{{About, fees for breaking terms of agreements or long-term contracts, Interconnect fees in (telephone) networks, Termination rates
An early termination fee is a charge levied when a party wants to break the term of an agreement or long-term
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
. They are stipulated in the contract or agreement itself, and provide an incentive for the party subject to them to abide by the agreement.
Early Termination Fee – The total fee that will be charged for early termination of a contract or agreement. If the contract has a declining rate “Early Termination Fee” refers to the initial or starting amount.
Early Termination Fee Amount – The fee that would be assessed at a point in time. If the contract has a flat fee, the fee remains constant for the period described in the contract. If the contract has a declining fee the fee decreases at a rate described in the contract as a period elapses.
Early Termination Fee Rate – The Rate at which an Early Termination Fee declines.
Service industries
Termination fees are common to
service industries
Service industries are those not directly concerned with the production of physical goods (such as agriculture and manufacturing).
Some service industries, including transportation, wholesale trade and retail trade are part of the supply chain del ...
such as
cellular telephone
A mobile phone, cellular phone, cell phone, cellphone, handphone, hand phone or pocket phone, sometimes shortened to simply mobile, cell, or just phone, is a portable telephone that can make and receive telephone call, calls over a radio freq ...
service, subscription
television
Television, sometimes shortened to TV, is a telecommunication medium for transmitting moving images and sound. The term can refer to a television set, or the medium of television transmission. Television is a mass medium for advertisin ...
, and so on, where they are often known as early termination fees (ETFs). For instance, a customer who purchases cellular phone service might sign a two-year contract, which might stipulate a $350 fee if the customer breaks the contract. Consumer interest groups have criticized such fees as being anti-competitive because they prevent users from migrating to superior service
In the suburban Atlanta county of Gwinnett, customers were hit with termination fees of over $23 when the county commission chose not to renew the contracts of the county trash collectors in November 2008. The two companies charged this both in violation of county law and in breach of contract.
Mergers and acquisitions
In
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
termination fees are often levied in the event that one party fails to consummate a merger—for instance, because it was unsuccessful in getting shareholder approval or because it agreed to a competing offer. For instance, in 2005
Johnson & Johnson
Johnson & Johnson (J&J) is an American multinational corporation founded in 1886 that develops medical devices, pharmaceuticals, and consumer packaged goods. Its common stock is a component of the Dow Jones Industrial Average and the company i ...
agreed to acquire
Guidant
Guidant Corporation, part of Boston Scientific and Abbott Labs, designs and manufactures artificial cardiac pacemakers, implantable cardioverter-defibrillators, stents, and other cardiovascular medical products. Their company headquarters is loc ...
, but Guidant later accepted a competing offer and was subject to a termination fee of $705 million.
These termination fees have been criticized as well. Shareholders in companies being purchased sometimes believe that termination fees are too high, and instead of representing the costs that the purchasing party would suffer should the deal fall through, instead act as a way of forcing shareholders and directors to accede to the deal
See also
*
Retained interest {{unreferenced, date=April 2019
Retained interest (also colloquially known as a ''payout penalty'') is future, currently unpaid, interest that some lenders add to the remaining principal of a loan to determine a payout figure in the event that the ...