By Janeia Brounson
Nearly all contracts allow each party to terminate the agreement if the other party has failed to honor its obligations for the project or for no reason at all. Often the contract outlines the grounds under which each party can terminate the contract, and most contracts lay out the consequences and remedies if such termination occurs.
Even though termination clauses are standard, they are not all created equal. So, before you skim over the termination provision in your next contract, let’s review some standard termination terms you should look out for.
- Termination grounds: The contract allows a party to terminate the contract for any reason or for no reason at all (often labeled as termination for convenience). Consider limiting such termination grounds to “material” non-compliance with the agreement. If you cannot remove a termination for convenience provision (which is preferable), at minimum, you should include your demobilization costs and third-party termination expenses within the scope of the termination payment to be made to you if the contract is terminated without cause.
- Insufficient notice: The other party is not required to notify you before it has the right to terminate the contract. Consider including language that requires the other party to give you sufficient written notice prior to terminating the contract.
- Cure period: The contract does not give you an opportunity to correct a problem before the other party has the right to terminate the contract, or the cure period is too short. Consider including language that provides you a reasonable period of time to commence and correct such problem prior to terminating the contract, taking into account the complexity of the problem.
- Mutual termination rights: You are not entitled to suspend performance due to non-payment, nor do you have any express termination rights (and would need to rely solely on your “common law” remedies). Consider including language that at minimum allows you to terminate the contract if you are not paid undisputed amounts in accordance with the contract.
While the goal is for all contracts to run their course without any issues, that is not always the reality. The next time you encounter a termination provision, make sure the provision clearly defines the grounds for termination, provides a reasonable notice and cure period, and allows for mutual termination in case of breach by either party.
Janeia Brounson is an attorney with Faegre Drinker, counsel to the CSIA and many of its members. You can reach her at Janeia.Brounson@faegredrinker.com. For more information about the CSIA Legal Plan for members, go here.
