Drafting Earlier Termination Clauses

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IDI 2007 Annual Meeting Vienna, 15-16 June 2007

• Drafting Earlier Termination Clauses
• Silvia Bortolotti
• Buffa Bortolotti Mathis (Italy)

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• Purpose of the clause

• To terminate the contract with immediate effect
• in case of a serious breach by one of the
  parties, or
• where exceptional circumstances arise

BUFFA, BORTOLOTTI MATHIS
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• Applicable law

• Parties are normally free to agree on the events
  that will justify the termination, within certain
  limits
• Often courts are entitled to judge on the
  importance of the event, which has given rise to
  termination
• Courts may assess damages, if the termination was
  not justified

BUFFA, BORTOLOTTI MATHIS
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• Breach

Serious breach act or omission of a party which
would make it unreasonable to require that the
innocent party continues the contractual
relationship Minor default prior warning and
additional period for remedy (grace period) A
repeated default may be considered a serious
breach

BUFFA, BORTOLOTTI MATHIS
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• IDI Agency Model - balanced

18.2 (Substantial breach). Any failure by a
party to carry out all or part of his contractual
obligations resulting in such detriment to the
other party as to substantially deprive him of
what he is entitled to expect under the contract,
shall be considered as a substantial breach for
the purpose of Article 18.1 above.
18.3 (Specific cases of substantial breach).
The parties hereby agree to consider in
principle, unless the contrary is proved, as a
substantial breach of the contract the violation
of the provisions under Articles
................... Moreover, the violation of
any other contractual obligation may be
considered as a substantial breach, if such
violation is repeated notwithstanding a request
by the other party to fulfil its contract duties.
BUFFA, BORTOLOTTI MATHIS
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• Example of clause
• (Civil law style)

Each party may terminate the present contract
with immediate effect, in case of occurrence of
an important event constituting a justifiable
reason for the contract termination, by written
notice sent by registered mail with return
receipt.   A justifiable reason for the contract
termination is any violation of the contract
obligations that is of sufficient importance not
to allow for the continuing of the relationship
on a reciprocal confidence basis. The parties
jointly declare that the violation of the
provisions under articles ......................
of the present contract is to be considered as a
justifiable reason for the contract termination.  

BUFFA, BORTOLOTTI MATHIS
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• Example of clause
• (Anglo-American style)

Either party to this Agreement shall have the
right to terminate this Agreement on thirty (30)
days written notice to the other if the other
party then be in default or breach of any
material provision hereof provided, however,
that if the party receiving such notice of
termination shall cure the breach or default
within such 30 days period, or within such
period, shall be proceeding diligently to cure
such default and does in fact cure such default
within an additional 30 days period, this
Agreement shall continue in full force and
effect. () Manufacturer shall also have the
right to terminate this Agreement if the minimum
purchase or royalty provisions of this agreement
(as the case may be) are not met by Distributor.
BUFFA, BORTOLOTTI MATHIS
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• Example of clause
• (Anglo-American style)

Termination Due to Default. Either party may
terminate this CONTRACT with immediate effect
upon written notice thereof in case of a breach
by the other party of its contractual
obligations, including without limitations a
breach of the provisions contained in Articles
... of this CONTRACT, or in the event either
party hereto defaults in any of its duties,
obligations or responsibilities hereunder and
such default shall not have been cured within a
reasonable time after having been invited in
writing to do so by the other party. Such
termination shall be effective immediately upon
notice being given as provided in Article 20.1
hereof. A termination by MANUFACTURER due to
DISTRIBUTORs default shall be identical in legal
effect to a termination by MANUFACTURER for cause
(except that if a termination is due to default
there is the right to cure described in this
Article and if the termination is for cause,
there is no right to cure and termination is
effective immediately upon notice). Upon a
termination by DISTRIBUTOR due to MANUFACTURERs
default, the parties will proceed in accordance
with Article 20.1a.
BUFFA, BORTOLOTTI MATHIS
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• (continue)

Termination for Cause by MANUFACTURER.
MANUFACTURER may, at its option, by written
notice to DISTRIBUTOR, terminate this CONTRACT
effective immediately, if any of the following
occurs (a) DISTRIBUTOR fails to maintain a
service facility adequate to meet the needs of
owners of Products within the Territory (in
Manufacturers sole opinion), (b) DISTRIBUTOR
fails to meet any sales quotas, purchase
engagements or other requirements relating to
sales and service established by MANUFACTURER,
from time to time (whether set forth in the
Manufacturers Dealer Manual, or in a
Manufacturers memorandum), for the Territory,
which quotas or engagements may be modified in
MANUFACTURERs sole discretion, (c) DISTRIBUTOR
sells or attempts to make a sale in bulk and not
in the ordinary course of business of all or any
substantial portion of its purchases from
MANUFACTURER, (d) DISTRIBUTOR sells or attempts
to sell Products to individuals, companies or
organization trading in ..., outside the
Territory, (e) DISTRIBUTOR fails to secure,
maintain or renew a license required by any State
or jurisdiction where this CONTRACT is to be
performed or such license is suspended or revoked
for any reason,
BUFFA, BORTOLOTTI MATHIS
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• (continue)

(f) DISTRIBUTOR assigns or attempts to assign
this CONTRACT, or any interest herein or any
right hereunder, without MANUFACTURERs written
consent, (g) DISTRIBUTORs establishment remains
closed for the conduct of sales or service
operations during regular business hours for more
than five (5) consecutive days, (h) any dispute,
disagreement or controversy shall arise between
or among Principals, managers, officers or
stockholders of DISTRIBUTOR which, in the opinion
of MANUFACTURER, could adversely affect the
operation, management, reputation, business or
interest of DISTRIBUTOR or the business or
interest of MANUFACTURER or the reputation of the
Products, (i) DISTRIBUTOR falsifies any records
or reports, (j) any submission by a DISTRIBUTOR
to MANUFACTURER of a false or fraudulent
application or claims or statements in support
thereof for reimbursement for warranty, special
policy or campaign adjustments performed by
DISTRIBUTOR for parts, service or promotional
compensation or for any other discount,
allowance, refund, or credit under any other of
MANUFACTURERs programs, (k) ()
BUFFA, BORTOLOTTI MATHIS
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• Exceptional circumstances

Circumstances which would make it unreasonable
to require that the innocent party continues to
be bound by the contract Normally death,
serious illness, incapacity, bankruptcy or other
similar procedures, criminal sentences, change in
the legal structure of the agent/distributor
company

BUFFA, BORTOLOTTI MATHIS
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• IDI Agency Model - balanced

18.4 (Exceptional circumstances). Circumstances
in which it would be unreasonable to require the
terminating party to continue to be bound by this
contract, shall be considered as exceptional
circumstances for the purpose of Article 18.1
above. The parties agree to consider as
exceptional circumstances which justify the
earlier contract termination by the other party
the following situations bankruptcy, moratorium,
receivership, liquidation or any kind of
composition between the debtor and the creditors,
or any circumstances which are likely to affect
substantially one party's ability to carry out
his obligations under this contract. ()

BUFFA, BORTOLOTTI MATHIS
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• (continue)

18.5 (Change of control, ownership and of
management). If the Agent is a company, this
contract may also be terminated by the Principal
with immediate effect at the occurrence of a
material change of the legal structure, of the
shareholders or of the management of the Agent
company, carried out without the prior consent of
the Principal, and particularly where one of the
persons indicated in Annex H ceases to have the
position therein indicated or anyway ceases to
personally take care of the relationship with the
customers. The Principal shall not unreasonably
withhold his authorisation to the above changes,
especially if the Agent gives adequate warranties
that the changes will not affect the Agents
ability to carry out his contractual obligations
in the most effective way.

BUFFA, BORTOLOTTI MATHIS
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• Example of clause
• (Civil law style)

The following events shall also be considered as
justifiable reasons for contract termination
bankruptcy, any kind of composition between the
bankrupt and the creditors, death or incapacity
of the agent, civil or criminal sentences which
may affect his reputation or hamper his
activities, as well as any important change in
the juridical structure or in the management of
the agent company. In particular, it is
understood that the manufacturer may immediately
terminate the contract from the moment when M.
........... shall cease to be ......... of the
agent company. 

BUFFA, BORTOLOTTI MATHIS
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• Notification of the termination

Term for notifying the termination - specific
term required by law - reasonable term Form
for notification (registered letter)
BUFFA, BORTOLOTTI MATHIS