Your Right to Terminate: Quite Possibly the Most Important Right In Your Business Contract

It’s almost inevitable. At least three or four times a year, the phone will ring or an email will arrive with the client saying something like this:

“John, it’s not going as we had hoped. We need to know how to get out of this deal, and the consequences. How soon can you review the contract?

Rewind 6-12 months prior to this message, when the sky was blue, the birds were singing, and this was going to be the best deal in history. Indeed, the parties’ unbridled enthusiasm to work together on a new transaction is one of my favorite things about being a deal lawyer. This enthusiasm provides the foundation momentum to swiftly negotiate and close the transaction.

In an acquisition, the seller is happy to cash out and the buyer is eager to add new assets to its portfolio. In a joint venture, the parties are keen to make a whole greater than the sum of its parts. In the hiring of a new employee or consultant, the company appreciates adding human capital and the employee or consultant relishes the new opportunity.

But after the deal is signed and the honeymoon period fades, assets may be prove defective or deficient, personalities may clash, performance may falter, and other unexpected challenges may arise.

When this happens, the most important contractual term is not the price you negotiated, the assets you have the right to buy, or the services or other items you are supposed to receive. Instead, the most important term is your right to terminate the deal, including the ability to cut your losses (or increase your gains) and return to the status quo (or enhance your position).

Without the right to terminate, you could be forced to return to the negotiating table for settlement discussions on a termination agreement. This may involve an expensive settlement payment plus attorneys’ fees, in addition to the cost of your valuable time and emotional capital. In the worst case, it could mean mediation, arbitration, or litigation. Meantime, you may need to continue to honor burdensome obligations under the existing contract, ratcheting the pressure on an already tense situation.

Conversely, if you have strong termination rights, you may be able to leverage a termination situation to your advantage. Your leverage may allow you to end the agreement unilaterally, but it may also enable you to re-negotiate the deal to achieve better terms or to salvage a challenging relationship by changing expectations.

The termination clause and its related provisions are so important that when I negotiate deals for my clients, I read them and re-read them several times as we iterate and revise drafts. When negotiating complex deals, I often lie awake in at night weaving the termination and post-termination rights provisions in my mind, making sure they fit and function in my client’s best interests.

While we all hope that each business deal is a success, when negotiating your agreements it is important to take a moment to envision your rights and remedies if the relationship does not evolve as favorably as anticipated. Your lawyer should help you craft deals that enhance your upside but also protect you from downside risks, which include the right to terminate the deal when things go awry.

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