Introduction
Contracts are everywhere in business. A major component of all commercial clauses is the Term and Termination clause. However, even one small mistake in the Term and Termination Clause can cause big headaches: legal disputes, financial losses, unnecessary liabilities and whatnot!
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Want an example of how important it is? Consider M/S Inter Ads Exhibition Pvt Ltd vs. Busworld International. In this case, the Termination clause in the Memorandum of Understanding (MoU) granted the Respondent the right to terminate if definitive agreements were not executed within a specified period. The Petitioner argued that the Respondent’s conduct had extended this period, implying that the termination was invalid. However, the court upheld the termination, emphasizing the determinable nature of the contract due to the termination clause mentioned.
Now, think about how terminating an employee can turn into a legal nightmare if an employment contract isn’t drafted properly! Similarly, contracts without clear Termination terms may be considered “inherently determinable” under Indian law, meaning courts won’t enforce them beyond monetary damages!
Further, even the financial impact is massive. India’s contract lifecycle management market is booming and expected to grow from $298 million in 2024 to over $1 billion by 2033. This shows that companies are realizing the cost of bad contracts and investing in better drafting. For instance, drafting better boilerplate clauses will not crack the deal since these are generic and might not suit each client’s special needs.
Therefore, here is where you can step in! Have satisfied clients by drafting a strong Term and Termination clause that sets clear and customized expectations, such that the contract can be focused on:
- How long the contract lasts
- When and how it can end
- What happens after termination
Hence, getting this right protects businesses from unnecessary losses, legal troubles, and sour partnerships. Now, let’s dive into the specifics of each.
What is a Term Clause, and Why is it Important?
Meaning
If a contract doesn’t specify a duration, it usually continues indefinitely. Some agreements are time-bound (like a supply contract), while others end once a transaction is complete (like a share purchase). It’s crucial to define how long both parties are expected to fulfill their obligations.
For agreements that might be renewed, like a rental contract, it’s best to include a clear renewal clause. If the terms change significantly, drafting a new contract is smarter than just renewing the old one. If the goal is simply to extend the existing terms without renegotiation, the clause should be labeled “Extension” instead of “Renewal.”
Check Points
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- An automatic renewal clause allows the agreement to continue automatically unless one party wishes to terminate it. This clause is preferred by clients in long-term service agreements, like toll plaza maintenance by a toll operator. However, automatic renewal clauses carry risks, as they can lock parties into an agreement even if the situation becomes unfavorable.
- Be cautious when drafting such clauses to avoid limiting flexibility and creating undesirable situations. If no preference is given, consider drafting a fixed-term agreement, allowing parties to exit if the relationship turns sour.
Sample
“This Agreement shall be effective from the Effective Date and shall terminate on the expiry of 31 December 2022, unless terminated earlier by the provisions of this Agreement. The Parties may mutually agree, in writing, to extend the term of this Agreement at any time prior to its expiration.”
In such clauses, it is common to specify a time period within which the parties must decide on an extension. This provides stability and certainty for both parties.
Alternatively, the parties may opt for a clause that allows for automatic renewal upon the expiry of a specified period. A sample clause for such an arrangement is provided below:
“This Agreement shall be effective from the Effective Date and shall terminate on the expiry of 31 December 2022, unless terminated earlier by the provisions of this Agreement (the “Initial Term”). Upon expiration of the Initial Term, the Agreement shall automatically renew for successive one-year periods (each such extension, together with the Initial Term, referred to as the “Term”), unless either the Licensor or Licensee provides written notice of non-extension to the other party at least 30 (thirty) days prior to the expiration of the then-current Term.”
What Is a Termination Clause, and Why Is It Important?
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Meaning
Sometimes, one party might fail to meet their obligations under an agreement, giving the other party the right to terminate the contract. For example, ABC Ltd. hires Mr. X to create artwork with a specific deadline. If Raj is incapacitated due to an accident and can’t deliver, ABC Ltd. can terminate the contract because it becomes impossible for Mr. X to perform.
Another reason for termination could be misrepresentation. For instance, if Mr. X falsely claims to be an artist and ABC Ltd. later finds out he isn’t, they can terminate the agreement. Some other common reasons for termination include:
- Death or insolvency of a party
- Change of company control
- Misrepresentation or breach of warranty
- Non-performance
- Revocation of an approval
Termination can also happen by mutual consent. For example, suppose two parties are building a national highway but later discover that the terrain is prone to earthquakes. In such a a case, they might agree to terminate the contract if such unforeseen events make the construction impossible.
Thus, termination can be “for cause” or “for convenience.” With “for cause,” the contract can only be terminated if specific issues arise, like a breach. “For convenience” allows either party to terminate without giving a reason, often depending on their bargaining power.
Similiarly, in employment contracts, termination “for cause” is common, allowing the employer to end the contract due to issues like misconduct or fraud. Some contracts may also include a “for convenience” clause, letting either party terminate with proper notice.
Review Points
- The procedure for initiating termination should be clearly specified.
- The party initiating termination must provide written notice to the other party stating the grounds for termination.
- Depending on the situation, decide whether termination should be immediate or with a notice period.
- In employment contracts, check if local law mandates a minimum notice period.
- For large-scale infrastructure projects, the agreement should include a notice to remedy the breach or non-performance. If not remedied, a termination notice follows.
- After termination or expiration of the contract, specify the consequences clearly.
- Address how the parties should conduct themselves post-termination, including the return of confidential information.
- Include provisions for the survival of certain clauses (e.g., confidentiality, non-compete) after termination or expiry of the contract.
Sample
“At any time during the Term of the Agreement, either Party shall have the right to terminate this Agreement immediately by notice in writing to the Licensee upon the occurrence of any of the following events:
(a) The representations and warranties made by the other Party are found to be untrue in any respect.
b) The other Party breaches any obligation contained under the Agreement; or
(c) The other Party becomes incapacitated, or it is found that it does not have the authority to perform the obligations contained in the Agreement.”
Open Resource Links
Access some more open-access resources of term and termination drafts that can come in handy here:
Put your Skills to the Test!
Question 1:
You are tasked with drafting a contract for a licensing agreement between two parties. The agreement needs a clause outlining the term of the contract, including provisions for both the possibility of extending the term by mutual agreement and the automatic renewal of the agreement after its expiration. Draft a clause that includes:
- A provision for the agreement to terminate on a specific date unless terminated earlier.
- A provision allowing the parties to mutually agree in writing to extend the term of the agreement.
- An alternative provision for automatic renewal of the agreement after the expiry of the initial term, with the option for either party to opt out by providing written notice.
Answer:
“This Agreement shall be effective from the Effective Date and terminate on the expiry of 31 December 2024 unless terminated earlier by the provisions of this Agreement. The Parties may mutually decide to extend the term of this Agreement, in writing, at any time prior to the expiration of this Agreement.
Alternative:
This Agreement shall be effective from the Effective Date and terminate on the expiry of 31 December 2024 unless terminated by the provisions of this Agreement (“Initial Term”). Upon expiration of the Initial Term, the Agreement shall be automatically extended for successive 2 (Two) year periods (if so extended, the extension terms collectively with the Initial Term shall be referred to as the “Term”); unless either Licensor or Licensee provides written notice of non-extension to the other Party at least 45 (Forty-Five) days prior to the expiration of the then applicable Term.”
Question 2:
Draft a clause for an employment contract that includes a Termination for Cause, specifying:
- The types of misconduct or actions that can lead to termination (e.g., negligence, fraud, material breach).
- A notice period for the employee to remedy the cause (e.g., 15 days)
- That the company can terminate without assigning a reason.
Answer:
“Termination for Cause: The Company may at any time terminate the Employee’s employment for Cause by way of a written notice of termination to the Employee provided that the Company shall allow the Employee a period of 15 (fifteen) days to remedy the said Cause Cause’ means (i) negligence or misconduct in carrying out the duties or obligations of the Employee; (ii) fraud, embezzlement, theft, commission of an offence involving moral turpitude, or proven dishonesty in the course of his employment; or (iii) a material breach of any of his obligations under this Agreement as determined by the Company.
Termination for convenience: The Company may, with prior notice of a (one) month or payment in lieu of such notice, terminate the Employee’s employment without assigning any reason whatsoever.”
There’s a Lot More to Learn!
Congratulations on reaching this point! However, this is just the beginning of the exciting journey ahead in learning contract drafting. These tips were based on the extensively prepared modules of the Online Certificate Course on ‘Contract Drafting & Negotiation’ by LLS. Check out the course to gain all the insights it has to provide. You can also look at ‘Self-paced Contract Drafting Pro: Mastering 20+ Legal Agreements.’ These courses by LLS are:
- Developed by experts who have worked at top law firms like Trilegal, SAM, and Khaitan and Co., and in-house at corporates like HDFC and Infosys.
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- Reviewing simple agreements can earn you Rs. 5000 per agreement, while drafting complex agreements can bring in 2-10 lakh rupees.
- Includes a module on negotiation, a crucial skill that can help you negotiate rent agreements, employment contracts, and M&A deals worth crores.
- Save yourself 4 years of legal career learning by mastering the same skills in just 2 months.
- Learn how to negotiate effectively in daily life, job interviews, contractual negotiations, and competitions.
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