Enterprise Software

Can your termination clause hold up in court?

A termination clause can be a consultant's best friend if you find that a relationship with a client is unmendable. Here are some factors to consider when adding a termination clause to your contract.


If consultants have a role model in American politics, 18th century American statesmen Henry Clay might fit the bill. Known as The Great Pacificator, Clay is credited with resolving three separate conflicts that threatened the existence of the fledgling Union. Like Clay, consultants are often masters of compromise in the effort to cultivate good client relationships and develop new business.

But even the best consultant has a limit. When a compromise is impossible, a termination clause may be your best bet.

Termination clauses describe the basis on which a consultant or client can dissolve the relationship, as well as the payment terms for remaining debts or reimbursements. (We featured a termination clause recently in an article that offered tips for leaving nightmare clients.)

But some types of legal documents, noncompete agreements, for example, have a history of being easily toppled in court. We wanted more advice about the validity of termination clauses, their ability to stand up in court, and what factors may make them more solid if a case comes to litigation. We asked several legal experts to comment. They provided advice for creating a watertight termination clause.

Defining the terms of termination
To ensure that both the consultant and the client are able to terminate the contract at any time, include language in the consulting agreement that provides that the relationship is terminable at the will of either party at any time for any reason whatsoever or for no reason at all, said Jennifer Gardner, a partner with Los Angeles firm Gardner & Booth.

She also suggested that if you use the word "reasonable" in your termination clause, define it by setting time parameters. Language such as: "Client and Consultant agree that 'reasonable notice' shall consist of no less than 'x' number of days following the client's/consultant's receipt of written notice terminating the consulting agreement," could be included to assist the parties, and possibly a court, in determining what was intended by the word "reasonable."

Gardner also recommended that consultants should state exactly how many days after either party receives written notice of termination that the final payment for unpaid fees and consulting services will be due. This will also assist a court in determining whether there has been a breach of the consulting agreement and in calculating the amount of recoverable damages.

Termination clauses that stick
Of the companies we contacted, CollegeRecruiter.com, a Minneapolis-based Web site for job-seeking students and graduates, and employers, said it has successfully invoked the termination clauses that appear in all its vendor contracts.

When properly written and invoked, termination clauses are perfectly legitimate and upheld by courts, said Steven Rothberg, president and founder of CollegeRecruiter.com.

Figure A


Rothberg said the company has never had to go to court over ending a vendor relationship because its clauses define the permissible reasons for termination, the notice required, and the result of giving that notice. CollegeRecruiter.com's termination clause is shown in Figure A. Permissible reasons for termination include any sort of breach of contract, and the amount of notice required is dependent on the nature of the relationship and the severity of the breach, Rothberg said.

"Most of our agreements provide for a 30- or 60-day notice period, but for very serious breaches, we usually can terminate immediately and without notice. An example of such a serious breach would be insolvency."

For clarity, CollegeRecruiter.com's contracts state that if the company gives notice, it intends to terminate the relationship. In addition, the clauses state that CollegeRecruiter.com owes no damages and that the matter does not go to arbitration or mediation.

"If those issues aren't spelled out, the other side could argue that the effect of termination was that the parties would go to arbitration to try to resolve their differences," Rothberg said. "If both parties want that option, that's fine, but if you don't, then you want to make sure that your contract indicates that."

What could derail a termination clause?
Termination clauses could be derailed by other common documents generated during the course of a contract. Common actions, like developing a project definition document or project schedule, could provide records that might be seen as superseding the contract, said Mark A. Stafford, a partner with the law firm of Kilpatrick Stockton, LLP in Winston-Salem, NC, who specializes in national computer performance litigation.

He warned that subsequent documents or conversations might nullify a termination clause. Even conversational comments the consultant might make about "being there until the end" or references to some specified phase of the project could be construed as replacing the contract unless the termination clause explicitly states otherwise.

"Because such documents or representations come after the creation of the termination clause, a court might find that such representations are 'modifications' of the termination clause that take away the clause's intended effect," Stafford said.

Tell us your experience
Have you exercised a termination clause? Were you successful, or did your actions result in a nasty court battle? Send us an e-mail or discuss your experiences below.

 

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