Professor René Franz Henschel provides insight into which considerations should be made in connection with termination provisions in contracts and the typical pitfalls that should be avoided - something that is further elaborated on at NSCCM's training courses in contract and commercial management.
What should be the considerations regarding termination provisions?
Termination of a contract is an extremely intrusive remedy, and it should always be considered what the cause and purpose is: is it because the contract is breached so that you have to find another supplier? Is it because the contract no longer has business value? Is it because the trust between the parties is gone?
Typically, we distinguish between termination for convenience and termination for cause, as well as subjective and objective reasons for termination. The subjective reasons are based on a closer assessment, e.g. whether a breach is "substantial" or not. This can cause problems in the specific situation.
In contrast, the objective reasons typically give rise to the automatic termination if certain facts are present, e.g. termination by convenience 1 year after signing the contract. Objective termination by-cause-reasons are often certain types of repeated or very serious breach of contract. Examples include repeated breach of contract, bribery, fraud, serious offenses (e.g. in relation to work environment, environmental regulations, etc.), breaches of trade secrets or infringement of intellectual property rights, etc.
The termination clause's association with other clauses in the contract should also be considered, for example, for price adjustment mechanisms, penalty clauses, force majeure, changes and hardship, exit clauses, etc. Finally, attention should be paid to the process to be followed at termination, and what consequences, termination may have, e.g. in relation to compensation, continued obligations such as guarantees, and for return of documents, materials, etc.
In general, termination provisions should have a much greater focus on the contracting parties than they have today including how the provisions are handled in the specific situation. Not infrequently the right to terminating a contract is lost due to inaction against default. It is therefore important to focus on the processes of dealing with these clauses.
If you want to know more about how you draft and manage legally clear and commercially sustainable contract clauses, including termination provisions, you should consider our English Contract and Commercial Management (CCM) Practitioner (Fast Track Edition).
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companies that introduce contract management often get higher value on Stock exchanges? They are sold at a higher price, as the value and risks of the contracts are known exactly - therefore buyers and investors dare to pay more.