In service contracts, termination for convenience clauses often call for a long notice period. The customer (usually) can terminate for any reason, but it has to give 90 days’ notice — or maybe 180 days’ or more. In many cases, the customer also has to pay an early termination fee. But if the fee compensates the provider for early termination, what’s the point of the notice period?

The early termination fee reimburses the provider, not the notice period.

The early termination fee reimburses the provider for its lost investment. The customer committed to the entire term, and the provider relied on that commitment — allocating resources, passing up other opportunities, etc. Fair enough.

Most providers look to the long notice period for compensation too (even if they never articulate it). The notice period gives the provider extra business: the chance to keep earning for a few more months. The provider really doesn’t need the notice period for anything else. It might need time to withdraw and reassign its people and other resources. But if the provider has unused resources during the transition, cash compensates it for the cost. In other words, the early termination fee should cover the provider’s loss.

If the early termination fee doesn’t compensate the provider, increase it.

If the early termination fee isn’t enough to make the provider whole, increase it. That’s better than forcing the parties to continue a relationship that no longer works. A payment works more efficiently than continuing the relationship.

To put it another way, a notice period works like a second (hidden) early termination fee. Why not put the full fee up front?

Better terms for each party

The customer might need transition time after notice of termination. But the same goes for any termination, including for breach. You can handle that with a transition clause — or by letting the customer choose the notice period required to terminate for convenience.

Customer may terminate this Agreement for any reason or no reason by written notice to provider specifying the effective date of such termination. Customer shall pay Provider the Early Termination fee on the effective date of termination pursuant to the preceding sentence.

Providers, keep your eye on the prize. You want cash, not time. And customers, why commit to continuing a relationship you no longer want — if you’re willing to pay the provider for the lost business?

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