Exit clause: Overview, definition and example
What is an exit clause?
An exit clause in a contract allows one or both parties to terminate the agreement under certain conditions, without facing penalties. It outlines the steps for ending the contract and what happens afterward, ensuring that both parties understand their rights and responsibilities if they decide to exit the agreement early.
For example, in a business partnership agreement, the exit clause might allow one partner to leave the business by selling their share to the other partner under agreed terms.
Why is an exit clause important?
An exit clause is important because it gives both parties the option to end the contract if the circumstances change. Without an exit clause, it may be difficult or costly to break the contract. The clause provides clarity on how to handle the termination process and helps manage risks if one party wants to leave the agreement.
In business deals, especially long-term contracts, having a well-defined exit clause allows for a smoother transition if things don't work out, preventing potential disputes.
Understanding exit clauses through an example
Imagine a technology company enters into a partnership agreement with a supplier for two years. The exit clause in the contract states that either party can terminate the agreement if specific performance benchmarks are not met within the first six months.
After three months, the supplier fails to meet the agreed milestones, and the technology company decides to exit the contract early. Because the exit clause was clearly defined, the company is able to end the contract without facing legal penalties or complications.
An example of an exit clause
Here’s how an exit clause might look in a business agreement:
“Either party may terminate this Agreement upon thirty (30) days written notice if the other party fails to meet the performance milestones as outlined in Schedule A. In such event, all outstanding obligations shall be settled within sixty (60) days of termination.”
Conclusion
An exit clause is a critical part of a contract, providing both parties with the flexibility to end the agreement if necessary. By clearly defining how and when a contract can be terminated, it protects both parties and helps avoid costly legal disputes. When drafting or reviewing contracts, make sure the exit clause aligns with your business needs and provides an appropriate exit strategy.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.