Termination clauses in an agreement

Deborah Fosbrook

The extent of the grounds for termination are very important and the failure to address this issue may have significant financial consequences either to a company or an individual.

It is often not appreciated that it is possible to draft specific termination clauses for each of the parties to an agreement with different grounds of termination. Many agreements still use the same general clauses for both parties.

The clause may refer to: a material breach of the agreement which is not remedied within a specific period; breach of specific clauses of the agreement; failure to deliver; failure to complete work; failure to make a payment or the right to terminate if the company ceases trading; or if there is a court order to wind up the company; insolvency; or it is put into receivership or administration. Any of these grounds may be set out as sufficient for notice of termination to be served.

Terminating sponsorship agreements

A sponsorship agreement or a contract for services may include a myriad of grounds for termination by a company to an individual: if a person fails a drug test; does not pass a medical assessment; becomes involved in a political controversy or posts on social media any material which could potentially damage the reputation of the company, its products and brand or is alleged to have committed or is found guilty of a criminal act. The grounds may also include matters which would put the company at risk from having a complaint lodged against it by a regulatory body such as Ofcom or could pose a threat to its right to operate under a commercial licence. The list of grounds can be very wide based on an assessment of the potential variety of scenarios which may arise in relation to the person and the company.

The opportunity to remedy

You may agree to a procedure so that where notice of any alleged reasons for termination are served, that on each occasion there is a fixed period in which the other party may have the opportunity to remedy the problem.

In the event that the problem cannot be resolved the parties may have agreed that there is a contractual obligation to hold informal discussions which are not binding as a means to try to avoid termination or litigation. Alternative dispute resolution, mediation and arbitration clauses may also be considered.

Avoid future claims

There may also be a potential future claim for loss of fees, expenses, costs as well as damages for the consequent effect on the reputation of a person or company of the termination. Therefore a contractual commitment that the person or company will not make any such claim if the contract is validly terminated on the agreed grounds may be one means of limiting liability.

Have a broad range of terms which set out the grounds of termination

Any termination is inevitably linked to the detail and description of what the other party was required to fulfil or supply under the agreement. As well as those dates by which it was crucial the work was completed. The right to terminate can be included at many different stages of a contract for example when material is delivered which is not of the quality and standard required or when the other party seeks to transfer the agreement to a third party to fulfil the work. It is to your advantage to expand the terms which set out the grounds of termination upon which you may rely under a contract.

Numerous government software agreements have been terminated without the projects having been successfully completed. What lessons can be learnt from these catastrophic failures? Mechanisms should have been put in place at numerous stages to assess the progress of the project. These clauses can then be linked to specific grounds of termination at each such stage. The failure to achieve functionality of the software programme being one obvious ground. The agreement could also include an agreed fixed sum that the other party would receive at any such stage if termination were served on valid grounds with no right to claim or demand additional sums for further work. The key difference is that these issues would be argued at the negotiation stage not after work has commenced.

Excluding certain events or grounds of termination

You may seek to exclude certain grounds so that using the company email account or mobile for personal use are specifically accepted by both parties as not grounds for termination. Other matters which may be excluded may be for example a delay in delivery of less than a week or failure to complete a project by the date required due to the absence of key personnel for up to one month. In a sponsorship agreement an excluded ground of termination may be the fact that the person does not take part in or win a specific event or is unable to complete their work due to their own ill health or that of an immediate family member.

Consequences of termination

It is preferable that an agreement sets out in detail the likely matters that will arise in the event that one or both parties serve notice to terminate. There are crucial questions that could be addressed at the drafting stage which should be stated. Who will own the copyright, intellectual property rights and computer software rights in the new material which has been created and any associated logos, images, text, films, websites, apps, domain names or trade marks. It should not be assumed that it necessarily follows that the company that has expended the budget will own those rights.

In a merchandising agreement the licensor may seek to ensure that the rights which have been granted to the licensee revert back to the licensor in the event of termination by either party. Further any new rights which have been created and any new material are also to be assigned to the licensor by the licensee.

A person who has an agency or management agreement with a company may want a clause which ends the right of the company to receive any percentage of any future income in the event that the agreement is validly terminated for certain reasons. Whereas, in contrast in relation to a distribution agreement where the agreement is terminated by a licensor. The licensor would still want the right to receive payments of all sums received at anytime by the distributor after the date of termination in relation to the project.

Deborah Fosbrook Barrister and Consultant

© Deborah Fosbrook 2016
Deborah Fosbrook is co-author of the following publications published by Bloomsbury Professional:

97817804382389781780431963

Cont9781780434797ract and Copyright Drafting Skills First Edition – publication date May 2016.
The A-Z of Contract Clauses Sixth Edition
Media and Business Contracts Handbook Fifth Edition

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