Category Archives: termination

This Week on The Web 2009-09-13 (my birthday edition)

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It happens to be my birthday weekend and between eating some great food, playing Guitar Hero with my wife and hanging with the family, these are the things that happened around the web this week – maybe you already read about them, maybe you need to again – there were some REALLY great discussions going on.  Come join the party on twitter (follow me here and you’ll join the conversation live.)

I also realized that many of you might have no idea what you’re seeing below.  Sorry.  These are “tweets”, 140 maximum character messages sent via Twitter.  Within the Twitterverse individual users follow others and have followers (think of it like overlapping Venn diagram circles).  To read a tweet, you have to wade through a bit of jargon used to make the most of the 140 character limitation.  “RT” for example, is shorthand for “Re-tweet” and the @____ is the username of some other individual on Twitter.  Combined together, then, “RT @_____” means that someone else wrote a tweet that I found important and I now want to forward along to my followers.  The URL’s are then also shortened by shortening services like bit.ly to make the most of the character limitation, too.  Lastly, you might see “hash” identifiers “#______” which are ways to tag tweets of a particular flavor for easy searching later and “<” which means that I am commenting on what came before it.

Individual Evergreen Clauses

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Fred Stutzman over at Unit Structures laments the issue of individual auto-renewing agreements (like those of any kind of subscription you may sign onto).  He’s rightfully upset about his individual circumstance, and even without reading the specifics of the ZipCar agreement (I’m sure there is one somewhere), the basic business practice is the issue – auto-renewing agreements, especially subscriptions, are problematic.

So what then of larger contracts of the evergreen sort?  The software maintenance renewals?  The never-ending services subscriptions?  The truth is that subscriptions are a benefit to both buyers and sellers – the trick is knowing what you’ve agreed to and how to get out cleanly when you are no longer interested.  Thus, as with almost every other contract term we discuss, renewal clauses are important post-contract terms to watch.

There are 4 parts to your basic renewal term:  mechanism of renewal (auto vs notice), length of renewal, cost of renewal and termination notice period.  Unfortunately, most contracts don’t put all of these things into one section and they try to use brevity in hopes that renewals will just “happen”.  Rather, make sure that each of these four areas is not only agreeable, but actually what you intend.

Mechanism – as we were just talking about evergreen clauses, the mechanism of renewal is the distinction between an automatic renewal (it’s continually green, like a pine tree) and one which requires some form of affirmation to renew.  As I mentioned in the term and termination discussion we had a week or so ago, the issue isn’t whether you allow it to auto-renew or not, the issue is whether you can TRACK it’s auto-renewing nature.  If a customer doesn’t have the ability to track these things, it’s better to have the contract terminate – the vendor will ALWAYS come knocking to get you to renew.

Length (term) – If you allow for an auto-renewal, I always suggest a relatively short term (about 1 year).  This is a reasonable time frame in which business decisions can be made, plans can change, etcetera.  Anything longer and you might find yourself stuck with a contract you don’t want – anything less and you’ll spend more time worrying about the renewals than in getting real work completed.

Cost – Agreeing to auto-renewing contracts should come with a price-break.  You should either have a continuation of the prior-years’ fees, or a SLIGHT increase based on the average increase in the cost of doing business.  In other words, the customer benefits from agreeing to the risk of auto-renewal.  On the other hand, customers should be prepared to negotiate cost increases if the contract no longer auto-renews.  (Actually, the customer used to always get a cost-increase-limiter on renewals… now this distinction seems to be taking root.  Pay attention.)  Oh, and if there’s NO renewal at all, the customer should not be surprised to see potentially large jumps in cost if they try to restart the services after some lapse/gap in service.

Termination period – Last, but not least, even with an auto-renewing agreement, there should be some amout of notice by which a party can terminate an evergreen contract.  As stated before, it’s usually some increment of 30 days – with longer periods of notice required for longer initial terms or larger-dollar deals.  As a buyer, I typically do not want my vendor to be able to terminate – even outside the notice period – because I want them to keep providing me service so long as I want it.  This is probably one of very few areas where I have felt justified in asking for such lop-sided terms.  Because what I don’t want is a situation where I’m willing to continue paying for service, but the vendor decides that they simply don’t like me anymore.  The only time I want a vendor to be able to terminate is if I don’t live up to my contractual obligations (such as paying ontime).

Oh, and as Frank unfortunately discovered, make sure there aren’t any other potential gotcha’s buried in the deal which would make termination difficult.

Weighing in on AIG

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Everyone’s buzzing about bailout money being used to pay for AIG executive bonuses – to the same folks’ whose division was the one that caused AIG to fail.

Even President Obama was on camera, promising to do something about it.

The House of Representatives released copies of the contracts that are supposedly preventing the government from taking action on this.  Too bad they don’t have a contracts guy reading section 3.04(b) with any clarity:

“3.04.  Forfeiture of 2008 and 2009 Guaranteed Retention Awards as a Result of Termination of Employment of Covered Person.  If the employment (or, as applicable, consultancy) of a Covered Person terminates prior to payment of a Guaranteed Retention Award, the Covered Person will forfeit the right to such Guaranteed Retention Award in the following circumstances: […]

b)  the Covered Person’s employment (or, as applicable, consultancy) is terminated by AIG-FP for cause (“cause” means conduct involving intentional wrongdoing, fraud, dishonesty, gross negligence, material breach of the AIG Code of Conduct or other policies of AIG-FP or AIG, or conviction of or entry of a plea of guilty or no contest to a criminal offense); […]”

Given that the US Government now has a controlling interest in the organization, and given that the US Government has such an interest due to these executives’ imputed gross negligence (“recklessness and greed” according to President Obama), one would think that the US Government could simply fire these individuals – thereby preventing them from getting their bonus.

Just a thought… maybe I’m misreading something somewhere, but I don’t think so.  President Obama:  Please give me a shout if the AG needs some contract-review assistance.  🙂

(Thanks to ContractsProf Blog for many of the links.)

[Update:  I guess there’s always the IRS version.  I still think that 10% is too much of a bonus for these folks.]