How to Revise Overbearing Termination Clauses

Apr 26, 2016

Suppliers can ask for termination language that can give a supplier significant power over a customer. A situation where a supplier can have the most power with termination language is where access to a service is provided. Unlike purchasing a product, access to services are under the control of the provider. For example, a SaaS supplier could technically deny access to software because it is in control of the access. However, terminating a software license can have the same legal effect as terminating SaaS access. Consequently, termination language should be carefully considered so that it does not bring about excessive consequences.

The way to handle overbearing termination language is to provide a problems resolution process in addition to the strict termination rights. Including language to suspend a license or service could be coupled with a process for remediating the issues. Additionally, cure periods can be included in the process to set timelines for resolutions of specific issues.

Even if you plan to have an attorney review and revise a contract, it can be helpful to communicate details that will ensure that the revisions are tailored to meet the needs of the business. Be ready to provide the following information:

1. Why the product or service is important to the business
2. Currently implemented alternative solutions or processes 
3. The time and cost to implement substitutes
4. How long the business operate without the products or services

An example of an overbearing clause is when a supplier can terminate an agreement for non-payment. A payment condition can be reasonable on its face. However, in a situation where a payment is lost, misdirected, or sent inadvertently with a deficient amount could be a default triggering the supplier’s right to terminate access, a license, or the entire agreement. Cure periods do not necessarily provide the tools to resolve the problem. Using the payment example, the problem could have occurred with a third-party process, or at the supplier’s point of receipt. Although, a supplier may argue that those examples would be an exception, a cure period of five or ten days may not be enough time to discover the root cause of the problem.

Consequently, including a problem resolution process coupled with the supplier’s suspension rights can be a more customer-friendly approach while still protecting the supplier. The purpose of an agreement is to do business together, so more attention should be given to creating language that promotes the parties cooperation with each other. Of course, bright lines for termination are useful and necessary, but such clauses can be overbearing without including a problem resolution process.

When working with commercial contracts, it can be helpful to employ the services an attorney who takes an interest in supporting the transaction and the customer-supplier relationship while protecting the interests of the client.