If the breach cannot be remedied, the aggrieved party should be able to terminate the agreement immediately.

Termination for cause – other causes

It is also possible to terminate an agreement for other reasons (causes) stipulated in the agreement. For example, where there is a change in laws or regulations that has the effect that a party cannot perform their obligation under the agreement.

The contracting parties are generally free to negotiate any termination for cause. For example, if the agreement is concluded with a business specifically to gain access to the knowledge of a key employee, the contracting parties may agree that if this key employee leaves the employment of this business, the agreement can be terminated for cause.

Termination for convenience – notice period

Depending on the services provided and how easily a replacement provider can be found, a reasonable notice period should be provided if a party wants to terminate the agreement under the termination for convenience provisions.

Termination for convenience – penalties

In practice, people often refer to termination penalties. This wording may cause some trouble because penalties may be subject to certain limits. The amount you are negotiating here is more a charge or fee payable by a party to terminate the agreement (without breaching the agreement). It’s different from liquidated damages.

TIP!

This is an important negotiation point. When you are negotiating the commercial of an agreement, it is usually done with a specific contract term in mind. If an agreement is terminated for no reason, the termination fee should be adequate to compensate the party who may have agreed to reduced rates due to the length of the agreement.  

Post-termination obligations and the effects of termination

Usually, when an agreement is terminated a couple of things need to happen. These obligations survive termination and aim to facilitate a good exit. For example:

  • all materials provided by either Party to the other under this Agreement must be returned within 30 days after termination.
 

For clarity, often certain effects of termination are also stipulated. For example:

  • all licenses granted under the Agreement terminates; or
  • all due fees become payable.

Termination assistance

Some transactions will not require termination assistance provisions. Then there are transactions where the termination assistance provisions are heavily negotiated. Generally, if the transaction, for example, involves the outsourcing of a key business operation, a smooth transition of the services under the agreement is vital when the agreement is terminated.

If it is going to be a complex untangling of the services from the business, it is a good idea to provide that the parties need to draw up an exit plan. If good contract management is applied, this exit plan is usually drawn up before the termination of the agreement.

 What needs to be included in the exit plan is dependent on the industry and the specific service and products that are provided. Examples of items to include as part of the exit plan:

  • the tasks to be performed by the Parties in connection with the Termination Assistance
  • the schedule for the performance of tasks under the Exit Plan
  • specific license or ownership rights of the Parties with respect to software or other intellectual property
  • a description and documentation of the services, service levels, fees, and access requirements that will be required to transition the service provided under the Agreement
  • the right to pass confidential product or service information on to other providers
  • the specific wind-down terms applicable to each stage of the Termination Assistance, including how volume changes will affect the provisioning of the services

 

You may also want to be clear on what happens if the agreement is terminated under force majeure provisions and whether or not the Termination Assistance provisions will still apply in such an event.

TIP!

If termination is due to a material breach of the Client, including non-payment, then make sure there is a right for the Provider to require additional terms to ensure compliance before providing any Termination Assistance.

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