Every story has a beginning, a middle, and an end. Contracts have a lifespan, which is like a story. The contract lifespan begins before the contract is signed, when the parties engage in negotiations. Statements made during those negotiations can have consequences afterwards.
The part we are all familiar with is the performance of the contract: I give you a dollar, you give me a sandwich – that kind of thing. We could call this the “middle” of the contract story. Usually this finishes with everyone doing what they are supposed to do, and that’s it. That’s the end of the story.
There is also a kind of anticlimax to the contract story: the things lawyers call “continuing obligations”. Things like confidentiality obligations, and warranties. If the sandwich you sell someone gives them food poisoning, you will find out that the story isn’t over yet.
Sometimes, the contract story gets interrupted before its natural end-point. This happens when a party terminates the contract. The termination clause is a very important clause, but a lot of people probably sign contracts without paying much attention to it. Here are a few good reasons to pay attention to the termination clause:
- Termination can be triggered automatically by specified events. If you don’t know what those events are, you probably aren’t taking intelligent steps to avoid them. Some termination clauses allow the defaulting party an opportunity to rectify their mistake, others don’t. Often, both types appear in a contract.
- Termination clauses can be asymmetrical: one party can terminate but the other can’t. I once saw a contract that locked a franchisee into a 20-year relationship with no way of terminating the agreement other than asking the franchisor to terminate it..
- Termination can have serious consequences. Under many commercial leases, termination by the landlord accelerates the tenant’s obligations to pay rent from the date of termination to the end point of the lease, and the payment is usually required immediately.
The next time someone asks you to sign a contract, check the termination clause. The next time you design a contract, think about how you want the relationship to end and what things you want to happen next. Your contract story doesn’t need to have a surprising ending.
This blog post does not represent legal advice for any particular person. It reflects the law applying in Australia at the time of writing. The author, James Irving, is a Perth contract lawyer and has many small business clients. If you need assistance with a contract, please contact Irving Law.