Guidance

Right to Cure

The right to cure is the right of a breaching party to make up for, to correct, that party's breach of the agreement. The parties agree on a "Cure Period", a certain number of days following a breach. If the breaching party cures its breach within the Cure Period, the agreement continues, the breach is forgiven, and there are not grounds for termination.

An agreement can allow for the right to cure after certain breaches, but not all.

The agreement can also limit the opportunities to cure a breach. If a party breaches the agreements, and it's first attempt to cure does not work, does the party have a second, or third chance to cure? Similarly, parties could have a certain number of opportunities to cure any breach across the life of an agreement. For example, the agreement could allow each party three opportunities to cure. If Party A breached the agreement three times, but successfully cured each of the three breaches, the party has used up its total opportunities to cure.

Our heavy pro-provider variant removes the breaching party's right to cure for material breach. This is a pretty harsh clause, it means the provider doesn't have to give the providee any chance to make up for a breach of the agreement before terminating it.

Change of Control

An agreement is necessarily made between two parties, two parties bargaining for each of them to do or provide something for the other. In some cases, the exact identity of one party doesn't matter. For example, any supply of widgets could supply you with a certain number and type of widgets. The exact ID of the supplier is less important than its ability to deliver widgets. On the other hand, if you contract an artist you like to design you logo or paint a picture, you want that specific party to do the work. Here, the exact ID of the party is important, it is crucial to the agreement.

A Change of Control provision protects the Party A who has contracted with the Party B, from then being bound to a contract with an unexpected Party C, who buys, merges with, or otherwise acquires control of the Party B. As mentioned, agreements can be 'personal' between the parties. The Change of Control provision allows a party to terminate the agreement if the opposite undergoes a change of control, protecting each party from being bound in an agreement with an unexpected party, one which might not be as cooperative, or have the same intent for the agreement.

Material v. Immaterial Breach

Not every breach of the agreement is grounds to terminate the agreement. There are two broad types of breach, material breach, and immaterial breach. To rightfully terminate an agreement, the other party must have committed a material breach of the agreement. If you terminate the agreement for an immaterial breach the other party can instead come back at you for breach-of-contract.

In the end, if push comes to shove, there is no firm definition of material breach, it will be up for a court to decide whether the breach was material. However, we can make a fairly good estimate of what a material breach is. Unfortunately, it is something of a circular definition, as Ken Adams notes here; a material breach is a breach that hits at the very core of the bargain, that stops one party from getting what they bargained for, it is something we could expect a reasonable person to terminate the agreement for.

For example, say you contract for a painter to paint the outside of your house red. If the painter paints it blue, that hits at exactly what you bargained for, a red house, and a reasonable person would likely think that getting a blue house was materially-different from the red house you bargained for. On the other hand, you contract a painter to paint the outside of your house red, using a certsin brand of red paint. The painter paints it red, but uses a different brand, but the exact same hue of red, and with the same water-resistant properties of the paint you requested. Unlikely getting a blue house instead of a red one, the difference in paints used, while the appearance and water-resistance is the same, is less likely to be material. 

To add specificity and certainty, the parties can agree on and include an enumerated list of certain events or actions that constitute material breaches of the agreement. If you really want that specific brand of red paint, include a provision explicitly declaring your intent that brand be used, and include in your list of what constitutes a material breach "Failure to Use MyBrand™ red paint. 

Our variants allow for termination on material breach, without including specific definitions of material breach. If there are deal-specific definitions of material breach you would like to include, make them clear; it can go a long way to preventing and resolving conflict down the road. 

Is it necessary to specify all the conditions?

The longer form of the agreement attempts to make it clear that the party has unrestricted rights to end the agreement. But, as Ken Adams points out: "If you say that Acme may terminate at any time, that carries with it the implication that Acme may terminate for any reason. If you say that Acme may terminate for any reason, that carries with it the implication that Acme may terminate at any time." http://www.adamsdrafting.com/termination-for-convenience/

Is the right to terminate unrestricted?

The inclusion of a termination for convenience clause make the business arrangement "at-will." It offers the parties considerable flexibility to adjust business relationships without significant cost.

Federal Contracts

(a) Bad Faith or Abuse of Discretion. "Federal courts interpreting the termination for convenience clause in federal government contracts have said the clause does not give the government unfettered authority to terminate at will. If a terminated contractor can prove the federal government acted in bad faith or abused its discretion when terminating the contract for convenience, then the termination is a breach of contract entitling the terminated party to breach of contract damages." Termination for convenience clauses - limitless or limited authority to terminate? Robert K. Cox, Williams Mullen, July 12, 2013.

However, to prove bad faith or abuse of discretion, requires proof by clear and convincing evidence that the federal government, acted with intent to harm.

(b) Lack or Good Faith or Fair Dealing. A 2013 decision of the U.S. Court of Federal Claims held that a contractor need not show intent to harm, to establish bad faith. Tigerswan, Inc. v. United States, No. 1:12cv62 (Fed. Cl. 2013). The court ruled that breach of the government's implied duty of good faith and fair dealing can be shown by proof of lack of diligence, negligence or failure to cooperate. Moreover, in such cases, the government can be liable for breach of contract damages and not the limited damages of the termination for convenience clause.

Private Contracts

Most state court have found an implied obligation of good faith in the exercise of a termination for convenience. See, AM Engineering & Construction, Inc. v. University of Louisville, 127 S.W.3d 579 (Ky. 2003).

Termination for Convenience Under the UCC

Absence of Specific Time Provisions. 2-309(2) of the UCC provides that contracts of indefinite duration are terminable at will by either party, even if not explicitly set forth in the agreement.

Reasonable Notice. "[C]ourts have enforced a reasonable notification requirement in UCC cases, but have not imposed the additional obligation of terminating in good faith. In short, the general rule is that, as long as reasonable notification under Section 2-309 is provided, broad termination for convenience clauses under the UCC allow one party to arbitrarily and unilaterally terminate a contract at will." Termination for Convenience Under the Uniform Commercial Code, Joseph Martini, Matthew Brown, Susan Kennedy, Wiggin Dana, March 10, 2014.

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  • Organization: Public
  • Updated: 03/29/2018
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Overview

The Termination clause details the circumstances under which the parties may end their legal relationship and discontinue their obligations under the agreement. Under common law, the parties may terminate the agreement for material or fundamental breach of the agreement.

Our standard agreement allows the parties to terminate by mutual consent, on breach or failure of a condition precedent, if one party becomes bankrupt, or if there is a law or order prohibiting the agreement.

Our variants are build using simple and easily-interchangeable modules so that the parties can choose a pre-built variant that fits their needs, or select which modules they desire and insert the modules into the parties' own clause.

The clause may expand or limit the common law right to terminate and may contain the following termination events, which may be mutual or unilateral, and optionally include a right to cure.

(a) termination on notice

(b) termination on breach

(c) termination on insolvency

(d) termination on a change of control

(e) termination on an event (such as a superseding agreement)

You may want to include a Termination Fee provision to your Termination Clause, so that if a party terminates the agreement for certain reasons that party will be required to pay a termination fee to the other party. See the Standard Clause + Termination Fee variant of our Expenses clause, which you can tailor to cover the reasons for termination that work for your agreement.

See our discussion below for more information on the right to cure, change of control provisions, and material v. immaterial breach.