Why you need to include an “out” in your business contracts

Why you need to include an “out” in your business contracts

| Jun 8, 2021 | Business Law |

When you create a new business contract with someone, you need to remember that times are uncertain and things can change. 

With that in mind, it’s always wise to stipulate an end date on all of your agreements — along with information on when (and how) a contract can be ended early.

Why are termination clauses in contracts important?

If you have a supplier-client relationship and no longer want to work together, it is not always as simple as just walking away. Let’s use the example of a clothing brand and a textile factory to explain why.

If the clothing brand were to break the relationship, it could leave the factory with materials they bought in, and no can no longer use. Perhaps they increased their staff levels to cope with demand from the vendor. Maybe they took out a loan to expand their premises or buy new machines to produce the quantities the clothes brand needed.

If the factory were to stop producing, it could leave the brand without clothes to sell. The brand would need time to find another company to make clothes so they do not run out of stock. Otherwise, they would breach other contracts they have with stores that sell their clothes.

How can termination clauses make ending a business relationship easier?

In the above example, the contract may include a minimum period of notice that either side must give to end the contract. It could also include a non-compete clause to prevent a rival clothing brand from offering more to persuade the factory owner to work for them instead.

If the clothing brand wants to prevent the factory owner from giving its designs to other brands it may include clauses that protect its intellectual property.

Creating a business contract that serves you in all circumstances will require skill and experience when drafting it. Any oversight or error could mean the agreement you hoped would protect your business ends up harming it instead.