10 Strategies for Termination Clause Drafting: Practice Points

Negotiate your exit help before you need it. Marybeth told us the thing she wished she had known earlier was how important it is to pre-negotiate your outs. Everybody wants to believe the relationship will go well and end with a quiet non-renewal, and it rarely works that way. Work out what transition help you will need while the vendor still wants your business, because asking after you send the termination notice costs you. Laura put it well when she said both sides forgive each other's hiccups during the term, and the moment you terminate you are a stranger asking for a favor.

Find out what you get when the contract says nothing. Lindsey walked through the default position, where common law lets you terminate for a material breach and not much else. The trouble is that you hand the question of what counts as material to an arbitrator or a judge. Write a termination for cause provision that says what triggers the right, so the standard is one the parties picked rather than one a stranger applies later. There is no default right to walk away for convenience, so that one exists only when you negotiate it in.

Match the cure period to what the failure actually costs you. Marybeth said 30 days is sometimes plenty and sometimes nowhere near enough for a technology failure, so she drafts 30 days unless the parties agree otherwise based on the circumstances of the breach. Lindsey runs energy operations where a vendor that stops delivering can leave her with no backup source, so her cure periods stay tight. Ask whether the breach can be cured at all, because a confidentiality breach cannot, and that kind of failure should trigger the right immediately. Some customers build steps into the clause, with a workaround due in one window and a real fix due in another.

Watch how many gates the materiality language stacks up. The sample clause required a material breach of a material term, and Marybeth said she loves that as a vendor because it makes a legitimate termination harder for the customer to declare. Lindsey wanted it more generic for exactly that reason. Marybeth described the vendor ideal as a material uncured breach of a material term that materially impairs performance, with as many gates as she could get. Count the qualifiers BEFORE you agree to them, because each one hands the other side another argument.

Keep termination from becoming your only remedy. The sample provision said the termination right came in addition to, and not in lieu of, other remedies, and that stacking was the piece Marybeth said would give her hives on the vendor side. She wants your only right to be to terminate and walk away, with no damages claim and no clawback. Lindsey wanted the opposite and said she would pursue damages and any other harm the breach caused. Whichever side you sit on, notice that a short line at the end of the section decides how much the termination right is really worth.

Be careful with language that declares a breach material on its face. Laura pointed to the line you often see underneath the main trigger, where failure to pay on time gets called a material breach of a material term. That declaration skips the whole argument about what is material. As a customer, it means being 10 cents short for one day can put you in default, so push back and keep one standard for everything. As a vendor, it may be the most useful sentence in the section, because paying is most of what your customer does.

Tie a termination fee to costs you can document. Laura explained that termination fees are liquidated damages, and courts look hard at whether they hold up. She said this is one of the rare areas where you can protect enforceability yourself by covering every element your jurisdiction requires. Marybeth counsels clients to build the number from capital outlays, personnel costs, and other documentable spend rather than sticking a finger in the wind. The vendor dream of collecting every remaining year rarely survives negotiation and probably would not survive a challenge either.

Think about what a convenience right does to your company's value. Laura called this one of the most impactful provisions we negotiate, because an acquirer values a vendor on expected revenue from its customer base. A customer base that can all walk tomorrow is worth less. Get someone with revenue responsibility to approve a convenience right before you grant it, and keep the record showing you escalated. Don't let a junior salesperson hand it out because it sounded like an easy concession.

Reach for convenience before cause when you have both. Laura shared the practice point she did not learn until she had been in-house a while, which is that experienced teams avoid terminating for cause almost every time. Terminating for cause turns into a he said, she said, and the other side will argue they only stopped performing because you defaulted first. Now you have a factual fight nobody resolves short of arbitration, when what you wanted was clarity. She watched very good lawyers pass on blatant cause terminations with a full written record and take the convenience exit instead.

Spell out what survives, by number and by name. Laura's rule is never to accept a survival clause covering the provisions that by their nature should survive, because it leaves everyone guessing and makes any fight expensive. List the sections, and put the section name in parentheses next to the number, since numbering shifts during drafting and courts follow the name when the two stop matching. Marybeth's standard list runs to confidentiality, limitation of liability, indemnity, accrued payment obligations, data protection, and the general clauses. Lindsey added time limits, like final invoices due within 30 days, so nobody surfaces three years later with a bill.