What is a sunset clause?
What are the advantages and disadvantages?
How are they used in contracts and what are some examples?
We will define a sunset clause, sunset provision example, how they are used in contracts, concrete examples in corporate reorganizations, real estate transactions, software development contracts and more.
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What is a sunset clause
A sunset clause or sunset provision is when a statute or contract provides for certain obligations to stop producing legal effects after a specified date.
For example:
A software license agreement may provide for a sunset clause where a particular software version will no longer be supported after a specified date.
This means that the software company’s obligations with regards to a particular software application will “sunset” or “stop” after the designated date.
Definition
According to Investopedia, a sunset clause is defined as:
A sunset provision, or sunset law, is a clause in a statute, regulation, or similar piece of legislation that expires automatically.
What is notable with this definition is that a statute or contractual clause automatically expires with the passing of time.
Advantages
The advantage of a sunset clause in a contract is that the obligations of a party (or both parties) automatically will expire.
In other words, a contractual party does not have to formally trigger the termination of the contract or invoke rights under the contract to no longer be legally bound by certain provisions.
Another advantage is that a sunset provision can also be used to compel a contractual party to act.
For example:
A software company includes a sunset provision in the contract to “sunset” or cease developing a certain version of its software and requires the client to purchase a new software version.
Drawbacks
Sunset provisions can also have drawbacks as well.
In many cases, when a contract is signed, the contractual parties store the contract somewhere and rarely come back to it.
A party may forget that certain rights expire with the passing of time
A contractual party may forget that certain obligations are slated to “sunset” or expire after a certain period of time.
As such, if they are not notified that the sunset provision will take effect or a sunset expiry date is approaching, they may lose certain contractual rights.
In other situations, a contractual party may use a sunset provision abusively.
For example:
A property builder may sell properties off the plans and include a sunset clause stating that if the property is not built by a certain date, both parties can walk out of the deal.
If the market conditions remain stable or become worse, the builder will ensure to build the property before the sunset expiry date to ensure the buyer is committed to buying.
However, if the market conditions improve, the builder may deliberately delay the completion of the project to trigger the sunset clause, get out of the contract and then sell the property at higher market value.
Negotiating a sunset clause should be done carefully and by understanding what it may entail.
Sunset clause contract
A sunset clause in a contract is a contractual obligation affecting one party or more that will expire or terminate after a certain period of time.
The date the parties agree to have certain obligations automatically expire or terminate is called the “sunset date”.
The objective of a sunset clause is for the parties, prior to entering into a contract, to define the duration of their legal obligation.
For example:
A sunset clause can be used by a corporation issuing shares to shareholders of a certain class of shares to redeem the company stocks prior to a certain date.
On December 15, 2015, Goldcorp announced a sunset clause expiry date with regards to certain shares of the corporation
With the passing of time, the sunset clause will lead to parts or even all of the contract to terminate.
However, the parties can mutually agree to amend their contract to either extend the sunset date or even eliminate it from the contract.
Sunset clause example
Let’s look at a few examples of how a sunset clause can be used in a contract.
Sunset clause date extension
Parties to a contract may agree to extend a sunset date, here is an example:
Sunset clause insurance
Parties to an insurance contract can include a sunset date for certain coverages to automatically expire or not include any sunset provision.
Here is the description of insurance coverage where the parties have specifically agreed not to include any sunset provision:
Sunset clause share conversion
Corporations may use a sunset clause or provision to convert certain classes of shares to another within their capital stock.
Here is an example where the Counsil for Institutional Investors recommending a time-based sunset clause to deal with certain voting rights related to the Facebook stocks:
Sunset clause real estate
Parties to a real estate transaction can use a sunset clause to provide that they must conclude the transaction by no later than a certain date.
If the deal is not “closed” by that date, the buyer and seller can walk away from the deal.
For example:
A buyer of a property agrees with the developer that the new property must be built by a certain date, if not, the buyer can walk away from the deal.
A buyer of an existing property can agree with the seller that the settlement of the transaction must happen within 30 days, if not, the deal is off.
Sunset clause sample
Here are a couple of fictional sunset clauses we’ve drafted to give you an idea of how they may be presented in a contract:
Notwithstanding anything to the contrary, the Client agrees that the Software licensed hereunder shall be supported and maintained by the Vendor until December 31, 20XX. The Client may exercise its option to license the latest major version of the Software at the then-current price list by no later than December 31, 20XX, otherwise, the present Agreement including all obligations hereunder shall terminate without further notice.
The Parties agree that the present provision shall automatically terminate as of April 30, 20XX unless the Parties mutually agree to extend the application of this provision for an additional one-year period in writing prior to the aforementioned date.
Sunset clause FAQ
What are sunset laws?
Sunset laws or a sunset rule are statutes, regulators or other legislative provisions that will automatically be repealed by a certain date or within a certain timeline.
Typically, a sunset law is enacted when the government needs to act quickly and did not have time to study the appropriateness or consequences for the adoption of certain laws.
The government will therefore adopt a law quickly to react to an urgent situation but will provide for the provision to stop producing legal effects after a certain period of time allowing it to better study the impact of the statute or regulation.
For example:
A famous example of legislation adopted containing a sunset provision was the U.S.A. Patriot Act following the September 11, 2001 attacks.
What is a sunset clause?
A sunset clause is a contractual provision stipulating that the obligations of the contract or specific provisions will cease to produce legal effects after a certain time.
For example:
In the context of a corporate plan of arrangement, a corporation may include a sunset clause for stockholders to exchange their shares for cash or other securities failure of which they will lose the right to any compensation.
In 2015, Goldcorp announced such a plan of arrangement whereby the stockholders were given a deadline to exchange their shares.
What is a sunset date?
A sunset date is a date past which a contract is automatically terminated or a statute or regulation is automatically repealed.
A sunset date is like an “expiration date” or “termination date”.
The legal obligations of a party to a contract will stop, cease to have legal effect or will no longer be enforceable after the sunset date.
What is a sunset clause in a contract?
A sunset clause in a contract provides for a date past which the same clause, other clauses or the entire contract will terminate.
The termination of the contract can be linked to a specific date or to an event.
Here is an example of a sunset clause linked to a defined date:
The parties may agree to sunset certain clauses by December 31, 20XX.
The parties may also sunset certain contractual obligations with the occurrence or non-occurrence of an event.
Here is an example of a sunset clause linked to a defined event:
The parties may agree that a buyer will have an obligation to buy a property within 60 days after receiving notice from the builder that the property is built according to specification.
In this case, the sunset period is not definitive in time and will get triggered when a notice is submitted.
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