Don’t use liquidated damages with termination for convenience

Don’t confuse liquidated damages and early termination fees. Liquidated damages compensate a party for the other’s breach of contract. They work like any other damages, except the parties agree on the amount in advance. (The parties liquidate the damages so they won’t have to fight about the amount later, like in court.) Early termination fees, on the other hand, have nothing to do with breach. They’re not damages.

termination for convenience


Termination for convenience doesn’t breach the contract, so the fees are not damages

In a termination for convenience clause, one party gets the right to terminate early, without cause. But often the parties agree that the terminating party will pay for that right — at least, where the customer gets the right. If the customer terminates early, it pays an early termination fee.

The early termination fee works like any other contract payment obligation — like fees for software development, for IP rights, for SaaS access, etc. It’s a payment, not damages. It couldn’t qualify as damages, since the customer hasn’t breached. The contract specifically authorizes early termination.

Consequences (aside from looking silly)

If you use liquidated damages in place of early termination fees, you may find you can’t enforce your clause. There’s no breach, so the liquidated damages clause plays no role. Of course, a court might take pity on you and assume both parties intended an early termination fee. That could lead the court to enforce the clause. But we shouldn’t rely on courts to fix our unclear terms. They’re not that reliable.

To learn more about termination for convenience and early termination fees, see Chapter II.V.3 in The Tech Contracts Handbook — and see our clause library for sample language. And for liquidated damages, see Chapter II.N of the Handbook — and the clause library’s sample language for specification of liquidated damages and for justification of those damages.

© 2021 by Tech Contracts Academy, LLC. All rights reserved.

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