“Review this agreement and provide me with your comments” is usually the first introduction that young business lawyers are given to the topic of reviewing contracts and the sum total of the training that they receive about how to do it. So off we go and comment on the scourge of typographical errors, the horror of undefined terms, the frightening absence of the word “reasonable,” and of course, unforgivably sloppy cross-references.
Actually, there are a multitude of more important things to think about when you are reviewing contracts. One of them is how long the agreement is going to last, and that actually depends on three things. These are: (i) term; (ii) termination rights; and (iii) renewal rights.
Length of Term
So how long should the term of a contract be? The starting point is to understand the client’s objectives. For example it is often the case in distribution agreements, franchise agreements, and commercial leases that your client is going to make a substantial investment of time, effort, and money, all of which may be lost at the end of the term. In those cases, the answer might be ‘the longer the better.’
On the other hand, there may be circumstances where the last thing that the client wants is to be locked into a long-term commitment.
When longer is better, you have to be on the look-out for unilateral termination rights such as the right of the other side to terminate the contract “for convenience,” “in its discretion,” or “on thirty days’ notice.” If you cannot insist on those provisions being removed, you may ask for compensation for certain costs which your client will incur if the agreement is terminated early.
Or perhaps it is your client who needs to have the right to terminate the contract early and is willing to pay a price to do so. Again, what are your client’s objectives?
You must also consider what happens if the other party wants to terminate the agreement upon default by your client. You should be certain that breaches are clearly defined and you can think about asking for things such as: (i) written notice of any alleged default and time to rectify it prior to the termination right kicking in; and (ii) the remedy of termination being limited to only the most important breaches.
And what about your client’s right to terminate if the other side is in breach? Frequently (such as in virtually every commercial lease and franchise agreement ever drafted), someone puts forth an agreement that details their right to terminate on breach but is silent on the other side’s right to do so. Think about whether your client needs to be able to terminate if the other side is not performing.
And very occasionally you might find a ‘million-dollar comma’ in the wrong place such as was the case in some famous litigation in Canada where the Supreme Court of Canada had to decide whether the following clause allowed one party to terminate the agreement prior to the expiration of the first five-year term:
“This agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party.”
(The Supreme Court decided that the second comma meant that the agreement could be terminated on one year’s notice at any time. If it were not there, the one-year notice could not apply during the first five years.)
Sometimes renewal rights are made subject to conditions such as: (ii) the parties being able to agree on amounts payable during the renewal term (which may the render the clause merely an ‘agreement to agree’ and therefore unenforceable); (ii) your client never having been in default before, no matter how minor the previous default; or (iii) giving a renewal notice during a very narrow time-window.
When reviewing the agreement, you cannot stop at determining that there is a renewal right. You also have to determine if it is reasonable and enforceable, both legally and practically.
And now and then you will come across an automatic renewal right buried in the small print which will extend the term of the agreement if your client does not give notice that it wants the agreement to end, which in some cases can be an unbelievably bad thing.
So, length does matter and a good lawyer will figure out how the contractual pieces fit together to make sure that the agreement will remain in effect for exactly as long as their client wants it to.