I am going to teach you a simple but very important clause right now – people tend to make a lot of mistakes while drafting this clause.
This is called a termination clause. Under which circumstances would a party terminate an agreement?
There are 3 grounds – expiry, convenience and breach.
Here are some clauses:
Scenario 1. Termination on expiry
How would you draft a clause for expiry of a lease deed?
The Lease Deed shall be effective for a period of 3 years from execution, after which this deed will expire unless renewed as per the provisions of this agreement.
Scenario 2. Termination for Convenience
Termination for convenience does not require any reasons to be provided, but it requires a prior notice.
Try to draft a clause for a 30-day notice period on chat.
What if one of the parties included a lock-in period of, say, 6 months?
Either Party may terminate this Agreement at any time after lock-in of 6 (six) months, with a notice of 30 (thirty) days to the other Party.
Scenario 3. Termination for Breach:
If there is a breach of this agreement, the non-defaulting Party has the right to terminate the agreement with immediate effect by serving a written notice if, after giving a 7 (seven) day prior notice to the defaulting Party to rectify the breach, the Defaulting party has failed to do so.
Breach:
If the Borrower or any other person is in violation or breach of any material term or condition under this Agreement, and such default has continued for a period of 15 days after notice of the same has been given to the borrower, it shall be considered a breach of the agreement.
Without narrowing the scope of the above paragraph, the following events shall constitute a breach:
- Non-payment of dues within a period of seven days
- Non-completion of work by the Deadline, or not meeting the required quality standards by the Deadline
One aspect that parties often miss out on drafting is the clause on consequences of termination.
Often, depending on the nature of the product or service provided, there will be some spillover effects of actions that were taken prior to termination, amounts payable for earlier action, and responsibilities that continue in respect of past customers or beneficiaries for some period of time.
These must be identified and specified to prevent likelihood of future disputes or litigation initiated by a third party against one of the parties.
Consequences of termination
Upon termination of this Agreement, each Party shall discharge the following obligations:
- It shall complete all outstanding payments until the expiry of termination [- in case of loan agreements]
- It shall complete provision of outstanding services due under this Agreement until the termination takes effect. [- in employment and consultancy agreements]
It shall complete a full and satisfactory handover of pending work. [in employment and consultancy agreements]