Tag Archives: termination

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Do You Need to Escape a Contract?

If you are bound by a contract that is no longer working for you, it is important to review the term and termination clauses in the agreement. The term of a contract is the amount of time it remains effective. The termination clauses outline the various ways the contract can end.

Term of the Contract

Most contracts set forth the “effective date” or the start date of the contract and a “termination date” which is the date the contract expires. It is common for an agreement to provide ways the contract can be renewed, which means that a new term for the contract is established for a set period of time. It is important to note that if your contract contains an automatic renewal clause, the agreement will be automatically renewed unless one of the parties provides notice of its intent to terminate the contract.

It is imperative that you understand the term of your contracts and your termination and renewal options. You should schedule the termination date and any deadlines for giving notice of your intent to terminate to avoid automatic renewal. You don’t want to miss your opportunity to escape a burdensome contract by missing this deadline!

Contract Termination

It is important to understand the termination provisions of your contract. The simplest way to end a contract is “without cause,” which means the terminating party does not provide a reason for the termination. You must typically provide written notice of termination to the other party.

Particularly from the Buyer perspective, it is extremely important that you negotiate such a termination without cause provision into your contract. If you no longer require the goods or services and therefore, wish to terminate the contract, this clause is one of the few mechanism that permits you to do so. Even if you have a legitimate business reason to terminate, contract law does not permit you to do so without an express provision in your contract giving you that right.

Your contract may also outline how to terminate the contract “with cause,” which means either party can end the contract if certain specified events occur. Depending on the event, the contract may allow the other party an opportunity to “cure” the event and avoid termination. Otherwise, the termination for cause can be immediately effective upon notice to the other party. It is common for termination with cause to result in a dispute over whether or not cause actually existed or if it was properly cured. Thus, if you intend to terminate a contract for cause, it is imperative that you carefully document the reasons for cause and record all events that provide you with cause to terminate. Finally, you should note that there may be certain obligations that extend past the termination of the contract, such as confidentiality provisions.

If you are considering terminating an existing contract, call Leslie Marell for help in reviewing the requirements of the term and termination clauses.

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Defining “Material Breach” in Your Contract

Hopefully you have read our blog titled “State of Indiana v. IBM: Test for Determining the Materiality of a Breach of Contract.” Below are a few tips for how to define what constitutes a material breach in your contract and help ensure the court will support your termination when a material breach occurs:

  • Clearly identify the specific events that constitute a material breach and that the parties agree will allow termination of the contract without the payment of termination charges. This will not only help ensure the court enforces these provisions, but the negotiated terms will also provide the court guidance in assessing if an unlisted breach is material.
  • The contract should set forth a notice requirement prior to terminating the contract for a material breach event. The breaching party should be given the opportunity to cure the defect. By giving this notice, you will likely learn any arguments the breaching party has that its conduct does not meet the material breach standard.
  • In addition to the specific material breach provision, the contract should also contain general breach of contract terms. You will want to include operational standards that must be met in measuring performance.
  • When defining the standards of performance, avoid using ambiguous terms. Common examples of terms to avoid include “industry standard,” “appropriate,” or “best practice.”
  • To ensure that the service levels are important, you must have meaningful service level credits. If the service level credits are minimal, it minimizes the significance of missed service levels. You should also avoid using service level credits as liquidated damages. You don’t want the other party or the court to view payment of these “liquidated damages” as a valid alternative to performing.
  • Set forth service levels that allow you the ability to terminate the contract if performance falls below a defined standard.

If you need assistance defining a material breach in your agreements or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.