Whether you are a supplier or a customer, it may feel like you are sending the wrong message worrying about termination provisions in a proposed contract. However, failing to protect your position adequately could leave you trapped in an unprofitable commercial relationship or, conversely, cut loose without sufficient notice.
Establish a clear base term
Typically, a supply contract will be for:
- A fixed initial term, after which it automatically terminates unless both parties mutually agree to extend it; or
- A fixed initial term, after which it automatically extends for additional period(s) unless either party serves notice to terminate; or
- An indefinite period (in perpetuity).
For contracts which are long-term or in perpetuity, a Court may consider both parties to have an implied right to terminate for convenience upon serving “reasonable” notice, but it is far better to set out express termination rights in your contract.
Termination for convenience
The parties should agree and set out in the contract suitable notice periods for either to terminate for convenience (i.e. through no fault by the other party) – this period might be the same or different for the customer and supplier.
A customer might be reliant upon the products/ services which and need sufficient termination notice from the supplier to source these elsewhere.
A supplier’s pricing etc. may depend upon a long-term commitment on the customer’s part and limited rights for the customer to terminate at short notice.
The contract could prohibit either party from terminating for convenience during an agreed initial fixed term, after which they may terminate upon serving the required notice. If so, clear wording is needed to clarify whether:
- The notice period can run during the fixed term so that the contract terminates immediately at the end of that fixed term; or alternatively
- The parties are effectively locked in for the fixed term plus whatever notice period is required.
Termination for cause
A well drafted contract will also give each party express rights to terminate immediately for cause (i.e. on a “fault” basis). That sounds simple but the devil is in the details.
For example, it would be risky to permit the other party to terminate if you commit any breach whatsoever, as your breach might be extremely minor or easily capable of remedy without lasting damage. Often, a right to terminate for breach is therefore qualified by reference to “material” breaches (i.e. significant breaches, which might be defined with reference to particular contractual obligations). It may also allow the party in breach a chance to remedy the breach within an agreed period to avoid termination.
Notwithstanding such qualifications, it may also be prudent to include a right for a party to terminate if the other repeatedly breaches the contract, even if these are not material breaches or are material breaches which are fixed.
A contract might also expressly permit a party to terminate if the other experiences significant financial difficulties, again with clear and precise trigger point(s) which reference particular stages of the relevant insolvency legislation and procedures.
A termination right due to “change of control” (ie. ownership) of the other party is less common. A supplier might not care who owns its (corporate) customer, provided that all bills are paid promptly and fully. Similarly, a customer might not care who owns its (corporate) supplier, as long as all services or products are supplied correctly. However, if a customer values the personal connection it has with the existing owner of its corporate supplier, or if either party is concerned about a competitor taking control of the other party, it might be appropriate to include a right to terminate if the other party’s ownership changes.
Other termination considerations
The length of the contract and termination rights are fundamental terms but there are several other related issues to consider, including force majeure and also post-termination rights and responsibilities to allow the parties to smoothly go their separate ways.
In summary, if you can’t get out of it, don’t get into it. Spend thought and care on the termination provisions of your contracts and get legal advice to ensure that these are done correctly.
Peter Kouwenberg is a partner at Taylor Walton Solicitors www.taylorwalton.co.uk
