Consequences of termination
When businesses enter into contracts they typically focus on provisions such as price, duration and how the contract can be terminated. They often overlook, though, provisions that make clear what happens when the contract is terminated or expires.
The type and nature of the contract will determine the relevance and importance of those provisions. The arrangements might involve:
- sharing information which is sensitive or confidential in nature;
- using another’s licences through sub-licencing arrangements;
- using another’s property (vacation and repair considerations);
- having something only partially completed e.g. an incomplete installation or build;
- having unused or unsold stock or other materials sitting in its warehouse;
- supplying goods so that there might be work-in-progress and outstanding invoices; and
- payments made in advance of the provision of goods and services which have not yet been delivered or rendered.
If the contract is terminated or expires, what happens to the information, stock or licenses held by the other party? The discloser of the confidential information will likely want the information destroyed or returned to it; the owner of any unused or unsold stock will want its stock returned; and the freehold owner of the property will want the property repaired and left in a good state.
Some rights and/or obligations might survive termination or expiration of the contract and so it is essential to be clear what these are and whether you need them to protect your business. For example, if you have shared highly sensitive information with another party, that information should remain confidential notwithstanding the end of the contract.
Aside from the practical commercial issues, a provision detailing consequences of termination will be fundamental in certain arrangements to address more technical matters such as whether the TUPE regulations apply and in determining whether a party is entitled to compensation as a result of being a commercial agent.
It can cause serious difficulties if these matters are not thought about and recorded in the contract. Please get in touch if we can assist you in preparing or reviewing any contractual arrangements.Back to Our Thinking →