The subject of early termination fees is frequently debated by hosts. On the one hand, hosts almost always include these fees in their term based contracts. On the other, hosts try to avoid them when they’re seeking to get out of bandwidth contracts that no longer make economic sense. Customers (and hosts) often try to argue that these clauses are “penalty” clauses that may not be part of a contract. A recent decision by the U.S. District Court for the Western District of Washington dismisses this argument.
In Minnick v. Clearwire, the court reviewed an early termination fee in an ISP’s contract. The customer argued that the presence of the early termination fee made the contract void. Not only did the court dismiss this argument, stating that the presence of a penalty clause was a contract defense, and not a cause of action, but it also held that an early termination fee was a bargained for alternative payment provision.
The provision created an “alternative performance contract.” In essence, the court determined that the contract gave the customer two choices. When the customer entered into the contract they were offered two alternatives: pay monthly for the entire term or pay for some months, then terminate, incurring the early termination provision. The fact that the customer had this choice made the provision contractually valid.
Hosts would be wise to remember this reasoning both when drafting and enforcing their own contracts, and when signing contracts with vendors. It is particularly difficult to get out of term contracts once they are signed. The fact that it no longer makes economic sense for you (or your customer) to be in the contract, or that you had certain expectations for the service that were not met (but not set out in the contract), are not reasons for terminating a contract and avoiding an early termination penalty. Making sure that a contract makes economic sense during the entire term is the safest way to avoid these charges.
