Term and termination clauses (of one flavor or another) are common to information technology (and other) contracts. But they aren’t always understood – or remembered timely.
In these extraordinary political times, many U.S. federal government contractors find themselves on the receiving end of sudden terminations, without cause. But that’s not just an issue for contracts with a governmental entity. In this brief article we look at clauses related to Termination For Convenience (aka without cause), including Early Termination Fees.
Some questions for you to consider:
- Which of your contracts, if any, offer termination without cause?
- Which party, or parties, can trigger it?
- With how much advance notice?
- Must the terminating party pay an early termination fee?
- Does this clause suit your needs in that deal? Or, when you get a chance, do you want to renegotiate, or change your standard template?
We provide here some basics, and sample clauses (not specific to government contracts) largely drawn from The Tech Contracts Handbook: Cloud Computing Agreements, Software Licenses, and Other IT Contracts for Lawyers and Businesspeople (ABA Publishing 2021, 3rd edition), authored by Tech Contract Academy founder David Tollen (the “Handbook”). For more explanation, other sample clause alternatives for Termination for Convenience (and sample clauses about Termination for Cause), see Part II(V) (Term and Termination) of the Handbook.
Term
Here’s an example of an open-ended Term clause:
This Agreement will continue until terminated by either party as specifically authorized herein.
Note those last few words, “as specifically authorized herein.” What else is in the contract that may allow termination?
Termination for “Convenience”
If your contract includes something like this (or says it is terminable “for convenience”), it is terminable without cause:
Either party may terminate this Agreement for any reason or no reason on __ days’ advance written notice.
Or,
Either party may terminate this Agreement for convenience by written notice, effective immediately or on such date as the notice may specify.
Warning: These samples start with “[e]ither party.” That isn’t a given. You may see versions that empower both parties — or only one party — to terminate for convenience (limiting the other to only terminations for cause, like a breach). For example:
Customer may terminate this Agreement for any reason or no reason on __ days’ advance written notice.
Or,
Vendor may terminate this Agreement for any reason or no reason on __ days’ advance written notice.
Where only one party gets this escape hatch, consider whether that’s: unavoidable (unequal bargaining power?) A first offer in negotiations? If the deal’s specifics make it reasonable (or palatable?) Or … a deal-breaker for you (or another party)?
Regardless, for any termination, consider how much notice is needed to protect your party from loss, whether an early termination fee is appropriate, and how those concepts (remedies?) work together. (See The Handbook, Part II(V)(3)(Termination for Convenience), at pp. 263-264).
Early Termination Fee?
Some contracts that allow termination without cause impose a price for exercising that right – an early termination fee. Below are some sample clauses.
First, for any or no reason:
Customer may terminate this Agreement for convenience by written notice, effective immediately or on such date as the notice may specify. On the date of such termination, Customer shall pay Provider an early termination fee of __ % of the fees for Services not yet performed.
Or, variations can be drafted, narrowed to particular events. Here’s an example, tied to departure of a particularly important employee of the vendor:
Customer may terminate this Agreement for convenience upon __ days’ advance written notice if ______ (the “Key Employee”) terminates employment with Provider or otherwise ceases to provide Professional Services; provided Customer issues notice of termination within __ days of such termination or cessation.
These samples assume only the Customer can terminate, but as discussed above a given contract may say otherwise.
Early termination fees are not to be confused with liquidated damages, for breach of contract. (See The Handbook, Part II(N).) For clauses addressing breaches and other forms of “cause,” see The Handbook, Part II(V)(2)(Termination for Cause)).
Reminder: For more explanation, see The Handbook (Part II(V)(Term and Termination)). And, consider attending Tech Contract Academy trainings about information technology contracts, such as:
- The Tech Contracts Master Class™ #4, End-Game and Special Clauses: Disputes, Termination, Special Clauses, and OSS.
- Or better yet, the full four-course Master Class series.
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Notes:
Quick caveats and observations: Always think through and customize samples for the unique issues raised by your deal; no contract language can be airlifted in without care. We’re highlighting just certain clauses – you need to consider your contracts in their entirety, and how specific terms work together.
Where terms are capitalized, that assumes the contract defines them; when the sample clause shows a blank/underline, that’s a placeholder the parties need to fill in as appropriate for their deal. These clauses, like all on our website (https://www.techcontracts.com/forms/) are provided free of charge, but subject to our TERMS OF USE, which includes both disclaimers and license restrictions on reselling our forms. And, of course:
THIS ARTICLE IS NOT LEGAL ADVICE. IT IS GENERAL IN NATURE AND MAY NOT BE SUFFICIENT FOR A SPECIFIC CONTRACTUAL, TECHNOLOGICAL, OR LEGAL PROBLEM OR DISPUTE, AND IT IS NOT PROVIDED WITH ANY GUARANTEE, WARRANTY, OR REPRESENTATION. LEGAL SITUATIONS VARY, SO BEFORE ACTING ON ANY SUGGESTION IN THIS ARTICLE, YOU SHOULD CONSULT A QUALIFIED ATTORNEY REGARDING YOUR SPECIFIC MATTER OR NEED.
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