Background:
When entering into a contract it is important to consider how the parties can go about terminating such contract.
It is commonly known that a contract can provide for termination in the event of a breach. It is also possible however, to provide for "friendly" termination of a contract. Such termination can be affected in the absence of a breach by way of a termination for convenience clause.
This article sets out the advantages and disadvantages of providing for termination for convenience in a contract.
Termination in the event of breach:
Termination in the event of breach ordinarily requires the aggrieved party to prove that a breach of the contract has occurred and to follow the procedure prescribed by the contract in the event of a breach, if any.
Breaches that may warrant termination can occur by way of -
In order for an aggrieved party to terminate a contract in the event of breach, typically the breach would first have to be proved or notice thereof provided to the breaching party. The breaching party would then be allowed an agreed time period to remedy the breach, failing which, the aggrieved party would be allowed to terminate the contract.
This is a time consuming and potentially costly process for the party seeking to terminate contract.
Termination for convenience:
A termination for convenience clause allows for the termination of the contract in the absence of a breach and at the convenience of a party.
The inclusion of a termination for convenience clause has both advantages and disadvantages. The key advantages and disadvantages of including a termination for convenience clause together with how the disadvantages can be mitigated are set out below.
Advantages:
Disadvantages:
Mitigation of disadvantages:
The above disadvantages can be mitigated by including provisions in the contract which increase certainty in relation to the contract's duration, scope and costs. Such clauses may introduce an initial fixed term in the contract during which the parties are prohibited from invoking the termination for convenience clause and/or termination charges imposed on the terminating party, which can be calculated according to a formula and which can limit losses caused by early termination of the contract.
Recommendations:
A termination for convenience clause can be a feasible alternative to a clause that provides for termination in the event of a breach. Such a clause has several advantages for the party receiving a service and this may be a cost-effective manner to effect termination for all parties to a contract.
There are also disadvantages to including a termination for convenience clause in a contract, however such disadvantages can be mitigated by providing for an initial fixed term and/or termination charges.
The question of whether a termination for convenience clause will be suitable or not would depend on the intention of the parties to a contract and the goals and objectives which the parties seek to achieve through their contractual relationship.
VDMA's team of experts is at your disposal for any assistance that you may require with the drafting, reviewing and/or the amending of contracts.
Source: VDMA