Clause Of The Month

On its surface, customer's right to terminate upon the filing of a bankruptcy petition by or against the vendor can be a very useful tool, since customer may want to promptly transition the services to a more financially stable service provider. Unfortunately, any right to terminate that is triggered by a bankruptcy filing is unenforceable under the United States Bankruptcy Code (see 11 U.S.C. '355(e)(1)). Therefore, what the customer needs is an early warning system that gives it the right to terminate based on events that are the precursors to a bankruptcy filing. The provision below accomplishes this by triggering the customer's right to terminate when the vendor is in default with respect to various types of indebtedness. It is crucial that termination pursuant to this clause be implemented before a bankruptcy petition is filed by or against the vendor, because once the bankruptcy case is initiated this clause will also be unenforceable. The blank dollar figure is to be determined on a case-by-case basis for each customer-vendor relationship.

Vendor shall immediately notify Customer if Vendor is in default under any agreement, document or instrument relating to any (i) indebtedness for borrowed money owing to any person or entity, (ii) capitalized lease obligations, or (iii) contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person or entity, in each case in an amount in excess of $___________ (each, an 'Indebtedness Default'). Upon the occurrence of an Indebtedness Default that continues for more than the cure period, if any, applicable thereto, Customer may, without any penalty or fee, terminate this Agreement immediately upon written notice to Vendor.

Bryan Alter is a Senior Associate in the New York office of Brown Raysman Millstein Felder & Steiner LLP.

Long-term services contracts, such as contracts for outsourcing, generally provide the customer only limited rights to terminate. Typically, the customer is permitted to terminate the contract for the vendor's uncured material breach or upon the filing of a bankruptcy petition by or against the vendor. Even if the customer has the right to terminate for convenience, it is often conditioned on the customer's paying a substantial amount.