Yet More on “Termination”

I’ve blogged about termination twice previously. In this 2007 post on the AdamsDrafting blog (and in MSCD) I explain why I prefer stating that a contract terminates on a given date rather than expires on that date.

And in this post from January 2012 I discuss the implications of (1) termination of this agreement, (2) this agreement terminates, and (3) this agreement is terminated. I also explain why I use the first formulation if I want to encompass termination by one or more parties and termination by operation of the contract without party action.

Thanks to this blog post by Michael Hayes of the Demorest Law Firm, based in Michigan, it’s time to address termination again.

Michael’s post discusses Holtzman Interests 23, L.L.C. v FFC Sugarloaf, L.L.C., a recent Michigan Court of Appeals opinion (copy here). At issue in this case is whether a provision in one contract (an operating agreement) that refers to “termination” of another contract (a management agreement) applies to nonrenewal of that other contract. The court affirmed the lower court in holding that it did not.

Here’s how the court explained its decision (citations omitted):

As the parties correctly point out, there are three different provisions under which the Management Agreement may be brought to an end: (1) nonrenewal under § 1.3, (2) termination with cause under § 21.1, and (3) termination without cause under § 21.2. However, as the circuit court accurately observed at oral argument, only two of these provisions, § 21.1 and § 21.2, actually use the word “terminate.” Moreover, contrary to plaintiff’s argument, the terms “termination” and “expiration” are not used interchangeably within the Management Agreement. Indeed, as the language of § 21.5(a) of the Management Agreement makes clear, “expiration” of the agreement and “termination” of the agreement are two distinct concepts. Indeed, if the terms expiration and termination were synonymous as plaintiff contends, the drafters of the Management Agreement would not have used the two words disjunctively in § 21.5(a); it would have been sufficient for the drafters to use merely one of the two terms. Stated another way, if expiration were truly synonymous with termination, the word “expiration” in § 21.5(a) would have no meaning and would amount to mere surplusage. It is well settled that a “contract must be construed so as to give effect to every word, clause, and phrase, and a construction should be avoided that would render any part of the contract surplusage or nugatory.” We conclude that the terms “expiration” and “termination” describe two separate and distinct means of bringing the Management Agreement to an end.

Here’s what I deduce from this case.

First, the drafter of the management agreement would have done well to do as I suggest and use termination to apply to both termination by one or more parties and termination by operation of the contract without party action. This dispute shows that if you use two different terms, you’re locked into doing so consistently not only in that contract, but also in other contracts that refer to that contract.

Second, even if the management agreement had not used the word “expiration,” the way to make it clear that the operating agreement applied to all kinds of termination would have been to refer in the operating agreement to “termination in accordance with section 1.3, section 21.1, or section 21.2,” or some such. That’s because section 1.3 of the management agreement used the word “nonrenewal,” meaning that if you’re not specific in the operating agreement, having section 1.3 fall within the scope of a reference to “termination” would require investigating how the management agreement refers to the effect of section 1.3. Although the end result would probably be the same (as long as the management agreement didn’t use the word “expiration”), it would be simpler if you could avoid having to making that leap in deduction.

So don’t use expiration, and consider referring to the appropriate section numbers when you’re referring to the grounds for termination of some other contract.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.