Negotiating a Contract’s Termination Often Gets Ugly
Writing contracts is often like drafting the Great American Novel and I take pride in the contracts I create for my clients. Lawyers are often accused of simply using forms thoughtlessly to create the nearly identical contracts. Poor lawyers certainly do this, but a good attorney will take the time to customize their templates every time for his client since no two situations are alike.
Given all this time and effort I put into my contracts, I really hate to see them go bad. I understand that my client’s business needs change over time. However, I see so many bad contracts that I hate to see the good ones go away.
Still times and needs change, so even the best deals go bad. There are many reasons deals go bad and I will touch on a few in this article.
Sometimes, through no fault of either party, a contract has simply outlived its usefulness. Business needs and relationships change. Technologies change and become outdated. Like a divorce, no one may be at fault and either party may simply want to end the contract and move on.
The contract’s original champions and other people involved in the negotiation of the contract and underlying business deal leave. Nobody who is left wants to deal with the old legacy contract.
Finally, one party may be in breach or default and the other party would rather just get out of the contract rather than taking the time and expense to enforce the contract.
Today I’m going to offer some generalizations on what you can do when your contract is dying. Not surprisingly, there are a variety of ways to end your contract ranging from the simple to the complex.
I’m going to use an overused analogy here so brace yourself. You need to keep in mind that contracts are like snowflakes—no two are alike (told you this analogy was overused). The generalizations I’m going to outline below will not all fit your particular situation. As always, consult an attorney before taking any action relating to the termination of a contract.
In a perfect world both sides will see the contract the same way—past its usefulness and more trouble than the contract is worth. You would be surprised how often I see situations where a contact is holding both sides in a business relationship that’s not really benefiting anybody.
When both sides want out of a contract it can often be terminated quickly. The parties simply terminate it by mutual agreement.
While an immediate termination may be desirable, you probably should allow for a minimal wrap up period. Odds are one or both sides will have obligations to complete before the parties terminate the contract.
Your attorney can draft a simple termination agreement to wrap up the contract and the underlying business relationship.
By the Contract’s Own Terms
You remember when your lawyer asked you to read the contract before signing. There was all that boilerplate stuff toward the end that dealt with the legal issues you paid your attorney to handle. You know the formal legalese that deals with issues like jurisdiction, choice of law, amendments, and other technical legal issues. At the time, you probably glanced over this section, but now this section may help your cause.
Good contracts will contain a termination clause that explicitly tells everyone when the contract will terminate. This clause should be as specific as possible so there is no chance of misunderstanding. If the parties want the contract to terminate on June 17, 2018 then the termination clause should say so.
Moreover, a well written contract will also address the issue of early termination.
When I get the chance to draft an original contract I often start by drafting a heavily slanted early termination clause for my client. Something that would allow my client to immediately terminate the contract at any time, for any reason, by simply providing notice to the other side. Pending approval by my client, this type of early termination clause provides the ultimate out to any contract.
Obviously, this kind of language is pretty harsh to the other side, but I’ll put it in my first draft and wait for the other side to push back. If they don’t push back, my client keeps the ultimate out and can terminate the contract at any time for any reason.
Often the other side will push back, and we’ll wind up negotiating a more standardized termination clause that allows either party to terminate the contract by providing the other party with 30, 60, or 90 days’ notice. This kind of termination allows the parties to work together through a wrapping up period during which all bills are paid and the work performed under the contract is stopped.
So, look for an early termination clause, it may save you a lot of headaches and effort.
But sometimes one side will refuse to offer this kind of termination provision due to the costs incurred under the contract. A party may invest large amounts of time and effort into gearing up to perform their obligations under the contract, and may be counting on recouping those investments over the course of the contract. In such situations, a party may demand the removal of any early termination clause.
When this situation occurs, the best option is then to move into negotiating the termination of your contract.
How much you are able to negotiate your way out of your contract depends on how much power or leverage you bring to the negotiating table. I don’t have the space here to delve too deeply into negotiating tips and strategies, and I’ve covered them in other TechLaw columns.
But if both sides are willing to talk, you can often negotiate a termination agreement that will allow both sides to economically wrap up their obligations. Often such agreements will address things like scheduling outstanding payments, setting a timeline for remaining performance, and ensure the transferring of intellectual property.
Like all negotiations, you probably are not going to get everything you want. But so long as the negotiated termination works for you then you can economically get yourself out of a dying contract.
The final (and most expensive) way to terminate a contract is through litigation—taking them to court. Litigating a contract may include suing to terminate the contract, and ensuring you get paid or that you receive the products or services you are due under the contract.
As part of your overall negotiating strategy you should ensure the other party believes you won’t hesitate to litigate as a final option. While litigation commonly means you are going to take them to court, it could also mean you are going to use litigation’s cousins arbitration and mediation. Such dispute resolution methods are commonly written into the contract itself.
Whichever legal course you choose, the attorneys on both sides really get involved at this point and everyone’s costs go up exponentially.
Often the threat of litigation is the most powerful tool you possess. Like a nuclear bomb even the threat that you could use it will often be enough to bring the other side to the negotiating table.
Keep in mind that you should be ready, willing, and able to litigate. More importantly, the other side should believe you--the threat is useless if the other side doesn’t believe you.
But once you start to litigate you need to fully commit to taking the litigation endgame. The other side might be willing to negotiate, especially once you’ve served them with court papers, but they might not. Litigation truly is like going to war and your sole goal should be to win.
I used the word win, but a litigator would probably say you should aim to crush the other side. Regardless, once you “Cry Havoc, and let slip the dogs of war” you need to understand that litigation may not go according to plan. As any general will tell you, “A plan is only good until the first shot is fired.” Or as Mike Tyson has said, “Everybody’s got plans…. until they get hit.”
Litigation strategy is a subject way beyond the scope of this article. Law schools teach courses on the subject.
Keep in mind that just because you start the litigation process doesn’t mean you have to take it all the way to the courtroom. Starting litigation can be a means to an end--very few cases actually make it to court, settling long before the case makes it to the courtroom.
I’ve tried to describe some methods you can use to get out of your contracts. Still, please keep in mind that your attorney can’t always get you out of your contract simply because you want out. A well drafted contract will lock in both sides until the contract terminates on its own terms, so don’t’ march into your lawyer’s office with the request “Get me out of this contract.” You might wind up disappointed.