Termination for Convenience
Parties can agree for either one or both of them to have a right to terminate the contract “for convenience”, in other words, without needing a reason to do so. This right to terminate is often one of the most hotly contested termination rights, as it creates significant uncertainty as to how long the contract will last.
From a supplier’s perspective, a customer’s right to terminate for convenience poses a significant risk to the amount of income it will have anticipated generating under the contract and may also threaten its ability to recover any costs incurred in delivering the goods/services.
From a customer’s perspective, a supplier’s right to terminate for convenience poses a significant risk to continuity of service and may result in it having to pay above market rates to procure replacement goods and/or services at short notice if the supplier unexpectedly exercises this right.
It is therefore important for both parties that an appropriate amount of notice is provided by the party terminating the contract for convenience. The customer will want sufficient notice to give it enough time to appoint a replacement supplier and to transition the goods/services to the replacement supplier in an organised manner. The supplier will want sufficient notice to give it enough time to mitigate unrealised income (e.g. by selling off any leftover stock) and identify new customers/revenue streams. Depending on the circumstances, it may be that each party must serve a different period of notice in order to terminate the contract for convenience.
The supplier may also want to place additional conditions on the customer’s right to terminate for convenience. Such conditions could include:
- the customer only being able to exercise its right to terminate after a certain point in time in the duration of the contract (e.g. the customer may only terminate the contract for convenience after the third year of the five year term of the contract). This will help reduce the amount of stranded costs and unrealised revenue suffered by the supplier;
- the supplier being able to recover from the customer any stranded costs it has incurred (these could include unrecouped start-up costs, capital expenditure, investments and third party contract commitments). The mechanism for calculating such stranded costs can often be quite complex and will take into account factors such as the depreciation of any assets the supplier has purchased in order to perform the contract;
- the customer having to make a termination payment in respect of the supplier’s unrealised income/profit for the remainder of the contract. A mechanism for calculating the amount of such termination payment will need to be agreed and will largely be based on when the customer serves notice to terminate.