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Termination Provisions That Should Be Included In Your Contract

Contracts

 

(photo by Design House of Moira)

 

The blessing and the curse of my business are that as I grow more and more selective about the clients I take on, I typically end up having a close relationship with them. Which means that when they get taken advantage of or treated unjustly, I do not take it well.

And in the last few months, I’ve had the same issue arise with not one, not two, but three different clients. They’ve all followed the exact same fact pattern, and I’m tired of it. Here’s a brief rundown of what happens:

A bride hires a wedding professional (WP) for their wedding, usually more than 8 months in advance of their event. The WP is in a specific industry wherein the majority of the work to be performed for the wedding is completed prior to the wedding date (ie, a wedding planner or a florist, rather than a photographer). The WP performs the work exactly in accordance with the contract…and the bride pulls the rug out from under the WP’s feet, terminating them for no reason at all. Usually, it’s a tasteless attempt to save money while still getting the work out of the WP, which means that the breaching party bails without paying the WP even remotely close to the amount that’s due.

Why is this able to happen? First, because the contracts of each of these clients I’m describing only had a “termination for convenience” clause (more on that below). Second, because whether you’re right, wrong, or indifferent, it’s expensive to argue the nuances of your contract in court. It’s almost never worth the time or money it requires. Therefore, it’s going to save you so much time, money, heartache, and effort to take the time now to ensure that your contract clearly contemplates each and every type of potential termination scenario that you want to be covered.

Of course, it’s impossible to foresee every possible termination scenario that can arise when you enter into a client relationship. However, they generally fall into one of three types of categories: termination for convenience, termination for cause, and termination for insolvency. Below, I outline what each of these provisions entails…and suggestions on how to write a contract that will serve both you and your client.

 

First, termination for convenience.

Circumstances change, and in the course of your performance of the contract, the original agreement you and your client entered into may no longer be practical for you both. In that case, you must have an exit strategy in place. In other words, a termination for convenience clause.

This language should contemplate how much notice is required by the breaching party (typically 30 days notice), if that notice must be in writing, and when that notice is effective.

A termination for convenience clause allows either of the contractual parties to terminate the agreement. This agreement doesn’t require a breach for the agreement to be terminated and instead allows for the maximum amount of flexibility. When writing a termination for convenience clause, it’s important to keep in mind whether or not you want to include any specifics on how the termination may be accepted (more on this below in “opportunity to cure”).

What types of scenarios would fall under this provision? This may include unforeseen events such as pregnancy, illness, etc- basically, anything that does NOT include a breach.

The potential downside to this provision? If your client decides to terminate the agreement against your wishes, you’ve lost the benefit of the bargain of entering into the agreement in the first place.

 

Second, Termination for Cause

Termination for cause is exactly what it sounds like: a provision allowing for a party to terminate the agreement only if a breach has occurred.

Much like the above, this provision should specify when and how notice must be made. In addition, it may specify what types of breaches it contemplates. Keep in mind, it may save you time later to have a provision in your contract outlining what constitutes a breach.

If your termination for cause provisions allows for immediate termination, you will run the risk of a grey area of interpretation when it comes to what constitutes cause. Unless it is defined with particularly, this could apply to something as a one day delay in a payment, etc.

 

Third: Termination for Insolvency

Unsurprisingly, termination for insolvency provisions also do exactly what they sound like: they protect the parties in the event that either party goes through bankruptcy. Typical termination provisions allow for the automatic right of termination if such a situation arises. However, many legal considerations go into whether or not this provision should be included in your contract and how it should be worded, so I would highly recommend working with an attorney on this language.

 

ALTERNATIVE OPTION: OPTION TO CURE

In life and in business, the one thing you can count on is for the unexpected to happen at some point. What happens if an illness lands you in the hospital, and you miss a payment deadline? Or, what if you move, and your client tries to send the payment to the wrong address? After all, if your contract has allowed for automatic termination, what effect would this have on your own business?

An alternative that gives both parties a cushion of flexibility is an “option to cure” clause. These clauses state that if either of the parties breaches the agreement, and if such breach is not cured (fixed) with a certain amount of days after receiving notice (usually written) from the non-breaching party, the non-breaching party will have the portion to terminate the entire agreement. This allows for a cushion for the breaching party to fix the breach if that situation were to arise, which will go a long ways towards improving your client relationship (especially if you point this out to your client at the outset)- just make sure and point out to them that this paragraph protects you both from those unexpected scenarios, when no malicious intent is involved. 

 

Conclusion

If you walk away from anything from this article, let it be this: you must always have a provision detailing termination and breaches in your contract. The unexpected termination of a client agreement can be one of the most painful experiences you go through as a business owner, and just a few sentences in a contract can be the only difference between an amicable ending or fighting it out in court. Save yourself the time, money, and heartache now, and update your client agreement before it becomes a necessity. 

 

 

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