Termination: Consequences

Table of Contents:

• Acceleration of Payments Owed

• Adjustment of Volume Commitments

• Refunds

• Loss of License Rights

• Payment of Stranded Costs

Termination: Consequences

The termination of a contract may be expected to usher in a host of events that need to be considered by the terminating party(ies). This is particularly true for a customer who has a unilateral right to terminate for convenience, since exercise of that right will often trigger certain rights beneficial to the non-terminating party (e.g., the seller).

Acceleration of Payments Owed

As illustrated in the following exemplar, one important consequence is that payment obligations are accelerated upon termination. A provider is particularly vulnerable to early termination costs if the provider agreed to amortize its costs over the full length of the contract period. In such a case, such costs are built-in to the service price, and may not be fully recovered if the contract is terminated prematurely. Accordingly, a service provider who agrees to recover project costs through payment by the client over the course of the contract term may require the customer to accelerate payment of such costs upon termination.

However, as demonstrated by the following exemplars, the client can insist on a refund of the unearned or unused portion of any pre-paid service fees and the delivery of all deliverables:

Exemplar C71B-1

Client will pay, within thirty (30) days of the effective date of termination, all amounts that are owed to Contractor for services completed and accepted by Client prior to the termination date.

Exemplar C71B-2

Client may terminate this Agreement or any Statement of Work (unless otherwise provided for in a Statement of Work), upon 30 days’ advance written notice. Upon any such termination, Contractor shall advise Client of the extent to which performance has been completed through such date. Contractor agrees to collect and deliver to Client the Work Product that then exists, provided that Contractor has been paid for all uncompensated work that Contractor can demonstrate was properly performed prior to the date of termination, Services and Work Product and expenses incurred through the date of termination, including charges for any products and equipment ordered by Contractor on Client’s behalf, which cannot be returned for a full refund, if such return is requested by the Client in writing. In the event of any termination of a Statement of Work or the Agreement without cause while any Statement of Work remains uncompleted, Client shall pay an additional cancellation fee, if such a fee is set forth in the applicable Statement(s) of Work to compensate Contractor for actual costs associated with such termination.

Exemplar C71B-3

Customer may terminate this Agreement (i) at any time without prior notice upon breach of this Agreement by Contractor, or (ii) for convenience upon fifteen (15) days’ notice to Contractor. Upon termination for any reason, Customer will not incur or be liable for further charges except for such uncompensated work that Contractor can demonstrate was properly performed prior to the date of termination.

Adjustment of Volume Commitments

The following exemplar addresses the effect that termination may have on any volume commitments made by the terminating party:

Exemplar C71B-4

Upon such termination, Contractor is entitled to payment of all accrued but unpaid Charges incurred through the date of such termination, and any volume commitment will be reduced, as appropriate, to account for the reduction in Customer’s expenditures for the terminated Services.

Refunds

As shown in the following exemplars, a customer who terminates a contract for convenience is entitled to receive a refund of any pre-paid fees or other fees paid in advance for work that has not been performed due to early termination:

Exemplar C71B-5

In the event of such termination, Service Provider will refund to Customer any funds which have been prepaid for Services not received beyond the effective date of termination.

Exemplar C71B-6

Promptly after such cancellation, Contractor shall refund to Client on a pro-rata basis any advance monthly fee paid to Contractor corresponding to the unused portion of the then-current month, and any other fees paid to Contractor for unperformed services. Contractor will turn over to Client all deliverables, or portions thereof, that have been completed or in progress as of the termination date.

Exemplar C71B-7

If Customer elects the termination option described above, Customer may, in its sole discretion, elect to terminate with respect to any Nonconforming Deliverable(s), as well as any Services and/or Deliverable(s) that are no longer desired due to the absence of the Nonconforming Deliverable(s) (collectively, the “Related Services and/or Deliverable(s)”). In the event of a termination as set forth above, Supplier shall pay to Customer, within ten (10) business days of written notice of termination, all sums paid to Supplier by Customer under this Agreement for the Services and/or Deliverables as to which the termination applies, and all out-of-pocket expenses associated with the terminated Services and/or Deliverables.

Exemplar C71B-8

In the event Contractor is unable through reasonable efforts to correct the defective Service within thirty (30) days from receipt of notice from Client of the breach, Client may elect to terminate this Agreement and receive a pro-rated refund of any pre-paid, unused recurring fees for the non-conforming Services.

Exemplar C71B-9

If you do not agree to such amendment, your sole and exclusive remedy is to terminate this Agreement, and to the extent applicable, all purchase orders relating to it within 30 days of such announcement, in which case termination shall become effective on the date the amendment comes into effect and Contractor will return to you the pro-rated fees (if any) paid in advance for the remaining period of your subscription.

Exemplar C71B-10

Provider may (iii) terminate this Agreement upon written notice to Customer and refund to Customer fees that were pre-paid for the then current term, pro-rated for the remainder thereof. Either party may terminate this Agreement for breach by the other party if such breach remains uncured for more than thirty (30) days after written notice thereof. Otherwise, Client may not terminate this Agreement without providing Contractor at least ninety (90) days prior written notice, and Contractor will be entitled to compensation on a prorated basis up to the date of such termination. Any unearned fees paid in advance will be refunded.

By contrast, where the parties agree to a minimum payment period, the following exemplar imposes a financial penalty on the customer for terminating early:

Exemplar C71B-11

If Customer terminates this agreement for convenience before the end of the minimum payment period and time stipulated under this agreement, Customer will pay 50% of the monthly recurring charges for the terminated service or service component multiplied by the months remaining in the agreement period, plus any waived or unpaid non-recurring charges identified in the pricing schedule.

Loss of License Rights

Another important effect of terminating a contract is the immediate loss of license rights. However, as demonstrated in the following exemplar, the licensee should preserve the rights necessary to fulfill its obligations to third parties, including the rights of sublicensed end users to continue to use licensed software:

Exemplar C71B-12

Upon any termination of this Agreement (other than for Contractor’s material breach), the rights and licenses granted to Customer under this Agreement shall immediately terminate; provided, however, that sublicenses of the Software or Derivative Works in Object Code format, to the extent validly granted to end users prior to termination of this Agreement, shall survive such termination subject to compliance with the obligations set forth herein.

For a discussion on “wind down” periods to avoid disruption to a licensee’s end users, see the section entitled “Termination: Wind Down”.

Payment of Stranded Costs

Premature termination of a contract by a customer may result in additional costs to the service provider, often referred to “stranded costs”. For example, a service provider may have hired personnel for an early-terminated project who may not be able to be reassigned to other projects or ordered materials that cannot be used for other projects. As the following exemplar demonstrates, such stranded costs are to be absorbed by the terminating customer:

Exemplar C71B-13

In the event that this Service Order is terminated for convenience: (a) Customer must make payment to Supplier for Services performed before the date of termination; (b) Customer must pay Supplier’s Stranded Costs, but Supplier will not be entitled to any other compensation for costs incurred as a result of termination. For the avoidance of doubt, Supplier’s Stranded Costs are not payable under any other termination provision; and Customer is not liable to pay for any work including any Services performed after termination. For purposes of the foregoing, “Stranded Costs” mean any reasonable costs incurred by Supplier that are substantiated to Customer’s satisfaction, which Supplier has used reasonable efforts to mitigate and is unable to recover by any means, that are directly attributable to the early termination of this Service Order by Customer, which may include non-refundable amounts paid by Supplier to a third party, unamortised costs of assets/equipment and software, redundancy costs associated with the termination of employment of any Personnel recruited by Supplier and assigned exclusively for Customer, where that Personnel cannot be redeployed within 90 days of the date of termination.

The recovery of costs is not only the concern of service providers, but also applies to suppliers of parts, and in particular “custom” or non-fungible parts. The following exemplar prescribes a process in which the supplier can make a claim for the recover of such custom parts:

Exemplar C71B-14

Upon termination for convenience by Buyer, Buyer’s sole liability to Supplier will be to pay Supplier for Parts delivered prior to the effective date of such termination. However, if Parts ordered hereunder are made specifically for Buyer and cannot be sold to other purchasers (“Custom Parts”), upon termination by Buyer, Supplier will promptly advise Buyer of the quantities of applicable work and material on hand or purchased prior to termination and the most favorable disposition that Supplier can make thereof. Supplier will comply with Buyer’s instructions regarding disposition of such work and material. All claims by Supplier based on such termination must be asserted, in writing and in full, within sixty (60) days from the effective date of the termination, or order price of finished work and the cost to Supplier, excluding profit or losses, of work in process and raw material less, however (i) the agreed value of any items used or sold by Supplier with Buyer’s consent and (ii) the reasonable value or cost (whichever is higher) of any defective, damaged or destroyed work or material and any items sold or used by Supplier without Buyer’s consent. Buyer will make no payment for finished work, work in process or raw materials fabricated or procured by Supplier unnecessarily in advance or in excess of Buyer’s delivery requirements. The payment provided for in this clause will constitute Buyer’s only liability in the event an Order for Custom Parts is terminated as provided herein. The foregoing provisions of this section will not apply to any termination by Buyer for Supplier’s default or breach. To the extent an Order covers items normally carried in inventory by Supplier (as distinguished from Custom Parts), Buyer will not have liability for any termination of the Order, in whole or in part, prior to actual shipment or for any termination, except that, within ten days after receipt of Parts by Buyer, its liability will be limited to returning said Parts and, with respect to conforming Parts, reimbursing Supplier for direct cost of handling and transportation.