Ending an agreement isn’t always as easy as saying, “I don’t want to do this anymore.” In fact, termination provisions can be much more complicated and it’s important to know how to read and interpret them in your agreements.
In this episode, I’ll give a quick overview of the two most common termination provisions in service agreements, considerations to be aware of for each, and questions to ask yourself to ensure you’ve covered the necessary bases.
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In this episode:
[02:26] – Breach for default or convenience are the two common termination provisions in most service-based contracts.
[02:37] – Danielle begins discussing the termination provision for breach or default.
[03:18] – A termination for breach will often say something like this.
[03:39] – This termination provision may also discuss the impact of the termination.
[03:57] – Danielle talks about termination for convenience provisions which are very common and usually include these considerations.
[04:36] – Clauses can vary considerably for notice periods, and some agreements include different notice periods for different parties.
[05:11] – How do you give notice of termination to the other party involved?
[06:06] – What else should you keep in mind when reviewing termination provisions? It depends on the type of agreement you enter.
[07:23] – Consider what happens to content created under an agreement when that contract ends early.
[07:58] – You may want to include other areas specific to your business in your termination provisions.
[08:33] – Wrapping up the episode, Danielle reviews today’s action steps.
Links & Resources:
Welcome to the Simplifying Legal podcast, brought to you by Businessese. I’m your host, Danielle Liss.
Many years ago, someone told me I was the least lawyer-y lawyer she’d ever met because I helped make legal easier to understand. To this day, it’s one of the best compliments I’ve received in my professional life.
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Hey there, I’m Danielle. Welcome to episode 11 of Simplifying Legal for Small Business Owners. In Episode 8, we kicked off a series on contracts. So far, we’ve discussed when you need a contract, payment provisions, and confidentiality clauses. In this episode, I’ll discuss ending a contract because, unfortunately, it’s not always as easy as saying, I don’t want to do this anymore.
Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first.
Now let’s talk about ending a contract.
The first thing I want to address is language. When we discuss ending a contract, there are two words that you’ll usually hear used. Termination and cancellation. You might also hear repudiation, revocation, or rescission occasionally. As you can probably guess, there are different legal nuances for each word.
Termination of Contract
For most service-based agreements, which we’re discussing today, the most commonly used term is termination, so that’s the term I’m using in today’s episode. A termination is ending a contract before it would have otherwise ended. Usually, an agreement will specifically state how the parties can terminate.
There are two common termination provisions in most service-based contracts.
- Termination due to a breach or default or
- Termination for convenience
Termination Due to a Breach or Default
First, let’s talk about termination for breach or default.
- This type of clause will say that either party may terminate if there is a breach or a default from the other party. This means, if one party violates the terms of the agreement, the other party, usually referred to as the non-breaching party, may terminate.
- However, in many contracts, there is usually a notice period required before the non-breaching party can terminate. This type of provision usually states that the non-breaching party needs to put the breaching party on notice of the breach and give them a certain period of time to cure, which means that they can fix the breach.
- Often, in an agreement, it will say something like this for termination for breach.
- In the event of a breach of this Agreement, the non-breaching party shall provide written notice of the default to the breaching party. The breaching party will have X number of days to remedy the breach. If the default has not been remedied, the non-breaching party may immediately terminate this Agreement.
- A termination due to breach may also discuss the impact of the termination. This could include refunds or other duties owed by the parties.
- For example, if you are a service provider and your client has made an initial payment, what happens if they don’t pay the next installment? We’ll talk a bit more about refunds shortly.
Termination for Convenience
Next, termination for convenience provisions are very common. Usually, it includes the following:
- Who can terminate
- What can the parties do?
- How much notice is required
- How to give notice.
Termination by Party
First, let’s talk about who can terminate. Is only one party able to terminate, or is it mutual and either party can?
Next, what can the parties do? The parties may be strictly limited to terminating the agreement; however, some termination provisions also allow for delay or postponement of the agreement.
Notice of Termination
Next, how much notice needs to be provided to terminate? Clauses can vary considerably for notice periods. It could say immediately upon notice, 14 days, 30 days, or more. The length of the notice period often depends on the industry. Some require longer lead time.
Additionally, some agreements will include different notice periods for the parties. For example, in an agreement where you are hiring a contractor, you, as the small business owner, may reserve the right to terminate the agreement immediately upon written notice; however, you may require a longer period if the contractor wishes to terminate.
Last, how do you give notice of termination to the other party? Some contracts still require a written letter. Others will simply say written notice. Then, it will depend upon whether or not your agreement allows an email to serve as written notice. But keep this in mind, if you are attempting to terminate by phone. You will want to make sure you follow up with something in writing.
Common phrasing for a termination provision might say: The parties may terminate this agreement upon 30 days written notice to the other party. This means that either party may terminate, as long as they provide 30 days written notice to the other party.
Other Termination Provisions to Review
What else should you consider when reviewing termination provisions? This may depend on the type of agreement you are entering. For most service-based agreements, it’s common to include refunds and ownership of content.
First, in the event of termination, is there a refund on any amount that has already been paid? This might come up if the services were paid-in-full, if there was a deposit, or if you are pre-paying for ongoing services.
Usually, I see one of two options when it comes to refunds. First, it may state that no refunds are available. Some agreements may also state that, in a multi-month agreement, if you terminate early, all payments will still be due.
The other common option is a pro-rata refund. This means that there would be a refund for any money not yet earned. Or, if there was work performed that hadn’t yet been paid, it may state that the amount will be due after sending an invoice.
This is an area that you should pay close attention to, both as a service provider or as someone hiring a service provider. Closely review the agreement to make sure you know how refunds will be handled if there is a termination.
Next, if any content is being created under the agreement, what happens to that content if the agreement is terminated? For example, if you hire a photographer to create content for your business, if the agreement is terminated early, before all the photos have been completed and approved, who owns the work that has already been completed?
Some agreements will state that only finalized and fully edited work is transferred, but this may depend on what the termination provision says or it could depend on other clauses related to ownership.
There may be other areas that you want to include that are specific to your business. Consider what would potentially be outstanding in the event of a termination and how you would want both parties to handle it.
When you set up your termination provision, it’s important to think in terms of the worst-case scenario. And I get it – no one wants to think about what happens if there’s a break up with a client; however, this is a regular part of life as a small business owner, so it’s important to consider what kind of impact a termination might have and make sure your business has the coverage that it needs.
This wraps up our discussion of ending a contract. Now, let’s review today’s action steps.
- What does your termination provision say? Is it clear on who can terminate, the notice period, and how to terminate? Do you need to make any updates?
- If you’ve had to terminate an agreement in the past, did any issues come up that could have been resolved with a better termination provision? Make sure you update to address any concerns.
- If you have agreements with any other vendors or team members, do you know what you would need to do to terminate the agreement? I think it’s important to track this type of thing so you know how much notice you would need to give if you want to end the agreement.
Thanks for joining me for today’s discussion on terminating contracts. In the next episode, we’re continuing the contract series with a discussion about exclusivity clauses.
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