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When It Comes to Contract Clauses, Equal Is Not Always Equitable

Many contract reviewers and negotiators often assume that terms and conditions applicable to both parties must be identical or mirror each other. Nothing could be further from reality.

Too often, customers fall into the trap set for them by vendor contracts. Almost as often, customers include the same traps in their own contracts. What are these traps and how can you avoid them? Keep reading…

Termination notice is a common contract provision that can be used to illustrate the trap. Consider the following language pulled from a cloud services agreement (as part of our contract review service):

“Either the Customer or Vendor may terminate this Agreement only by giving written notice to the other that this Agreement will terminate on the next succeeding anniversary date. Such notice shall be given on or before ninety (90) days prior to the anniversary date.”

At first glance it may appear that this provision is fair – each party has to give the same amount of notice to terminate the agreement. However, since the parties are not in the same position and have different business needs, this provision is not equitable.

Evaluation

The vendor in this situation provides cloud services (although it could be any services or goods/products) to many customers. The loss of one customer will not impact the vendor’s viability, and there is no reason for a long termination notice provision to protect the vendor. Typically, vendors use termination provisions of 90 or 180 days to capitalize on customers not paying attention to the contract details to generate automatic renewals. Notice from the customer of 30 days should be sufficient in most cases, unless there are extenuating circumstances.

The customer in this situation is relying on the vendor for 100% of its cloud services of this type. Termination on short notice by the vendor would leave the customer scrambling to find a new vendor and transition to the new vendor. This may involve generating a request for proposal (RFP), conducting a thorough evaluation of potential replacement services, negotiating a new contract, converting data, and training employees/users on a new system. This can lead to additional costs and a loss of productivity for the customer and its personnel. Notice from the vendor of 30 days to terminate the contract will not provide adequate time for the customer to migrate. Ninety days may not be sufficient either!

Recommendations

  • Ignore equality when evaluating termination provisions. Focus instead on whether the language is equitable for each party.
  • Create a timeline for all of the ancillary tasks that must be accomplished before termination notice can be provided: RFP, negotiations, etc. This will help you set the appropriate termination notice period for the vendor to provide.
  • Keep the customer’s termination notice period short (no more than 30 days) to preserve flexibility.
  • Use a contract management system to track termination notice obligations.

Bottom Line

When negotiating a termination provision, vendors will focus on the “equal” part of the equation and will need to be enlightened about using an “equitable” approach. Explain your position with illustrations that emphasize the impact on your organization and why an equitable termination provision is more fair than an equal one. In this situation, it’s not about the parties’ similarities; it’s about their differences.

Want to Know More?

Understand Common IT Contract Provisions to Negotiate More Effectively

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