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The Basics of Termination Agreements - Part 1

Posted by Kristin Kreuder on June 22, 2020 at 1:34 PM

Termination Agreements and contractsIn business, as in life, things don’t always work out as expected. When the parties to a contract wish to end their relationship (for any number of reasons, such as dissatisfaction with goods/services, better pricing found elsewhere, or simply a desire to walk away from the deal), a termination agreement enables them to formally cancel their contract before its expiration date[1]. In this two-part series, we will examine the basic provisions found in most termination agreements (part 1), as well as more complex provisions that are often required in more sophisticated transactions (part 2)

A termination agreement will supersede the terms of the original contract, and generally will specify any surviving obligations between the parties. For this reason, it must be mutually agreed upon and signed by all parties to the original contract. And, if there is a successor or assignee to the original contract, these facts must clearly be set forth in the termination agreement so the relationship of the parties executing the termination agreement can be explicitly clear to the reader.

Although termination agreements can vary in length, all agreements will typically identify the original parties, as well as the original contract between them which is being terminated; the reason for and the effective date of the termination; and finally, the terms and conditions which will guide and govern this parting of ways.

A Closer Look at Termination Agreements
To better understand the operation of a termination agreement, let’s review the basic provisions commonly included in the majority of such agreements.

1. Name of the original parties and agreement, including any amendments. This information can be provided in the recitals, the preamble or the body of the termination agreement, depending upon the complexity of the transactions upon which the original contract is based and the circumstances surrounding the termination. In some cases, the underlying agreement and amendments are attached as exhibits to the termination agreement itself.

2. Reason for termination. This provision can be short and sweet; or, in situations where a dispute precipitated the parties’ agreement to terminate, the nature of the dispute might be described in more detail. The parties may also wish to reference their collective desire to settle potential or actual claims between the parties in this section, as applicable.

3. Effective date of termination. The parties must decide when the termination will take effect (e.g., upon signing the termination agreement; post-dated to terminate on specific date in the future; or upon a future date[2] only after certain conditions precedent are met). In all instances, however, the effectiveness of the termination agreement should not occur until both parties have executed and delivered the termination agreement itself. Finally, it is important to note that termination will not affect any rights or obligations between the parties which commence after the date of termination, including those agreed to within the four corners of the termination agreement document.

4. Terms and Conditions/Rights and Obligations. Regardless of how this section is titled, these provisions detail the effect of termination on the rights and obligations of the parties, including whether any provisions of the original agreement will survive such termination. In some cases, a release of claims relating to the original agreement or the relationship generally may be included, and/or provisions relating to a termination payment, reimbursement of certain costs or expenses, or the introduction of additional restrictive covenants, such as a non-solicitation clause. If the parties do agree to include a payment as part of the termination transaction, the details of such payment would be referenced here, including the amount and terms of the payment. Likewise, it should be stated specifically in this provision that such payment is being made in consideration of the other party agreeing to terminate the original contract and/or consenting to any new obligations set forth in the termination agreement (i.e. any new restrictive covenant), as applicable.

5. Other Standard Contract Terms. As with any other substantive agreement pursuant to which the parties are giving up certain rights or agreeing to take on obligations, a termination agreement should include the standard representations and warranties, such as due authorization, due execution and enforceability. Additionally, a termination agreement should include the typical miscellaneous provisions, such as those relating to notices, governing law, amendments, assignments, execution in counterparts, invalidity/enforceability, equitable relief, entire agreement, and successors and assigns.

Of course, not all business relationships are the same and there may be other factors affecting the rights and obligations of the parties, as well as their ability to terminate their relationship and/or the agreement. The provisions discussed here are typically found in termination agreements involving two business entities. Terminations between individual parties or the termination of consumer contracts often require consideration of other factors which are not discussed here[3]. It is good practice to consult with legal counsel before entering a new contract to ensure you understand all of its provisions, including the implications of those provisions and how they will affect your rights going forward. For question about termination agreements or other commercial contracts, please contact Kristin Kreuder at kkreuder@outsidegc.com or 203-803-8714. 

 

[1] In some cases, a force majeure event is the reason behind a contract termination. This article contemplates terminations made due to reasons other than the occurrence of force majeure events.

[2] If a future date is selected for the effective date of termination and the termination agreement contains a release, the parties should carefully consider the effect of a future termination date on the enforceability of the release in accordance with applicable law.

[3] For example, an individual party may have the right to back out of certain types of contracts under applicable state law within a certain period of time, and this is typically referred to as a “rescission period” (i.e. in connection with a contract to purchase electricity supply for one’s home). Consumer contracts typically require an analysis of industry-specific laws, rules and/or regulations which may be applicable. Additionally, certain situations may require specific documentation in connection with a termination (for example, in the event of a termination of employment, a separation agreement may be appropriate).

 

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.

Topics: commercial contracts, termination agreements, termination contracts

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