Good business contracts will have good termination provisions. Most contracts succeed in setting out the basic agreement between the parties. But a good business contract goes further and ensures that there are clear provisions for various foreseeable eventualities. This is particularly important for contracts that take a long period of time to complete. Termination options are an example of provisions that should be included in a good business contract. An experienced San Diego corporate attorney can provide advice and counsel on how to maximize the value of your business contracts and reduce litigation risks.

In general, all contracts can be terminated. If the contract is silent as to the “how’s and when’s” of contract termination, then the risk of litigation over termination is enhanced. However, termination provisions can largely eliminate this risk in many situations. The key is to differentiate and specify “for cause” and “for convenience” termination. A “for cause” provision might look like this:

If PROVIDER fails or neglects to comply with this Agreement, COMPANY may give written notice that COMPANY intends to terminate this Agreement. If PROVIDER fails to correct such defaults, failure or neglect within seven days after being given such notice, COMPANY may terminate this Agreement without prejudice to any other remedies that the COMPANY might have (such as suing for breach of contract).

A “convenience and without cause” provision might look like this:

This Agreement may be terminated by COMPANY upon not less than seven days’ written notice to the PROVIDER for the COMPANY’s convenience and without cause.

Note that the second example, the provision did not include the “without prejudice to any other remedies” language. The best contract crafting practice is to include that language so as to clarify that a termination “for convenience” still might allow for the terminating party to sue if there has been a default by the other party. However, even in the absence of the extra language, courts will still often allow a suit for damages even if the termination was “for convenience.”

This was the recent holding in a federal case here in the Golden State called Chinese Hospital Association v. Jacobs Engineering Group., Inc., Case No. 18-cv-05403-JSC (US Dist. ND Cal. September 3, 2019). That case involved a set of contracts for the design and construction of a new hospital in San Francisco. The Agreements contained terminations clauses permitting “for cause” and “for convenience” termination. However, the “for convenience” termination provision did not state that the termination was without prejudice to other remedies.

The property owner, the Chinese Hospital Association (“Chinese Hospital”), terminated “for convenience” but still sued various parties including the architect and other for breach of the contract. The architect defended by arguing that a “for convenience” termination waived any right to sue for breach of contract damages. The court rejected the argument and allowed the case to proceed.

The issue was a close call for the court since the contract could have been more clear in its terms. However, the court was not willing to inject into the contract a waiver that was not specified. Generally, the law protects the rights of parties to bring lawsuits. Waiver of such rights should be clear and such waivers should not be found by implication.

Legal Lesson: It is important to have experienced corporate counsel draft your business contracts to make clear the intentions of the contracting parties.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named “Best of the Bar” by the San Diego Business Journal for four years running. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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