If you’ve ever tried to cancel your cable or cell phone contract, you know how hard it can be. With business-to-business services, it can be even worse. You might be stuck with an expensive contract or bad service for years. So the next time you need to create a long-term services agreement with a third-party vendor, talk to an attorney at Dungan & LeFevre about including a termination for convenience clause. Here’s why that one change is so important:
1. You should be able to walk away from bad service ASAP.
Whenever you contract with a service provider, they need to be able to do a better job than your team can manage internally. But if you’re working with a new third party, there’s always a chance that they’re bad at what they do. Many B2B service agreements have a standard term length of three years, depending on the nature of the business, and that’s a long time to pay for substandard service. Termination clauses that focus on failure to perform are usually complex, and sometimes bad service doesn’t technically violate the terms.
So negotiate to include a termination for convenience clause whenever possible so you can leave if you need to.
2. General termination clauses have delays and penalties.
A lot of contracts have in-built terms for cancellations, especially if you’re using the vendor’s default service agreement instead of your company’s standard vendor contract. If you’re not a big enough customer to push them into using your company’s contracts, you might accidentally agree to terms that are too expensive to leave and take too long to complete the cancellation.
When you’re adding a termination for convenience clause, there might still be a few delays. Most companies will require at least a thirty-day or sixty-day notice.
3. Long-term vendor deals can hurt your company’s sellability.
Many B2B contracts include language that the services will continue even in the event of a merger or an acquisition. That’s because vendors can’t take on the responsibility of monitoring your company as it changes hands. But if you have a five-year deal for an expensive service, that’s a heavy obligation for a buyer or parent company to take on.
Even if you can’t get a full termination for convenience, negotiate on this point. If you know your company is headed towards a merger or you built up the company to sell it to someone else, sometimes it’s a good strategy to tell the vendor without going into specifics. They still want your business, and they’ll negotiate on the point if they see it as a good way in.
4. Many companies don’t include termination for convenience clauses for a reason.
If your potential vendor doesn’t include a termination for convenience clause, you shouldn’t necessarily be suspicious. Most B2B companies don’t include them just as a default setting in their template.
But if they absolutely refuse or they include a one-sided termination for convenience (in which their company can terminate but yours can’t), be suspicious. Sometimes it’s not worth it for companies to have their attorneys negotiate on low-dollar deals, and that makes sense. But if you’re buying premium services and they still refuse, take a second look at the reviews for the company. Something might be wrong.
5. Don’t get stuck with bad pricing for being cautious.
Whenever you’re testing out a new vendor, signing up for a three-year deal is risky. But if you try to negotiate on term length, the pricing will often go up. Again, this makes perfect business sense: setting up a new customer (you) and renegotiating every year is an investment, and if they aren’t getting at least three years of guaranteed payments to recoup that investment and make a reasonable profit, they have to do it in one year. So instead of reducing your term length, request termination for convenience language. That implies you also want to stay with the vendor without having to deal with annual re-upping, but it gives you a way out if the service is bad or your company changes so much you don’t need it.
Negotiating business contracts on behalf of your own company when you’re not an attorney can be risky. In some states, corporate attorneys might even refuse because of potential ethics violations. If you need a one-off contract negotiation or you need legal backup but not a full-time attorney, contact our team at Dungan & LeFevre.