by Ward Mazzucco – Well, how about when you are planning a business relationship? Is it ever too soon to think about how your business commitments come to an end?
We would never presume to give advice on romantic commitments. We do recommend, however, that, when parties enter a contractual commitment, they should look ahead to how it might end. After all, in their eagerness to enter contracts, parties often lose sight of the need some day to terminate the relationship.
When a party reviews a contract prepared by the other side, it is only natural to focus on the business terms. After all, they are what motivate the parties to make a deal in the first place. Nevertheless, circumstances can change, disagreements can arise, and someone may eventually want to bring the relationship to an end.
As a general principle of contract law, if one party is in breach, the other party can ordinarily terminate the relationship. If, for example, the customer fails to pay, the supplier need not continue to ship a product and can stop doing business with the customer. Of course, the simple general rule can become complex in specific situations, especially when one party accepts, without negotiation, a contract prepared by the other.
The contract might provide, for example, that neither party can terminate unless it gives notice of any perceived noncompliance and a lengthy period, e.g., 60 days, for the other to cure. Such a clause may be entirely appropriate in case of quality issues which the supplier would need ample time to address. Such a clause may be entirely inappropriate, however, if the customer fails to make payments in accordance with the contract, and the supplier still has to continue to ship for an additional 60 days before declaring a default.
Many contracts have a fixed end date. Nevertheless, other contracts may renew automatically (for a year or more) unless either party gives notice more than a certain period of time before the contract would otherwise come to an end. Parties typically recall when a contract is supposed to terminate but often lose sight of the obligation to take action weeks or months beforehand to avoid an automatic renewal. Obviously, this can lead to a contract stretching for far longer than one of the parties might intend.
Most commercial contracts specify how and where notice is to be given. Thus, if a contract calls for notice only by certified mail to a certain address, then a phone call or email will not do. To inform the other party of a default or nonrenewal or other important issue, be sure to give notice the way the contract requires.
Even where a contract has a fixed end date, what exactly happens at that time? What about shipments that have not yet been delivered? What about intellectual property that may have to be returned to the owner? What about insurance, indemnity, and liability provisions that may extend beyond the term of the contract? Does a vendor have any obligation to assist the customer in transitioning to a different vendor? Parties often pay little attention to those important issues at the beginning, because the end seems so remote.
As with many divorces, the end of a business relationship can be contentious, costly, and emotional. Before walking down the aisle to consummate a business relationship, take time to think through how it might end. It will make the business marriage more productive in the long run.