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Termination for causal events

A termination for causal events clause is found in majority of contracts because of the fact that it is widely accepted as an industry-standard contractual provision. For purposes of this article, we delve into the termination for causal events, which we note at the outset differs from termination for cause ie, breach.

A termination for causal events clause lists certain types of events which, if materialised, may give rise to a right to terminate the agreement. The list of trigger events that are generally included in this clause is based on certain events that would either hinder or prevent a party from performing their obligations under the agreement, or otherwise render performance impossible. These events include the following:

  1. any event that affects the ownership structure of a contracting entity, including any sale, merger, acquisition or some other change of control;
  2. the restructuring of a contracting entity’s obligations with its creditors, which may include a compromise or composition (whether actual or threatened) or a scheme of arrangement with the creditors;
  3. solvency concerns in respect of a contracting entity, including liquidation, judicial management, business rescue, or passing a resolution for the voluntary winding-up of such contracting entity;
  4. the discontinuation of a contracting party’s business, including circumstances where there is (or a reasonable prospect of) a default or cessation of such entity's normal line of business;
  5. the disposal by a contracting entity of all, or a material portion, of its undertaking or assets; or
  6. unsatisfied judgments, or any threatened judgments, against a contracting entity that remains unsatisfied for an unreasonable period of time.

This clause is rarely disputed during negotiations unless it is one-sided and in favour of only one of the contracting parties and not both. In some instances, there may be legitimate grounds for a customer to contend that this clause be made one-sided, for example, if the customer itself may be in difficult financial circumstances.

The last article that will follow in this series will deal with the topic of extraction of services and termination/migration assistance in more detail.

Kayla Ferreira

Corporate Commercial | Senior Associate

kferreira@ENSafrica.com 

Ridwaan Boda

Corporate Commercial | Executive

rboda@ENSafrica.com