Quick Tip #19: Express your termination for convenience charges as a cap rather than an absolute amount
If we had to choose one clause that has proved most useful to our clients over the years, we would say the right to terminate a contract for convenience. The flexibility this right affords a customer of services is extremely valuable in practice. Time and again, we get asked by clients to give a view on what rights are available to the client to get out of a contract. A termination for convenience right makes this significantly easier to do, even if it attracts termination for convenience charges.
We could write several articles on this topic, but one quick tip on calculating termination charges is to set your termination charges as caps rather than absolute amounts. This means that the supplier is forced to demonstrate genuine sunk costs up to the cap set out in the agreement, and it shifts the burden of proof onto the supplier. The termination charges cap should decrease over time and should comprise of a breakdown of the relevant sunk costs suffered by a supplier as at the termination date, e.g. termination charges in subcontractor agreements, unamortised upfront investment and redundancy costs. In each instance supplier is required to demonstrate the actual cost and customer is liable for those costs as termination charges subject always to the termination charges cap.
The next Quick Tip will discuss whether this will create a problem for supplier’s ability to recognise revenue.