Dealing with Vendors and Suppliers: Exit Strategies and Transition Plans

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May 04, 2018

Dealing With vendors and suppliers: Exit Strategies and Transition Plans

Parties involved in contract negotiations are usually focused on what will happen during the duration of the contractual relationship, and this focus is certainly reasonable. However, customers should not allow this focus to distract from planning for the termination of the contract, whether this occurs as planned or otherwise.

Contractual relationships can end of their own accord, that is when the originally contemplated term expires, or they can end prematurely. Under the common law of contracts, one party’s material breach of its obligations typically allows the non-breaching party to terminate the contract. Ryko Mfg. Co. v. Eden Services, 823 F.2d 1215 (8th Cir. 1987). As noted above, catastrophically disruptive events may also act to terminate the contract by operation of law. In addition, one or both parties may seek to have the right to terminate the contract for their convenience, even in the absence of a breach or force majeure event.

All of these instances, whether planned or unplanned, carry with them the potential for unnecessary disruption to the customer. Depending on the nature of the relationship, the vendor may be in possession of the customer’s proprietary operational data or trade secret information. The customer should make sure that the contract expressly addresses treatment, handling and return of this data and information.

In addition, the vendor may be in the position of being the most appropriate entity to educate the customer’s employees or a successor vendor with respect to the transition. The customer is better off negotiating the terms of these transition services in advance, rather than at a time when the vendor has little incentive to be accommodating with terms because the relationship is ending.

For all of these reasons, customers would be wise to carefully evaluate vendor requests for the right to terminate for convenience prior to the end of the originally contemplated term. At a minimum, customers should require vendors to provide a sufficient number of days’ prior notice so as to give the customer enough time to transition to another vendor.

Conversely, if the customer anticipates the need to or desirability of having the right to terminate early for convenience, the customer should negotiate the terms of such a termination at the outset of the relationship. If the customer does not, the vendor will likely extract a larger fee for the privilege when the customer’s need arises mid-relationship.

Finally, as noted above, the occurrence of a disaster or other catastrophic event may cause the contractual relationship to terminate. As noted above, the customer’s disaster contingency planning should of course contemplate that eventuality as well.

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