Understanding Basic Contracts: The Termination Clause


A client of mine called me last week to express her frustration with a vendor. The vendor wasn’t turning around the work in a timely fashion, and this was severely impacting her business. She wanted out of the contract.

My first response was, “Which vendor was this, and how come I didn’t review the contract?”

So this is lesson number one. Send your contracts to your attorney to review. My client was likely moving too fast (lesson number two – don’t move too fast), or being too price sensitive (lesson number three – lawyers are not a cost center; they are an investment) to send the contract over for attorney review.

Well, she’s going to have a hard time getting out of this contract, and it’s likely going to end up costing $5k – $15k. It’s a pretty basic agreement and would have likely cost a fraction of that for full legal review.

But let’s move on to the key point I want to discuss today – understanding term and termination clauses. “Term” and “Termination” mean exactly what you think they do, and they are a core tenet of every contract. They are also fully negotiable. Make sure you think through how long you want the contract to be in force. If you’re the goods or service provider, it’s likely a long time. If you’re buying the goods or services, then you probably want the ability to get out sooner than later. Also, even though there may be a contract term, there should be a termination clause, whereby you can end the term sooner upon the occurrence of certain events.

Now, there are a lot of factors which affect term and termination. For example, exclusivity or more favorable pricing may be granted in exchange for a longer term. So it’s not that simple – which is exactly why you need to run all of your contracts by your attorney. But that is not an excuse for you to ignore your business contract. So make sure you fully understand the term of your agreements, and how they can be terminated.

About the Author
Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of M&A, venture financing, fund representation, and gaming law.

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