Navigating termination for convenience clauses

Companies, like people, are becoming more commitment-phobic

Most of us, especially those of us in our 30s or younger, have a friend or relative who lives with someone they love without getting married. Out of wedlock as they used to say. Government statistics place the percentage of unmarried U.S. couples at approaching 50 percent, and the annual number of marriages in the U.K. is at record-low levels.

People just aren’t as willing to enter into long-term commitments any more. Being able to pick up and walk out of a relationship lessens the feeling of captivity, that you have to make the relationship work no matter how unhappy it gets. And let’s face it, the world is a lot more complicated, less predictable and faster changing than it used to be. Where life takes you may not be where it takes your partner. Then there are the transactional costs of marriage. Ever priced out a basic wedding for 50 people? Big bucks. And if the marriage doesn’t work out, even a no-fault divorce is going to set one of you back a few grand.

From my perch as an in-house lawyer who has negotiated many kinds of services contracts, I see a similar shift in the business world. For many companies, the future is too uncertain to allow for long-term planning or obligations. My company sells professional and cloud computing services to hospitals. Our services and the associated contract provisions are typically an easy sell, until we get to the length of the service term. Our customers may be in talks with other hospitals to merge or be acquired at the same time they are sitting down to negotiate with me. The hospitals are comfortable with contracting year-to-year. My company’s service offerings are three years or longer. It’s a big pill for the hospitals to swallow.

A couple of decades ago, service providers started putting limitation of liability caps in contracts. Today, these clauses are sacrosanct to providers. I see termination for convenience trending into the same kind of staple risk mitigation provision for customers. Similar to the limitation of liability clause, a termination for convenience clause is a clear and easy-to-understand (if somewhat blunt) contractual tool for managing risks.

Termination for convenience works a little differently, though. Whereas a limitation of liability limits the aggregate impact of all risks, termination for convenience avoids all further occurrences of risks associated with procuring a service by ending the service itself. While termination can create a potential secondary risk of not having the service available, language can be added to the clause that gives the customer sufficient time in between the notice and when the termination takes effect to transition to another provider, avoiding downtime.

What is making termination for convenience a must-have for customers these days is not the traditional customer fears of getting locked into paying too much or paying for bad service.  There are other, more finessed ways in contracts to resolve those particular risks, e.g., most favored customer clauses, service levels. Rather, what customers now fear is that, due to mergers and acquisitions, budget cuts and changing C-suite leadership, the customer organization will end up paying for a service that it no longer wants or needs. Think of two people meeting and falling in love and living together in a cute little bungalow in a Southern California beach community. Then one of them gets transferred to Cleveland. You get the picture.

Does termination for convenience make any business sense for providers? Isn’t a longer, fixed-term contract always a better contract if you are selling? The answer depends. Termination for convenience clauses are one of those contract terms that are (or should be) shaped mostly by strategic business considerations. For example, your service product may be touted as scalable, meaning the user can turn the volume of service up or down or completely off; software-as-a-service is a perfect example. For scalable services, not only is termination for convenience acceptable, it is a key feature of the service offering.

Conversely, your company’s business model may hinge on establishing a customer base and selling add-on services from the inside, which can’t happen unless continuous, long-term relationships are established; outsourcing is the classic example. Or your service offering may require an upfront infrastructure investment that can only be recouped over time. In these other scenarios, termination for convenience is prohibitive, unless fees are imposed or you at least lengthen the prior notice period to allow sufficient time to mitigate losses by redeploying people and assets.

Introducing the concept of termination for convenience into a negotiation can be tricky. My experience is that, when offered, customers want termination for convenience, but they want it for free. I’ve also seen customers try to take a liquidated damages clause for material breach, or for lack of funding, and attempt to turn the clause into termination for convenience, arguing there isn’t any practical difference (which isn’t accurate).

If, after reading the above, you come away thinking about calling your outside counsel or visiting your favorite contract boilerplate website to acquire some good termination for convenience clauses, you’ve missed the point. These clauses necessarily differ from company to company depending on the business model, the service and the overall risk profile of a given transaction. Crafting termination for convenience is an opportunity for you as in-house counsel to apply your knowledge of your company’s business and products and to exert some legal creativity.

Here are some helpful tips (from a provider perspective) for working with termination for convenience clauses:

  • The decision to offer termination for convenience and under what conditions is mostly a business one, but the work of drafting the clause into the contract requires solid legal drafting skills (otherwise you could end up with one big gaping loophole).
  • Decisions about termination for convenience should be made during the service product development or proposal development phases, as applicable, not mid-stream during negotiation.
  • If uncertain, a good strategy is to keep termination for convenience out of standard contract language and in reserve for possible introduction later in negotiations.
  • In negotiation, be prepared to hold firm to the imposition of fees and other conditions (e.g., short or long notice period, no default on payment obligations).
  • Keep termination for convenience separate and distinct from other kinds of termination (e.g., material breach, merger and acquisition, legal compliance).
  • Agreeing to termination for convenience should lessen or obviate customer demands for increases in limitation of liability amounts and limitation carve outs.

As for getting and staying married. I have been married to my wife Jeanine for more than 20 years. I can’t imagine living life any other way.

author image

Eric Esperne

Eric Esperne is counsel for Dell Services and is located in Canton, Mass. He has more than 15 years experience as in-house counsel for government,...

Bio and more articles

Join the Conversation

Advertisement. Closing in 15 seconds.