The decision to terminate an agreement cannot be taken lightly. In exercising the option, understanding the key terms of the agreement and necessary steps to effectuate the termination are critical. As we have previously highlighted in past Contract Corners, termination provisions may include a variety of mechanisms built into them and one cannot assume that all termination provisions require the same steps to be taken. When considering a termination, a party must take the time to assess the actual termination rights under the agreement, what, if any, notice period will apply, and whether the termination will result in any payment or other obligations.
In this Contract Corner post, we highlight a few of the key considerations and provisions to examine when reviewing an agreement for termination.
Types of Termination Rights
Agreements may contain multiple termination rights. Almost all agreements will contain a termination right for cause that results from a “material breach” or a breach of a “material” term of the agreement of the non-terminating party. Agreements may also include a right of either party or only one party to terminate for convenience (without cause); however, not all agreements will contain this right. Certain agreements will also include rights for termination due to chronic failure to meet service levels or other performance metrics or in the event of a continued force majeure event affecting one of the parties. Termination rights may be included at the master agreement level, order form, statement of work, or subscription level, and may allow for partial and/or full termination.
When considering a termination, a party must assess what rights they have and what the proper mechanism is to terminate. If a party is going to terminate for cause they will need to evaluate whether the actions or inactions of the other party have met the definition of “cause” as it is detailed in the terms of the agreement. In for-cause terminations, the terminating party must be prepared for the other party to not accept or counter the assertion that the terminating party is making by claiming that the terminating party, through its actions or inactions, is responsible for the breach/default.
Notice and Cure Period Prior to Termination
Termination rights may be subject to a notice or cure period. Notice periods can range from a shorter period, such as 30 days, to longer lead times in excess of six to 12 months. It is also important to review how much notice must be given for termination and to provide such notice in accordance with the terms of the agreement.
Many for-cause termination rights based on a party’s breach or default will include a right for the breaching/defaulting party to cure such breach or default. If the breach or default is cured during such time, the termination right no longer exists. Failure to adhere to a notice period may mean being obligated to perform under the agreement past the desired termination date. Complying with any notice or cure period required to be given under the agreement is essential when seeking to properly terminate an agreement in accordance with its terms.
Express Payment Obligations
Termination of an agreement for any reason may result in payment obligations. These obligations may include paying for services previously performed or delivered through the termination date or the remainder of a certain term. Agreements may also include termination fees or the requirement for a vendor to refund or credit the customer for previously paid amounts. Understanding payment obligations upon termination may impact this decision and the plan on how and when to terminate an agreement.
Post-Termination and Surviving Obligations
Agreements typically include obligations that are triggered upon termination or that expressly survive termination. For a vendor, these obligations may include that the vendor provide termination assistance, including continued performance of existing services for a set period of time while the customer transitions away and assistance is required to facilitate the customer’s transitions.
In addition, vendors may have the obligations to return confidential information to the customer, deliver certain materials created by the vendor, and transfer knowledge to the customer or its next chosen vendor. A customer may be required to immediately stop using any software or materials provided under the agreement and return confidential information or other intellectual property of the vendor. Prior to attempting to terminate the agreement, the terminating party should question whether they are in a position to take the necessary steps to comply with the post-termination obligations required by the terms of the agreement.
If you are seeking to terminate an agreement or have any questions on the process or what to expect, do not hesitate to reach out to your Morgan Lewis team.