It is important when evaluating a commercial opportunity to ensure that you have an exit strategy, should everything not go according to plan. In commercial contracts this can take the form of a termination clause.
A commercial contract can terminate upon expiry of the duration of the contract. Therefore the contract could end either upon completion of the services or alternatively after a defined period of say a year. In certain situations it is also possible to include a “break clause” in the contract which enables the relevant parties to break or terminate the contract after a certain period of time and prior to the expiry of the contract. It is common to see “break clauses” in commercial leases, but they are applicable to most types of commercial contract.
However you should also consider including express termination clauses. There are essentially two types of termination clause, termination without cause and termination with cause.
A termination without cause provision entitles the named parties to terminate on notice, either immediately, or upon a defined timescale of say a month. The clause should clearly state how the notice should be given, and whether it should be in writing, and how the notice should be communicated, whether by post, fax etc. Notice by email is a contentious issue, since firewalls may prevent the email being received by the intended recipient and therefore it is questionable in such circumstances whether this would be effective notice.
An alternative termination provision is termination with cause. Termination with cause allows the party to terminate, generally immediately, upon the occurrence of certain defined events. The events include material and/ or repeated breach of the commercial contract by the relevant party. Non-payment is another common ground for termination.
Other circumstances that give rise to termination with cause include the insolvency and/ or threat of insolvency of the other party, where it is a corporate entity. Where the party is an individual the termination provision would be bankruptcy and/ or the threat of bankruptcy. It is possible to include bespoke events which provide grounds for termination, and which are dependent on the particular circumstances of the commercial arrangement.
It is common for a commercial contract to include both termination with cause and also termination without cause provisions. You should speak to your commercial solicitor to get guidance on which provisions would be suitable for your transaction.
You will also need to consider the consequences of termination, and in particular any outstanding payments should be made as soon as possible upon termination. Any products that have not been paid for should either be returned immediately, or paid for by the customer. Any of your property, such as documentation and confidential information, should also be returned immediately.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester.
