How Contracts End – Planning for Contract Termination and Beyond
Performing music involves more than playing the correct note at the correct note and for the proper duration. In addition, notes must be properly articulated. Merriam-Webster defines “articulate” as “to give shape or expression to” or “to give definition to.” In music, that can be defined as telling the musician “how to play a specific note or chord.”
There are numerous possible music articulations. Legato notes are played smoothly and are connected (but not necessarily slurred). An accent means the note should be played with a strong attack. Tenuto means a note is to be held for its full value (or slightly longer). Staccato notes are short and detached, and Marcato is a short note played forcefully.
Music training in articulation often focuses on how to start a note. But a musician can articulate the end of a note by ending it abruptly or allow a note to end gently by not articulating it. Frequently what separates advanced musicians from sophisticated ones is not how they start or play notes but how they end them.
What comes after a note also is important. French composer Claude Debussy said, "Music is the silence between the notes." Musicians who play maturely also focus on what happens after a note ends and before the following note starts. The length of silence, the musician’s movements, breath, and energy between the notes can be as expressive as the notes themselves.
Similarly, parties to real estate and business contracts should focus on how the contracts begin and end and what comes after contract termination. Yet, like musicians often don’t focus on the ends of notes or the silence afterward, contracting parties often neglect provisions for ending the contract and what comes after the contract ends.
This article discusses termination provisions parties should consider when they enter into a contract, the contract termination process, and when parties should consider post-termination obligations.
How and When Do Contracts End?
If you ask someone about the end of their contract, they probably will respond with a date. For a real estate lease, that will be when the lease term ends. With a service contract, that might be when the work is completed. And for a subscription service, that will be the end of the month or year, depending upon the length of the subscription. For a real estate purchase agreement, it might be the closing date.
But contract endings aren’t always predictable. A contract might end at a time other than the negotiated termination date for the following reasons:
One party breaches the contract, and the other party terminates it.
The contract gives a right of early termination that the party exercises.
The contract has an automatic renewal clause, and one party terminates it at the end of a term
A bankruptcy court or receiver terminates the contract.
Applicable law could shorten or extend the contract performance
Plus, parties may renegotiate contract terms and sign an amendment to extend or shorten the contract term.
Contract termination can be automatic. Or, a party might have to decide to terminate when the right occurs. Related to termination, a party might have the right to rescind a contract. For example, if one party conceals material information, the other might have a rescission right.
Parties need to look at their contract to determine when the contract ends. They may only look for a section captioned "termination" or "term," but termination-related contract provisions can appear throughout the contract.
Frequently, default provisions include a remedy that allows a party to terminate the contract when the other party doesn’t perform. Or, as is common in home purchase agreements, the contract may include a contingency, with either an automatic or optional termination if the contingency isn’t fulfilled within a specified period.
Where the contract doesn’t include termination language, state statutory or common law also may determine when a contract ends – or when a party can terminate it. For instance, Article 2 of the Uniform Commercial Code includes several "gap-filler" provisions, which describe how a contract can be terminated or canceled when the written contract doesn't have those provisions. A contract also might end if intervening circumstances make performance impossible.
When a Contact Doesn’t Completely End
Unless a contract (or under a few circumstances, state law) says otherwise, the parties’ obligations to each other end with the contract. But sometimes, that isn’t what the parties want. For instance, parties frequently want these types of provisions to continue post-termination:
Confidentiality obligations in employment, real estate, or business purchase agreements
Non-competition and non-solicitation provisions in employment or real estate, or business purchase agreements
Obligations to return materials one party shares with another so they can perform under the contract
Indemnification and duty to defend obligations in business or real estate purchase agreements
Obligations to pay for services rendered before the contract termination or in a real estate purchase contract, such as expense and income prorations
Cooperation in transitioning to a new service provider or real estate owned
Non-disparagement provisions
If a contract contains terms that impose duties after the contract is over, the contract should include survival language clarifying those obligations don’t end when the contract is terminated.
Survival provisions often go beyond a list of sections that impose obligations after the contract ends. Survival provisions also may include:
Duration of the survival period. For non-solicitation or non-competition clauses, an end date might be required for the clauses to be enforceable under state law.
Process for making claims. This might include arbitration or mediation requirements, choice of forum, and consent to jurisdiction.
Contractual “statute of limitations.” Separate from the expiration of the survival period, this provision limits how long a party may wait after discovering a claim before pursuing it. As discussed in my article Contractual “Truncation” or Shortening of Statutes of Limitation, these time limits frequently are shorter than the statute of limitations under state law.
Basket and Cap. Minimum claim amounts or “baskets” can eliminate small claims. Likewise, caps on liability can impose a dollar limit post-terminate claims.
Liquidated damages. Parties may agree on a fixed dollar amount of damages for violating confidentiality or other provisions where actual damages from a breach might be difficult to determine.
Credit support. For real estate transactions with a special purpose entity or other situations where a party might not be able to pay a claim, the parties may agree on a guaranty, liquidity requirement, or escrow so there is cash to pay a claim. My previous articles How Holdbacks Affect Music and Real Estate Transactions and Fermatas, Grand Pauses, and Alternatives to Holdbacks in Real Estate Transactions discuss common post-closing credit support options.
Attorney fees. The losing party may have to pay the winning party’s attorney fees. Although a contract may include this language, the attorney fee provision must include survival language to ensure it will be enforceable post-termination.
Conclusion
Debussy and other musicians got it right. How a note begins and what it sounds like are important. But how the note ends and what comes after are equally important. The same is true with contracts.
Negotiating how a contract will end may seem akin to requiring a prenuptial agreement before the marriage. Everyone hopes the contract will go well and both parties will be satisfied with the result. However, like marriages, sometimes things don’t go as everyone had expected in a contractual relationship. By addressing how the contract will end and post-termination obligations in advance, parties not only can set expectations, which may make the termination less painful when it comes.
© 2022 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality.
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