Termination Clauses are a Tricky Business

William Bierce, a partner at law firm Bierce & Kenerson, P.C., provides a bit more detail about the failed service agreement between service provider CSC and client Sears in this article. You can buy the extended version of Mr. Bierce’s legal opinions (based on “allegations in court documents and SEC disclosures) on the company’s Web site for $30, but here’s the rundown as the free version of the article explains.

Sears would have to pay a termination fee if the contract it had with CSC was canceled for convenience’s sake. If Sears canceled it “for cause,” there would be no termination fee imposed.

The amount of the termination fee was not fixed for the entire contract term. Rather, it would increase from the date of contact signature as CSC invested in software, hardware, subcontracts, training, process development and other implementation during transition. After completion of transition, the termination fee would decline over the remaining term of the contract.

Mr. Bierce says Sears approached CSC to negotiate a ceiling on the termination fee, but CSC refused. So Sears canceled for cause. The causes cited? Failure to meet implementation milestones.

According to Mr. Bierce, in its SEC filing about the cancellation, Sears said that the difference between cause and convenience would involve “tens of millions of dollars.” (I guess that’s a compelling reason to put this into the hands of the lawyers.)

Then Sears and CSC argued about whether the dispute should be settled by arbitration (Sears’ preference) or the court (CSC’s preference).

I’m going to do my darndest to get hold of the court documents that may have been filed. Should make for interesting reading during this slow-starting holiday week.