Sunset Provisions in Contract Law

Instructor: Kenneth Poortvliet
In a contract, some obligations come to an end before others. In this lesson, we will learn what a sunset provision in a contract is, how it works and when it's used.

When Will it End?

Retiring Ron is selling his house to Jim and Kim Newlywed. They entered a real estate contract and are just waiting on the mortgage company to approve the loan. The problem is, the mortgage company is taking a long time. Ron has buyers on a waiting list, and he needs the money from the sale to get his new home.

So how long does Ron have to wait? One week? A month? A year? If the contract doesn't address this issue, then there's really no set answer. A sunset clause would take care of this problem.

Contract Consideration and Essential Terms

A contract is an agreement between parties to do something. However, before a contract is valid, it must have consideration, which exists when both sides of a contract get something and give something. For example, Amelia wants Charles to sell her his airplane, the St. Louis Spitfire. She agrees to pay him five payments of $500 dollars over the course of a year, and Charles agrees to give her the plane to use in the meantime with the title of ownership to be signed to her upon her making the final payment.

This is a valid and enforceable contract because each party gives something and gets something. Amelia gives money and gets a plane, and Charles gives a plane and gets money. There are other obligations as well, and they are called essential terms as they are crucial to the consideration that is at the core of the contract. Essential terms of a contract can be enforced by the courts. Essential terms in Amelia and Charles' contract include the time of the payments, the amount of money, the usage of the plane and the signing of the deed.

Contract Breaches

So when does a contract end? Some, like the contract for the plane, has a natural end. It's when all the obligations in the contract are completed by both parties. For Amelia and Charles, the obligation for Amelia ends when she makes her final payment. For Charles, the end of his obligation occurs when he signs over the deed. But what if one party doesn't uphold their end? Then this is called a breach, and the breaching party can be taken to court and made to either pay damages or perform the obligation.

However, some contracts by their nature have no natural end. For example, Captain Crunchy agreed to buy a metric ton of sugar from Cane each month to make his breakfast bar. However, since they didn't specify the termination date, this could go on without end. If Captain Crunchy decided to make sugar-free breakfast bars, he might not want to keep buying sugar from Cane. However, if he just stopped buying, he might be in breach. How does the Captain avoid this?

Sunset Provisions

Sometimes the parties want to schedule an end to the contract. This can be accomplished by a sunset provision (or clause) in the contract. This is a provision in a contract that sets a date for the contract to end. This means that both parties no longer have an obligation under the contract unless they have an unfulfilled obligation prior to the end date.

For example, if Amelia and Charles agreed that Amelia would lease the Spitfire for $100 a month, this would be a valid contract. It has consideration in that both parties give and get. But how long is the lease? What if Amelia leased it for six months, but then didn't need it anymore, so she returned it to Charles. Could he say too bad? You have to lease it every month and keep paying? Without definite terms expressing for how long the lease is to last, he could very well take that position.

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