Special Provisions in Termination Agreements – Part 2

Just as the reasons why parties choose to terminate a contract will vary, so too will the nature of the relationship between the parties, as well as the complexity of the original business arrangement. Sophisticated relationships and complex deal terms often necessitate the inclusion of additional provisions in the termination agreement. In Part 2 of this series, we review those terms which are illustrative of a more complex termination arrangement:

1. Release.
   In a situation where one party is claiming a breach by the other party of the original agreement, or if the reason for termination could give rise to a potential breach of contract claim by one party, the parties may seek to include a release in the termination agreement. A general release typically covers all claims arising through the termination date, except those that are non-waivable under applicable law, those that relate to obligations which will survive the termination of the contract, and obligations that are imposed by inclusion in the termination agreement itself. Although a release can be broad, specific, or extremely narrow, it should be noted that certain jurisdictions might modify broad releases by either limiting them to a smaller set of particular claims or declaring them unenforceable, in whole or in part. It is important to consult with legal counsel before agreeing to a release of claims or potential claims or to waive any of your rights.

2. Indemnity.
   An indemnification clause is usually included whenever there is a release is involved in a termination agreement. It may also be beneficial to include an indemnity in situations where there are third parties who may be detrimentally impacted by the termination of the original agreement, or if there are significant termination or post-termination obligations set forth in the termination agreement. Indemnifications can be drafted as mutual or unilateral, and can be limited to covering only third party claims and/or direct claims. Again, the type and reach of the indemnity will depend upon the complexity of the relationship between the parties, the circumstances of the termination, including the potential claims and the relative risk of each party, and of course, the negotiation power of the respective parties (which is often a factor in most contracts).

3. Confidentiality and Publication.
   Like the above provisions, the decision to include a confidentiality clause depends on the situation leading to the termination and the relationship between the parties. Typically, it is included when a termination payment is being made, and often, it will completely prohibit (or in some cases specifically limit) any disclosure relating to the termination agreement, including its existence and its terms. In the event the limitation is milder, a similar provision can be included which addresses public announcements relating to the termination. This type of provision would assist the parties in exercising control over the form or timing of any public statement with respect to the termination or the parties’ relationship. Specifically, by requiring the consent of the other party before any publication or announcement may be released, the parties can ensure that it is made in accordance with mutually agreeable standards. If a publication provision is added, it may include exceptions for any disclosures required by applicable law (i.e. a required filing with the SEC) or as may be required to enable a party to enforce its rights under the termination agreement.

4. Non-Disparagement.
   Unfortunately, there may be instances where the events leading up to the termination are not positive or pleasant, and one or both parties may wish to protect themselves against disparaging statements or actions made by the other party, especially those which may cause harm to their company’s reputation. By including a non-disparagement provision, a party can ensure that communications are properly restricted in the event the other party seeks to intentionally disparage them. If inclusion of this clause is met with opposition, the parties alternatively could agree to imposing a time limitation on this restrictive covenant. This provision is typically found within the publication section of the termination agreement.

As we all know, life and partnerships don’t always work out as planned, and parties to an agreement cannot always address each and every issue that may arise during its term or otherwise in connection with their relationship. In the event this becomes the case, I hope this article will be helpful in guiding your understanding of what you need to do to effectively end the relationship while preserving your rights and avoiding the potentially negative consequences of such separation. For question about termination agreements or other commercial contracts, please contact Kristin Kreuder at [email protected] or 203-803-8714. 

Kristin Kreuder is a Member of our NY-area team with over 20 years of legal and business experience in both public and private corporations and in major NYC law firms. Kristin handles a wide range of legal matters, including mergers and acquisitions; commercial transactions; technology, media, licensing and sponsorship; capital markets, venture capital and private equity transactions; and a variety of general corporate and governance matters.