The Essentiality of Risk Management in Contracts: Ensuring Contractual Safeguards Are Properly Vetted Before Execution

Ambiguities in the Agreement

• Issue: Ambiguities arose due to the absence of a defined lock-in period and the lack of a clearly articulated termination for convenience clause for the client, thereby creating uncertainty around the possibility of an early exit.
• Solution: UJA in its advisory highlighted that contractual agreements lacking provisions for early termination may be deemed unreasonable. The absence of such a clause can significantly limit the licensee’s (client) operational flexibility and impose undue constraints, particularly in the event of unforeseen circumstances or changes in business strategy.
• UJA emphasized that rigid agreements of this nature not only hinder the licensee’s (client) ability to adapt but may also present legal grounds for challenging the enforceability of the contract. In such cases, a licensee (client) may seek an early exit and dispute any refusal to terminate the agreement, arguing that the lack of termination flexibility creates an unfair contractual imbalance.

Service Provider’s Assertion of Contractual Breach

• Issue: Service provider’s position on early termination: alleged breach, lump sum liability, and full-term performance expectation.
• Solution: The service provider cited a termination clause within the agreement to assert a breach and claim liability for a specified lump sum amount. However, following a detailed review of the agreement, UJA recommended that the referenced termination clause is not applicable in this context. According to the terms of the clause, the agreement may only be terminated by the service provider under specific conditions—namely, if the licensee becomes insolvent, engages in incompatible conduct, or commits material non-compliances.
• Therefore, our client was advised that termination clauses should not be limited to narrowly defined scenarios. Instead, they should provide a licensee in an agreement with broader exit options, particularly in cases where the business remains solvent but fails to achieve profitability. This approach ensures greater flexibility and enables termination of the agreement under commercially unsustainable conditions.
• Hence, as none of the above conditions applied to our client, UJA concluded that the termination clause’s liabilities cannot be invoked. Additionally, the clause stipulates that a lump sum payment is only triggered in the event of a breach of the above-mentioned terms. Since our client fully complied with all obligations under the agreement, including timely payment of service fees, no breach has occurred.

Concerns Regarding Restrictive Notice Period Provisions and Absence of Reasonable Termination Flexibility

• Issue: The existing agreement had a renewable clause, which stated the applicability of any one of the three notice periods, that a licensee needs to serve prior to termination of the contract. They are, (i) short-term or rolling arrangements required advance notice aligned with the start of a calendar month. (ii) medium-term of three months, necessitated a longer notice period nearing the end of the term, (iii) while engagements extending beyond three months imposed a more substantial advance notice obligation prior to termination.
• Solution: As the agreement did not provide an early exit clause, and only stated these three stated notice periods, UJA advised the client to propose serving a three-month notice period, in line with the agreement’s terms, and to consider offering compensation equivalent to the full duration of this notice period rather than for the remaining term of the agreement. This approach is intended to facilitate a structured exit by not serving the whole term, and which can help mitigate the risk of potential future penalties or claims by the service provider. Therefore, this scenario also serves as an adequate example, as to why exit clauses need to be vetted.

Service Provider’s Refusal to Accept Reasonable Pre-Termination Notice

• Issue: In an effort to initiate an early exit, a reasonable notice period of three months was offered by our client. However, the service provider declined the proposal, citing that the notice must be served prior to the originally agreed termination date of the agreement.
• Solution: Based on the circumstances, it was recommended to the client that any penalties imposed under the agreement must be reasonable and proportionate, reflecting the actual financial loss incurred by the service provider. Accordingly, if the service provider is unable to substantiate a legitimate financial loss, the licensee would have sufficient grounds to contest any claim requiring them to serve the full term or to make payment equivalent to the entire contractual duration.
• Additionally, UJA advised that, given the nature of the service provider’s business, which is associated with the operation of commercial office spaces, it is reasonable to presume that the premises in question would not remain vacant for an extended period following early termination by our client. As a result, any actual financial loss incurred by the service provider is likely to be minimal or negligible. In view of this, it was recommended that the client consider negotiating an early exit from the agreement, coupled with the offer of an additional one to two months’ rent as a gesture of goodwill and compromise.
• Therefore, in light of such scenarios, we advise clients to exercise caution, as this case exemplifies a one-sided contract: lacking clear termination clauses, offering no viable exit options, and providing limited circumstances under which a party can forfeit from its contractual obligations.