What If - Exit without drama from a contract

Introduction

Termination Clause in a Contract - image showing an exit sign in a building

Image credit - Unsplash

It’s important to remember while reviewing a contract that, out of the many purposes of a contract, an important one is to provide for the worst-case scenario - as to what happens when the parties cannot get along, or one of them fails in their duties or promises. This leads us to a very important topic – repercussions, which can be of different types. In this article we’ll focus on termination/exit and also mention some others.

Termination can also apply in other cases - for example, one party’s business/operational requirements changed.

Termination for Convenience

Termination without reason or for convenience is one of the most basic rights that most parties want to have in their contracts. Because one can’t predict the future. Business and operational requirements change all the time, and no one likes to be locked-in.

This one is a pretty basic one, with just a few considerations:

(1)   Before agreeing for a mutual clause and the same notice period, consider how that impacts your business and operations, for example:

(a)   in a logistics service contract - are you fine with your service provider having a right to terminate as well, and where does that leave you in terms of operational dependency. If you have 2-3 other service providers and your procurement process is fast, maybe you’ll be fine with the service provider having a right to exit with 30-45 days, but if this is your only service provider and your procurement process is very long, you might want to consider removing this right for the service provider and even if they insist, negotiating a longer period of 60-90 days will make sense.

(b)   for a short agreement for a promotion – termination for convenience will not make sense, because the parties would have invested time and resources towards something that is going to happen within a few weeks/months.

(2) In the UAE, the contractual language should reflect that this can be done without the need of a court order.

Termination due to Breach

Another type of repercussion is, termination of contract due to breach. Suspension of services or contract can also be done due to breach, but that’s a different topic.

This does not mean that indemnity and liability will not apply. A party can have multiple recourses in the case of a certain incident or trigger.

Termination due to breach is usually done after a remedy or cure period is given, which can range from 7 days, 14 days, 30 days, to more than that as well – with 30 days being the most common one, can be different based on context.

The way termination due to breach is worded can have different permutations and combinations:

(1)   It might say that for breach that is not capable of remedy, no remedy period applies;

(2)   It might mention “material” breach, which is usually not defined, but in some cases can be;

(3)   It might provide for specific events like non-payment or delay with a different timeline from the other breaches. For example, the general breach-based clause might say 30 days, for payment delays it might be 60 days, for delay in performance it might be yet another timeline.

Note: Delay based termination can be linked to liquidated damages, which is a different topic which I will write about in due course.

The clearer your clause (e.g. the more defined the triggers and the notice periods & processes) and more importantly the better your execution documentation (e.g. emails, project update documents and finally notices), the better are the chances of being able to exit without too many issues.

Bearing in mind that if you don’t follow the contract clause, the other party can claim wrongful termination. Hence termination for breach should only be invoked if your hands are clean and your house and documentation is in order.

Termination due to insolvency/liquidation

This is a standard clause in almost all contracts, where situations like liquidation, bankruptcy, insolvency would trigger termination. This is because no business would want to work with a business whose status or financial solvency is no longer fully functional.

Other repercussions

In addition to indemnity and liability, another type of repercussion is specific relief or injunctions, which means, to ask the court to make the other party do something, or stop them from doing something. A standard example of this is when there is a confidentiality provision, and there is breach of that. One party might ask the court to require the other party to stop disclosing the relevant information.

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