Contracts often have various provisions concerning when and how a party may terminate the contract. Typical termination provisions can cover situations in which the party terminates for cause or without cause. The distinction between the two types of termination clauses can be crucial to your contract rights and remedies.
A provision governing termination without cause essentially gives one or both parties the right to terminate the contract for any reason, whether or not there has been a breach. Often called a “termination for convenience” clause, these provisions can have various effects on the practical terms of your deal, which you may want to consider when you’re drafting or negotiating your contract.
1) If a termination without cause provision is going to be a part of your contract, consider how much notice you would like to have or give if you or the other party wants to terminate the contract without a breach. Things to consider would be how long it will take you to find another seller or service provider to fill in the void.
2) It is common for a service provider or seller to raise the price or quote a little bit in order to account for the fact that the other party may suddenly terminate the contract. Be aware of how the pricing structure works in your deal, and try to substantiate where the costs are attributed.
3) Consider your capital investment. Many times a termination without cause provision can expose you or the other party to losses resulting from a shorter contract period. If the contractual relationship is cut short early, the party may not have recovered their costs yet. Therefore, it is common to see some sort of cost recovery provision or penalty provision in the event a party terminates without cause.
Stay tuned for more on termination for cause provisions.
While there are many other issues to consider when you’re drafting termination provisions, these are just a few that you may want to keep in mind. You should always consult an attorney when you’re in the process of drafting and negotiating a contract.