Unilateral Termination Default Clauses in Widget Purchase Agreement (United States)

This Wisdom of the Crowd (ACC member discussion) addresses how to react to a buyer's refusal to include a clause allowing the seller to terminate the contract for default by the buyer, in a long-term contract for the sale of widgets. This resource was compiled from questions and responses posted on the forum of the Small Law Department ACC Network.*

*(Permission was received from the ACC members quoted below prior to publishing their forum comments in this Wisdom of the Crowd resource.)

I. UNILATERAL TERMINATION DEFAULT CLAUSES

Question:

I represent a seller and am currently negotiating a long-term contract for the sale of widgets. A buyer is insisting that the contract only includes a "termination for default by buyer" clause. Buyer has rejected a "termination for default by seller" clause. My thinking is that if buyer breaches its obligation to pay for the widgets under the contract, seller can still terminate the whole contract for default, whether or not a termination for default by seller clause is included. I would think seller would not be limited to remedies only of default in payment for certain purchase orders. Any thoughts?

Wisdom of the Crowd

• Response #1: This might be one of those times to consider how well the UCC already provides you with plenty of good remedies (over and above common law) -- I'm presuming that since you're selling 'widgets' that such are goods and the UCC would apply, and that it's a USA-USA transaction (or that you'd otherwise have a choice of law provision that would squarely make one state's UCC applicable). Remember then that the UCC articles will gap-fill where the contract is silent, and effectively give you remedies unless the contract expressly over-rides them (or at least gives you a good argument to that effect -- and I'd guess that most courts would find it hard to force you to keep shipping widgets in the face of a clearly non-paying customer if they sued you, so giving the court a handle in the law to grab on to will usually be enough to win the point). (Caveat: Everything is different if the default is concurrent with the Buyer having filed a petition in bankruptcy. That's a topic for another day.)

• One of my favorites in your situation might be @ 2-705, permitting the Seller the right to stop shipment in certain situations (and once you can do that, termination may be moot if you can hold the widgets hostage until you're happy). And, I'm sure an expert in the Code could do an even better job of listing many other things at your disposal as the Seller.

• Also, have you let them have a term in the contract that says you must accept any PO they issue? Usually the Seller has some discretion (contra some big commodity-item contracts, where the notions of requirements contracts still prevail) to decide whether to accept a PO regardless of whether or not the master contract is still in effect. So, you can protect yourself to a large extent by making sure that you have that discretion still (and that's often better done again by silence, since the Code would presume that discretion to accept an order unless you've let the other side write a term that overrides that aspect of the Code). Again, if they took you to court to try to enforce your unwillingness to accept an order, how do you think they'd do if you could show they haven't paid your invoices for the prior 6 months?

• The fact that they have given themselves a blunt force tool to terminate for breach doesn't not automatically translate to you losing all of your other remedies that are in the Code.

• My main point is that I believe many of us have gotten too used to the notion of looking solely to the contract and forgetting that the contract (particularly one for the sale of goods) needs to be interpreted within the framework of well-established commercial law - and, as a consequence, it may often be better for one party or the other NOT to raise an issue in the negotiation, since that might motivate the other side to write an express disclaimer in the contract where it might otherwise have left it unspoken (and you can then rely on the code's provisions without needing to flag them by putting them expressly in the contract). Such tactic also has the advantage of making your contracts shorter, which my time-shortened life certainly appreciates!ⁱ

• Response #2: Here's a link to an article that does a good job of explaining how this can work in practice.

• "Lawyers spend a huge amount of time drafting and negotiating detailed commercial contracts for their clients. But the in-house legal team at Scottish & Newcastle believes that in many cases detailed contract terms are unnecessary, and can be a waste of time and resources for the businesses involved. Steven Weatherley outlines the group's innovative "Pathclearer" approach."http://www.clarity-international.net/documents/Pathclearer%20article%20in%20PLC-3.pdfⁱⁱ

ⁱResponse from: Michael Fleming, Associate General Counsel, Cray Inc., St. Paul, MN (Small Law Departments eGroup, Mar. 13, 2014).

ⁱⁱResponse from: David A. Munn, General Counsel, Pramata Corporation, Minneapolis, MN (Small Law Departments eGroup, Mar. 13, 2014).