Termination, and consequences of termination

//Termination, and consequences of termination
Termination, and consequences of termination2017-02-19T13:49:45+00:00

revolverThe revolver represents termination of the contract. Not very politically correct, but you’ll remember it!

Most contracts will have a provision somewhere determining how the parties can terminate the contract. There are two common situations where this can occur:

  1. If a party is in breach, and fails to remedy the breach within a stated period of receiving notice from the other party; or
  2. If a party becomes insolvent, or a similar event occurs.

When agreeing these termination provisions, which are often considered ‘boilerplate’ and not given much attention, think about whether they will work properly for you, as drafted. For example, how long is it reasonable to give the other party to fix a breach, before termination becomes an option? How long would you expect to be given, if you were the party in breach?

Sometimes, a contract will have a term of a defined length and will expire naturally when that term comes to an end. There may be a provision allowing for the term to ‘rollover’ – that is, to automatically renew for a further term at the end of the current one, unless one or other party gives notice that they don’t want it to. Pay careful attention to such rollover provisions, and make a note in your calendar to review whether you want the contract to continue, leaving plenty of time to give notice in case you decide that you’d prefer it to end.

If at any point in the contract you decide that you would like to terminate (whether for the other party’s breach or insolvency, or for convenience), you will need to take careful advice before firing off your termination notice. You must check:

  1. That you actually have grounds to terminate, under the provisions of the contract; and
  2. That you are following the correct process for termination, addressing your notice to the correct people/organisation/address, in the correct form, etc.

This is very important as, if you try to terminate the contract but get it wrong (if, for example, you think the other party is in breach, but you present your termination notice incorrectly), you could find yourself on the receiving end of Court action. Your invalid termination notice could be considered by the other party to be “repudiatory breach” of the contract, and you could find yourself having to pay them damages even though they were the ones originally in the wrong!

Finally, when you have checked all of the termination provisions, make sure you look carefully at the consequences of termination. Generally, some provisions of the contract will continue in effect after the main agreement has finished – take a look at the lifebelt for more details.

It might be that in your particular agreement, there are some obvious candidates that require special treatment after the end of the agreement. For example, if the agreement is a Software Reseller Agreement, what happens to the end-user licences granted by the Reseller during the term of the contract, once the Reseller Agreement has finished? Who will support the end-users? You might want to deal with these issues differently depending on the reason for termination, so do think through the different permutations and make sure you’ve considered the issues thoroughly.

Want to know more? Contact Devant for contract assistance!