Steven Sholk, that indefatigable source of leads, has told me about yet another opinion dealing with a dispute over termination versus expiration. That’s a topic I’ve written about in a few blog posts.
In the case at issue, Hamden v. Total Car Franchising Corp., 7:12-CV-00003, 2012 WL 3255598 (W.D. Va. Aug. 7, 2012) (PDF copy here), the court held, among other things, that a noncompetition provision that used the word “termination” applied only on termination by one of the parties and didn’t also apply after the end of the term. That makes sense, as the heading of the section in question was “Rights and Duties of Parties Upon Expiration, Termination, or Non-Renewal.” If the section heading distinguishes between the different ways that a contract can come to an end, it makes sense to assume that the section itself does too.
This case has prompted me to revisit more generally how to handle the terminology. So here goes:
What to Use in Termination Provisions
Some might take issue with the following provision: This agreement terminates on August 23, 2013. They might argue that termination entails one or more parties’ ending a contract sooner than it otherwise would have ended, and that in this case the correct word to use is expires.
It’s certainly easy to find contract language suggesting that expiration isn’t a form of termination. For example: All such charges and expenses shall be promptly settled between the parties at the Closing or upon termination or expiration of further proceedings under this agreement. If expiration is a form of termination, logic would require omitting “or expiration.”
But just because drafters are partial to a distinction between termination and expiration (and between the verbs terminate and expire) doesn’t mean that a distinction is necessary, or even helpful.
One can readily find in legal reference works instances of termination used to refer to any means by which a contract comes to an end. Consider, for example, the following, which is from 17A Am. Jur. 2d. Contracts § 524: “A contract may be discharged by performance in accordance with its terms; in fact, this is the normal termination of every contract. A contract may also be terminated by the expiration of the time during which it is to remain operative.” In this passage, expiration is considered a form of termination rather than something distinct from termination.
This understanding of the relationship between termination and expiration can be found outside the realm of contracts. For example, the heading of 4 N.Y. Jur. 2d Appellate Review § 650 is “Expiration or other termination of order appealed from.” Again, expiration is just one form of termination. The definitions of termination and terminate in Black’s Law Dictionary are consistent with termination including expiration. Termination is defined as “The act of ending something” and “The end of something in time or existence.” In other words, termination is both something you do and something that can simply happen. To the same effect, terminate is defined as meaning “To put an end to; to bring to an end” and “To end; to conclude.”
Furthermore, using terminates in termination provisions instead of expires is unobjectionable, in that there’s no possible confusion as to the meaning of This agreement terminates on August 23, 2015.
But why not use expires in termination provisions instead of terminates? Because not only would it be unnecessary to do so, it would also lumber you with having to use elsewhere in the contract more ponderous constructions such as When this agreement expires or is terminated [or otherwise terminates] rather than just When this agreement terminates. If you don’t do so, the result can be confusion leading to a dispute. See Hamden v. Total Car Franchising Corp., 7:12-CV-00003, 2012 WL 3255598 (W.D. Va. Aug. 7, 2012). The same can happen if in one contract you don’t track the references to “expiration” and “termination” in another contract. See, e.g., Holtzman Interests 23, L.L.C. v. FFC Sugarloaf, L.L.C., 298430, 2012 WL 468257 (Mich. Ct. App. Feb. 14, 2012).
And don’t use terminates and expires, as in This agreement will terminate and expire upon cessation of commercial operation of the Plant. It exhibits either inconsistency or redundancy, depending on the meaning attributed to terminates.
Referring to Termination Provisions
But if you use terminates to refer to any means by which a contract comes to an end, you have to be careful how you refer to the termination provisions.
If you refer in a contract to termination of this agreement and the contract uses the verb terminate in referring to both the end of the term and a party bringing the contract to an end, a reasonable reader would conclude that you’re referring to any form of termination. But if the term of a contract is stated using the noun term, as in The term of this agreement is three years from the date of this agreement, the fact that the contract doesn’t use the verb terminate in stating the term would give a disgruntled contract party room to argue that end of the term represents expiration of the contract rather than termination. So if the contract doesn’t use the verb terminate in stating the term, refer explicitly to both the end of the term and the parties bringing the contract to an end if you intend the provision to encompass both kinds of termination; also referring to any relevant sections of the contract would be clearer still. Being explicit in that manner would be beneficial even if the contract does use the verb terminate to express the end of the term—the reader wouldn’t have to check the terminology used in the termination provisions to understand what termination means.
If you say if this agreement terminates, that could be understood as applying only to termination by operation of the contract without party action. If that’s what you intend, make that clear by referring to the one or more sections that provide for termination without party action.
If you say if this agreement is terminated, that could be understood as applying only to termination by one or more parties. If that’s what you intend, it would be clearer to use the active voice (if either party terminates this agreement) rather than the passive voice with missing by-agent. The same meaning would be conveyed by termination of this agreement by either party. Also referring to any relevant sections would be clearer still.
Ken, my pragmatic solution to this issue is to use the term termination throughout, and include an interpretation provision that states that “termination includes termination by expiry.” I would rather have that provision than one that states that the masculine includes the feminine or the singular includes the plural.
By the way, I also often include an interpretation provision that states that headings are used for convenience only, and should not be used in interpreting any provision of the agreement.
Ken:
My approach is quite different from most that I see.
I worry more about this issue in long term agreements where goods/services are provided over a long period of time. In such agreements the main focus is on the period when one party is still obligated to source services or goods from the other party. In such agreements the obligations that are applicable to a particular time typically include the phrase “During the Term……” where “Term is a defined term”. For example, “During the Term, the Purchaser shall exclusively obtain its supply of widgets from the Supplier”.
The agreement would have a provision such as this in it:
“The ending of the Term shall terminate the ongoing obligations/covenants of the Parties that are specifically stated to continue during the Term. However, the ending of the Term shall not constitute an termination of this Agreement as a whole. All covenants and obligations of the Parties which are not specifically limited in application to the Term shall continue after the ending of the Term. This agreement shall not terminate as a whole except pursuant to a written termination agreement signed by all of the Parties.”
Term might be defined as:
“Term” means the period from the effective date of this Agreement until the earlier of: (i) the end of the later of the Initial Term and, if applicable, the last of any Renewal Periods as provided for in Sections 7.1 and 7.2; and (ii) the date of any termination pursuant to Section 7.4.”
Section 7.1 and 7.2 would define periods of time that played out pursuant to normal expectations (i.e. initial 3 years with subsequent renewal terms of 1 year each) and Section 7.4 would be the typical laundery list of reasons the end might come earlier (i.e. breach, bankruptcy, change of control, etc. etc.) but 7.4 would not purport to kill the whole agreement but just end the obligations under the key provisions. Other provisions such as indemnities, follow on non-competition covenants, warranties, etc. (none of which would be limited with the words “During the Term”) would not be affected.
This is an unusual approach but I find it avoids any question about which covenants are intended to continue past the time period when performance of the main focus of the agreement ended. I find the construct of “terminating that agreement” (i.e. as a whole, all provisions) and then in the same mouthful saying that certain listed parts of the terminated agreement “survive” (particularly when the “surviving” parts of the agreement listed do not include definitions, miscellaneous clauses, interpretation provisions, or other parts of the agreement that are needed to give the “surviving” clauses proper meaning.