Contract Solutions With Termination for Convenience Clause

Over decades of advising clients on contractual issues, two provisions — term/termination and merger clauses — chronically cause headaches for in-house counsel.  What follows are simple solutions to consider for each of these clauses.  In particular, we will discuss how to use a termination for convenience clause to minimize the risk an agreement is not renewed.  We will also discuss how a merger clause with teeth is an effective mechanism to ward off potential future claims for fraud, negligent misrepresentation, and DPTA violations.

Using Termination for Convenience Clauses to Avoid Inadvertent Contract Terminations

The term and termination provisions are ripe for risk and oversight, particularly where a company has several business units and the units are given some amount of authority over contracts in their area.  In my experience, the managers of business units often give varying levels of attention to contracts for their unit and have different views on how key terms are drafted.  This can become a nightmare for in-house counsel that ultimately bears some responsibility for how contracts are managed.  These suggestions assume the company does not have a centralized contact management system over which all agreements can be monitored, standardized, and maintained.

Failure to timely give notice of termination and its opposite, failure to timely renew, have led to numerous and wasteful contract conflicts.  To solve each of these problems, we advise clients to include an automatic renewal provision, but also include a matching termination for convenience provision after the initial term concludes.  This allows for an easy out and also ensures contracts do not unexpectedly expire.  In-house counsel can breathe a little easier where they are not required to manage several agreements, including “hidden” ones, for renewal issues.  In the event a contract is inadvertently renewed due to failure to give notice, the termination for convenience clause becomes an effective exposure reducer by allowing an out within 30 days of notice.

Substantive Merger Clauses as a Shield

Merger clauses are often viewed as minor contractual provisions.  However, with some additional language, these clauses can act not only as litigation shields, but also swords against future plaintiffs.  Typically, a merger clause will include a statement that the written contract is the only agreement between the parties and that no party is relying on any representations not included in the written agreement.  Under Texas law, this type of language can serve as a defense to claims for negligent misrepresentation, fraud, and even Texas Consumer Protection Act claims because all of these claims require some form of reliance.  Sophisticated plaintiffs can get around this provision by including a claim for fraudulent inducement, which tends to result in expensive litigation because the alleged state of mind is often considered a factual issue.

Substantive Merger Clauses as a Sword 

In-house counsel can take the merger clause to a new level by including affirmative representations such as:

Each party represents and warrants that (i) it did not rely upon any prior representations, discussions, agreements, or negotiations in entering into this Agreement and (ii) this Agreement constitutes the entire agreement between the parties.

This additional language provides the company with two significant advantages.  First, it makes a fraudulent inducement claim hard to prove given the clear disclaimer of reliance.  Second and most importantly, the other party and potential future plaintiff has made an affirmative representation and warranty that it is not relying on anything outside the contract.  If it pursues any type of reliance claim (such as “X promised me I would also get “Y” if I signed the agreement even though Y is not mentioned in the agreement), it will almost always have to admit all the elements of a counterclaim for not only breach of contract, but also fraudulent inducement.  This tends to settle disputes quicky and is a brutal surprise for plaintiff’s counsel following a deposition in which the client unknowingly admits every element of the counterclaim.

With this clause included in an agreement, this is how a deposition sets up fraud and breach of contract counterclaims:

Me: You had time to review this agreement before you signed it, correct?

Plaintiff: Yes.

Me:          That’s your signature on the last page, correct?

Plaintiff:  Yes.

Me:         To your knowledge, there are no mistakes in this agreement, correct?

Plaintiff:  Not that I know of.

Me:          Please state the basis the factual basis of your claim for fraud.

Plaintiff:  Mr. Green promised me that I would get a 10% rebate of payments I made within the first year of the agreement.  The company refuses to make those payments and honor that promise.

Me:          Can you show me where that promise is in the agreement?

Plaintiff:   It’s not in the agreement.  It was a side promise made before I signed the agreement.

Me:           So at the time you signed the agreement, your testimony is that you were relying on this promise for rebates as part of the deal, is that right?

Plaintiff:    Absolutely.

Me:            That’s true even though there is no mention in the agreement about the alleged rebates?

Plaintiff:    Yes.  I wouldn’t have signed the agreement if Mr. Green hadn’t promised me the rebates.  That was an important deal term.

Me:            Please look at Section 7 of the agreement referred to as the “Merger Clause.”  Do you see that?

Plaintiff:    Yes.

Me:            That language was in the agreement at the time you signed it, correct?

Plaintiff:    Yes.

Me:            Let’s look at the specific language in the Merger Clause.  It states “This agreement is the entire agreement between the Parties.  There are no other agreements between the parties.  This agreement may only be modified in writing and signed by the parties.  Each party represents and warrants that (i) it did not rely upon any prior representations, discussions, agreements, or negotiations in entering into this Agreement and (ii) this Agreement constitutes the entire agreement between the parties.”  Did I read that correctly?”

Plaintiff:    Yes.

Me:            So we are clear, at the time you signed the agreement, you were relying on the promise of future rebates, but that promise was not in the agreement, correct?

Plaintiff:     Yes.

Me:             So your statements in the Merger Clause that “Each party represents and warrants that (i) it did not rely upon any prior representations, discussions, agreements, or negotiations in entering into this Agreement and (ii) this Agreement constitutes the entire agreement between the parties” was false at the time you signed the agreement, correct? 

Plaintiff’s Counsel: Objection!  Don’t answer that.

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Me:             Your counsel can’t save you from answering the question.

Plaintiff:     I suppose those statements weren’t true.  But I was relying on that promise.

Final Thoughts on Termination for Convenience Clauses and Substantive Merger Clauses

The use of special clauses in contracts help with common contract conflicts such as:

• The termination for convenience clause will facilitate the need to get out of a contract at term renewal;

• Use of an automatic renewal clause will help prevent unintentional expiration of a contract; and

• Substantive merger clauses can serve aslitigation shields preventing certain claims from being made.

For more information about contract law services, see our Corporate and Commercial Law Services and Industry Focused Legal Solutions pages.

This article has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company. © 2023 Klemchuk PLLC