Thursday, February 10, 2011
Negotiation -Thoughts on Negotiating The Termination with Cause Provision
To terminate a contract for cause, the party claiming the breach must prove that the other party had an obligation to them, they failed to meet that obligation, the obligation was material, after providing the breaching party with notice of the breach they further failed to correct (“cure”) it within the time allotted. If you meet all of those criteria you can then terminate the contract, at which time any obligations you had under the contract (except those which were agreed to survive the termination) will end. Further you would have the ability to sue the breaching party for the damages you sustained.
Since damages may be substantial, the negotiation of termination for cause provisions normally revolves around defining what individual breaches would be grounds for terminating the contract for cause, and what the parties rights of cure would be. This is usually managed by either having it be “material” breaches of the contract, which itself would be open to argument, or specific causes could be defined as being a “material” breach. If specific causes are negotiated, from a Buyer’s perspective the only thing that would constitute a material breach by Buyer would normally be the failure to make required payments although there could be other Buyer obligations that would constitute a material breach such as the Buyer refusing to provide the Supplier with access to premises where the work needed to be performed.. Material breaches by Supplier may include financial insolvency /bankruptcy but also their failure to meet other key obligations of the contract such as on-time delivery, warranty, indemnifications, etc.
One thing to consider is the extent of the Supplier’s rights to cure. How long do they have? What's appropriate will depend upon the circumstances and especially the impact to the Buyer of the breach.
A single time frame like thirty days may not work as a cure period for all breaches. Some breaches may not be cured. For example if the Supplier breached confidentiality obligations and disclosed information to another party, there is no way that can be cured. Some breaches should be able to be cured quickly and others may take longer to cure. If you have a single cure period, the Supplier will want that to be the worst case period. If you agree to that you are giving the Supplier a longer period to cure those other breaches that could have been cured sooner. Breaches are usually causing you problems so why would you want to give them a longer period to correct it. Another thing you want to
avoid is having Suppliers continually breaching and curing the breach as that would cause you substantial operational problems without any remedy. I those situations, you may want to place a limit on the number of times the Supplier has the right to cure for that type of breach within a certain period just to avoid the constant breach/cure, breach/cure possibility.
Suppliers may want to try to negotiate in the responsibility of the Buyer to pay for work in process in the event of a termination for cause. If the Buyer has breached the contract these costs would already be included in their damages so it’s not necessary. If the Supplier is the one that breaches the contract, agreeing to pay for such costs is tantamount to rewarding then for their breaching the contract and is something you should never do. Simply tell them that it’s a risk they take if they fail to cure, so they need to take that into account in their actions. It may be sufficient for them to make the investments required to cure.
Providing a supplier a cure notice where you notify them of your intent to terminate if they fail to cure is something that always needs to be done in conjunction with both the business and legal team to ensure that it’s the right strategy. If you have no obligation to pay for work that is not completed at the time of the termination, the Supplier will always look at the probability they will be able to cure versus the potential additional cost they will incur in the interim that will be at risk if they fail to cure. If the risk is great and the cost is high, Suppliers may simply stop work. If you need them to continue you may need to negotiate an alternative term to allow for a smoother transition.