What does “no-term contract” mean?
Contracts formalize arrangements, giving both parties certainty and predictability in a relationship.
How much is being paid? What for?
These are the sorts of things they set out, providing a stable foundation on which businesses and individuals can plan for the future.
However, sometimes a greater degree of flexibility is beneficial.
Fortunately, this can still be accommodated in a legally robust way — and “no-term contracts” are one example of this.
The “term” of a contract specifies how long it will run for i.e. its time frame.
A no-term contract, then, is one that does not include this, having no specified duration or end date.
Let’s find out a little more about them.
What does a “no-term agreement” mean?
With a traditional fixed-term agreement, the contracting parties must continue meeting their obligations until the end date passes (e.g. providing a product or service or paying for it).
There are only very specific circumstances or penalties that might allow a party to duck out of this prematurely.
With a no-term agreement, however, either party can terminate the contract at any time and for any reason.
No-term contracts have many applications, including:
- Employment contracts
- Tenancy agreements
- Consumer agreements
- Arrangements between businesses or organizations.
By their nature, they’re less definite and more open-ended than fixed-term contracts.
This offers both advantages and disadvantages.
You have more freedom to walk away from an agreement if it’s not meeting your needs, yet there’s also the risk of the other party doing this in circumstances where it doesn’t suit you.
That said, a no-term contract will often include a termination clause detailing exactly how the contract can be ended.
In this way, additional security can be embedded to strike a balance between flexibility and risk.
As we shall see, no-term contracts can be a useful option for business contracts and other agreements — but only when they’re fully understood.
Benefits of no-term agreements and contracts
No-term contracts offer a number of potential benefits.
- They allow each party the scope to respond to changing circumstances while still offering the protection of a valid contract.
- Companies are not obligated long-term to particular conditions of service. For example, if production costs increase, consumer prices can be adjusted to reflect these. Organizations can thus adapt to changing market conditions, allowing them to stay competitive.
- Likewise, consumers are free to cancel services they no longer require, can’t afford, or find a better alternative to. Many fixed-term consumer contracts only allow early exit on payment of a penalty. No-term contracts, on the other hand, give customers more control.
- No-term contracts involve a lower opportunity cost than more binding fixed-term contracts. One party might find a better way to meet their needs, and with a no-term contract, it’s easier to take advantage of this.
- No-term contracts are also a way of avoiding entering into a long-term commitment with the other party. They can therefore be a useful tool for assessing the viability and strength of a relationship.
- Their open-ended nature leaves the door open to ongoing negotiation.
Where fixed-term contracts are more static, no-term contracts are dynamic and ‘open’. This qualitative difference informs their suitability for different circumstances.
Drawbacks of no-term agreements and contracts
The very flexibility, dynamism, and freedom that a no-term contract provides can also be a potential drawback.
- No-term contracts introduce uncertainty into the relationship. After all, either party can walk away, potentially leaving the other in the lurch. This may hinder long-term planning if an arrangement cannot be relied upon.
- They can complicate financial planning. Fixed-term contracts enable spending or income obligations to be projected forward, facilitating accurate forecasts for the future. No-term contracts are less stable in this regard.
- The open nature of no-term contracts requires both parties to be more on the ball to ensure the arrangement is working well. This can require more time and energy.
- Linked to this, there is a danger that no-term contracts might be detrimental to longer-term planning. By necessitating an ongoing short-term review of arrangements, they can undermine strategic focus.
Clearly, therefore, it’s important for both parties to understand the implications of entering into a no-term contract in terms of both benefits and drawbacks.
Moreover, businesses using no-term contracts need robust systems and processes in place to stay on top of them. A contract management solution such as PandaDoc can be invaluable.
How do you end a no-term contract?
To end a no-term contract, you need to review it carefully.
Just because no term is specified, that doesn’t mean there’s not a termination clause governing it.
Check, in particular, whether there’s a notice period you need to adhere to.
Be careful to comply with the termination clause.
For example, it’s often appropriate to prepare a termination notice, informing the other party of your intentions.
Check out our guidance on how to terminate a contract to ensure you get this crucial step right.
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