Is it Really Over? Contract Provisions that Survive Termination and Why.

Is it Really Over? Contract Provisions that Survive Termination and Why.

Just like many relationships, not all parts of a contract become things of the past when they expire or terminate. One way to ensure that a contractual right or duty applies post-termination is to specify that will it “outlast” the contract. Typically, drafters do this through “survival” or “savings” clauses. I wrote about that topic several months ago in a blog found here. However, some contract provisions are commonly found to “survive” termination even when the relevant contract does not expressly state that it will.

When contracting parties dispute the survival of specific provisions, courts generally strive to determine what they intended. But courts have developed rules of thumb and applied analytical frameworks that assist in determining the parties’ “intent” (even when they might not have contemplated the issue). However, because the “intent of the parties” is the “north star” in contract interpretation, courts will not apply interpretive rules of thumb or analytical frameworks if a contrary intent is clearly expressed in the relevant agreement.

Contract terms that Commonly Survive Termination

Several types of contractual clauses commonly survive termination by their express terms or by implied intent, including the following:

• Dispute-Related Provisions. These clauses address how disputes concerning the contract are resolved. Common examples are arbitration clauses, choice of law clauses, and forum selection clauses.
• Representations and Warranties. Generally, these provisions are statements of fact or promises made to induce the contract. Common examples are statements concerning the condition of an item, or the legal or financial status of a company.
• Confidentiality Clauses. These often contain terms meant to protect sensitive information shared during the contract, disputes about the contract, or information about a party or the contract itself. Common examples are non-disclosure agreements and provisions intended to protect trade secrets or proprietary business information.
• Non-Compete Clauses. These provisions restrict one party from competing with the other (or related third parties) for a period after termination. For example, a seller of a business might be restricted from starting a rival business for several years after a merger or acquisition or an employee may be restricted from working for competitors at the conclusion of her employment.
• Indemnity Clauses. Typically, these require compensation for losses from specific events, such as losses incurred by one contracting party due to the negligence or misrepresentations of the other.
• Limitations of Liability. These terms limit the amount of the damages or other liability for which a party can be held liable in a legal proceeding.
• Payment Obligations. Often, payment obligations do not end when a contract terminates. For example, contracting parties are generally required to pay for goods or services already delivered under a services or purchasing contract despite the termination of the contract.

Why Certain Provisions Survive without a Survival Clause: Analytical Frameworks

As noted, even when contracts lack specific or general survival clauses, certain rights and obligations will clearly survive termination. But there will be room for argument concerning other types of obligations.

A few of the analytical frameworks applied by courts to determine whether obligations survive (if the contract doesn’t specify survival) include the following:

• Accrued or Vested Rights versus Mutually Executory (or Unperformed) Obligations

The notion of accrued or vested rights protects parties seeking to vindicate contract rights after termination of the contract. This applies to obligations such as those to make payment for goods delivered or services performed under a contract and to pay accrued employee benefits and compensation. Generally, rights which have accrued or vested under an agreement will survive termination of the agreement. See Litton v. National Labor Relations Board, 501 U.S. 190, 205-206).

This principle is embodied in the commercial law concerning the sale of goods in most states. In Texas, for example, when a contract for the sale of goods terminates, “all obligations which are still executory on both sides are discharged but any right based on prior breach or performance survives.” Tex. Bus. & Com. Code § 2.106(c). An obligation is executory on both sides if it is “one that is still unperformed by both parties or one with respect to which something still remains to be done on both sides.” Lee v. Cherry, 812 S.W.2d 361, 363 (Tex.App.-Houston [14th Dist.] 1991, writ denied)

The Fifth Circuit, in interpreting Texas law has applied this general common law principle to indemnity provisions for losses that arise during the contract period, stating “we are aware of no Texas authority that provides that the termination of agreements automatically applies retroactively to extinguish vested rights.” Millennium Petrochemicals, Inc. v. Brown & Root Holdings, Inc., 390 F.3d 336 (5th Cir. 2004) (quoting Sid Richardson Carbon & Gasoline Co. v. Interenergy Resources, Ltd., 99 F.3d 746, 754 (5th Cir. 1996). Other circuits have applied the same principle under the laws of other states. See e.g., Premier Corp. v. Economic Research Analysts, Inc., 578 F.2d 551, 553–54 (4^th Cir.1978) (expiration of a brokerage contract did not discharge a broker’s indemnity obligation for illegal sales made prior to expiration); Standard Oil Co. of Calif. v. Perkins, 347 F.2d 379, 383–84 (9th Cir.1965) (prior vested contractual rights may be extinguished only if parties intended to do so under subsequent contract).

• “Substantive” vs. “Structural” Provisions.

Several courts across the U.S. have applied this concept to hold that dispute-related provisions survive termination. For example, several courts have held that parties who agree to arbitrate or to litigate in a specific forum are bound to those agreements after termination when “they are otherwise applicable to the disputed issue and the parties have not agreed otherwise.” U.S. Smoke & Fire Curtain, LLC v. Bradley Lomas Electrolok, Ltd., 612 Fed.Appx. 671, 672-73 (4th Cir. 2015). The logic is that if structural provisions are meant to govern disputes about the contract, they should apply to all such disputes without regard to the conclusion of the contract’s performance obligations. However, contracting parties should not assume that the courts will apply this logic ubiquitously. For example, Texas courts don’t appear to have applied this framework, although they do hold that arbitration clauses survive contract termination.[i]

• “Primary” vs. “Secondary” Obligations

In some common law jurisdictions outside of the United States, courts hold that “primary” obligations of a contract, such as performance obligations, are unenforceable when a contract terminates. And in contrast, “secondary” obligations, such as those created by procedural provisions, are enforceable after termination.

The logic supporting the final two approaches appears quite similar. Most often, “primary” obligations would be “substantive” obligations. However, there are at least a few examples of clauses that might arguably be “secondary,” but not “structural” or “procedural.”

Grey Areas Requiring Caution.

Despite the above frameworks, whether a given clause will survive a contract is not always clear. Some contractual terms may not fit squarely into any one of the above categories. Further, in some cases there may be good reasons to continue an obligation beyond the life of the contract even though it might arguably not be structural, procedural, or secondary.

Examples of contract terms concerning which survivability may be contested include representations and warranties and confidentiality (or non-disclosure) obligations. When contracting parties clearly express whether an obligation will survive, courts will generally enforce their intent, but fate would not have such clarity in all cases.

Frequently, contract provisions are silent on survivability. And courts are sometimes called on to determine whether a given clause survived termination. To make that determination, courts will first look to textual (or other lawful) analyses to construe the parties’ intent. In the face of silence on an issue involving post-contractual survivability (depending on applicable law), a court could enforce the provision based on a “construction” of the parties’ intent or through an implied term based on “gap-filling” doctrines. Alternatively, a court could conclude that the obligation became unenforceable upon termination. Note that contract interpretation can be complex and the relevant rules can vary from state to state.

Similarly, contracts frequently stipulate that certain provisions survive termination without specifying a survival period. Sometimes, they stipulate survival “indefinitely.” This begs the question of whether an obligation can remain binding indefinitely, or even past the applicable statute of limitations. In a Delaware case addressing the survivability of representations and warranties, a court stated that surviving obligations would be deemed to terminate upon the expiration of the statute of limitations on the underlying contract. GRT v. Marathon GTF Technology, C.A. No. 5571-CS (Del. Ch. Jul. 11, 2011). That court reasoned this is required by “the public policy underlying statutes of limitations in general, and the widespread refusal of courts to permit parties to extend the limitations period.” Id.

Conclusion

In closing, if contracting parties want a contractual obligation to survive termination, the best practice is to stipulate an applicable survival period. That said, doing so is more crucial with some types of clauses than others, but that dynamic will vary between jurisdictions. Finally, if it is important for parties that a particular obligation survives the statute of limitations applicable to a contract, it may be wise to consider implementing that obligation as an entirely separate contract.

[i] See Cleveland Constr., Inc. v. Levco Constr, Inc., 359 S.W.3d 843, 854 (Tex. App.-Houston [1st Dist.] 2012, pet. dism’d); Henry v. Gonzalez, 18 S.W.3d 684, 690 (Tex.App.-San Antonio 2000, pet. dism’d); In re Koch Indus., Inc., 49 S.W.3d 439, 445 (Tex.App.-San Antonio 2001, orig. proceeding); Dallas Cardiology Assocs., P.A. v. Mallick, 978 S.W.2d 209, 213 (Tex.App.-Texarkana 1998, pet. denied).