Thinking Out Loud About Contract Survival – Please Contribute

August 12th, 2009

I have recently come across a number of contracts with extensive survival provisions.  For the non lawyer-wonks out there, a survival clause says that when the contract is terminated certain provisions will continue to govern the parties’ behavior toward one another.

There is a part of me that hates the concept of these provisions- they turn the whole deal into a kind of roach motel that the parties can enter, but can’t fully leave for a long time.

The other part of me understands that survival clauses have value, but wants to find the right logic for using them.

Confidentiality – Yes
For example, parties to a deal may well learn a bunch of confidential information about one another.  Terminating the agreement might be used as a way to escape the need to keep that information confidential, so I commonly see language that says the parties will be required to keep information confidential for 3-5 years, and that the confidentiality language will continue to bind the parties after the agreement is terminated.

Indemnification – No
On the other side, I also see language that says one party’s indemnification obligations will continue after the deal ends.  Indemnification means that, in an agreement between A and B, if C sues both A and B because of something A did, then A will take charge of the litigation and cover all of B’s damages and legal costs.

I can certainly see why B might want this, but B is really saying there that it wants the ability to terminate the deal- ending A’s economic advantages- and still keep A on the hook for any downside issues that come up.  As lawyer for A, I push back on this idea.  If B wants out so be it, but B shouldn’t get to keep the economic advantages and push all the risk onto A.

In Search of a Rule
Is there a principle goverining which provisions should survive termination of an agreement?  I’ m not sure and this is the thinking out loud part.  Here are my ideas to date:

-> Leverage wins.  If one side to a deal has significantly greater negotiating leverage then it can probably dictate the type of risk-allocation point above.

-> When the parties are in equal positions, my idea is that “passive” activities can/should survive, but the parties should not be required to affirmatively do anything.  E.g. confidentiality doesn’t require anyone to step forward and take action, so it can survive.  Indemnity is an active obligation by one side to litigate and pay costs.  It should not survive.

Seeing this written down, I am not sure if this is the right way to think about it.  E.g. the parties may negotiate limitations of liability in a deal (e.g. in a dispute damages payable by A are limited to fees paid to A by B during the term of the deal).  Should one side be able to terminate the agreement and dump the liability cap or should both sides be held to the negotiated terms forever?

Comments Requested
Is there a rule here or is every deal a unique set of circumstances?  I’d love to hear your thoughts in the comments.

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  • I don't know that there is a rule. In fact, after years of thinking about it, the only rule is that there isn't one. Some folks want to have everything survive… some want none. The wussy way out is to say that “those sections intended to survive” will survive – this really leaves it to the courts to decide if something survives.

    But I also don't think you can set some hard and fast rule. Indemnification obligations, which you believe should end upon termination, aren't always that simple. Just because you no longer use something that is now the subject of an infringement claim is not a way to avoid liability. So IP indemnification obligations SHOULD be ongoing – to cover the time period of use of the IP. The same is true for general indemnity – there's a statute of limitations for most tort claims, but I don't want to lose indemnification protection simply because I'm no longer using that painting contractor whose employee was hurt through their own behavior while on the job at my site (or, better yet, lose protection from claims from my own employees that one of the contractor's employees caused them harm).

    So it's not just about economic advantage going forward – it's about risk created as a result of the contractual relationship… and sometimes, those risks continue post termination (such as with confidentiality) – so the protections offered should continue as well.

  • There's an important distinction that maybe I should have made in the original post- whether the agreement is affirmatively terminated or whether the work simply wound down.

    In your example the contractor's employee is hurt and sues you and the contractor. You aren't using the contractor anymore, so assuming he agreed to indemnify you, does that indemnity still apply?

    If the agreement was affirmatively terminated, I say yes, the indemnity should go away. If the work simply wound up, then no.

    I see your point, though. It may take the employee 1.5 years to file a claim based on an injury prior to the termination date. Assuming you terminated him halfway through the job for screwing it up, why should the indemnity end at that point? You didn't have anything to do with the injury either way.

    My answer is that you would still have other remedies, but the affirmative right to indemnify should go with the contract.

    Great comment, Jeff.

  • Thanks Jay.

    I'm still not sure that the distinction you point out really changes the analysis. Even in a situation where I need to affirmatively terminate (say, for cause), then why would I want the indemnification to go away? And again, with IP, termination is irrelevant… use is all that mattered.

    Maybe I would grant you an exception to survival for warranties on products/services received to date with a contract terminated early. But even then, I'm not sure.

    The result is that survivability is 100% situational. The result is that we keep some things in a gray area because we can't even envision every conceivable scenario.

  • One of my mentors, the late IP legend Tom Arnold, was of the view that a contract per se cannot 'terminate' — it's a(n) historical fact — and so only specific rights and obligations can terminate.

  • Good topic, Jay. As a patent attorney, I don't generate many contracts beyond the occasional non-disclosure agreement, though when I was recently reviewing a proposed contract from a potential service provider for my firm, I was bothered by a lack of clarity in the survivability of the confidentiality provisions after the work was completed. In this context, continued confidentiality was essential, so I required addition of a couple lines to firm up the survivability of the confidentiality obligations.

    Interesting that this is one area of law that we all need to think about regardless of our specialty–we all enter into contracts. You also discussed indemnification–are there other lynchpin issues that are commonly a focus in terms of survivability? I wonder if there are any good journal articles or treatise sections on the subject. In any case, thanks for raising an interesting topic.

  • That is a very interesting point of view. A relationship can never truly end- just slowly fade away. Food for thought

  • I see reps & warranties survive sometimes. Also choice of law & arbitration provisions

  • helpful comments. Thanks

  • jasonmarkanderman

    I usually have the following sections survive: “Disclaimer”, “Limitation of Liability”, “Indemnification”, “Survival”, “Publicity” and “General.” The Indemnification provision usually is drafted so that the responsibility only applies to third party claims triggered by performance under the deal during the term, so I think its survival is appropriate. The same performance issue applies to publicity and limitation of liability.

    As to confidentiality, I'm uncomfortable with the blanket 3-5 year approach that is so often used. It's quite rare that the contracting parties take the time to figure out whether or not they think that the confidential information will still be valuable enough to need to remain confidential in 3-5 years, and hardly anyone ever actually tracks this over the life span of that time frame. I think the better approach is to just require all tangible confidential information to be returned, and require that you never disclose anything in your memory that doesn't fall within the typical exceptions (i.e., public domain, independent creation, third party source disclosure).

    Of course, this analysis begs an additional question. If no one cares enough about their confidential information to track nondisclosure compliance, do we really need most of these confidentiality agreements?

  • very helpful comments. Thanks Jason

  • jasonmarkanderman

    Thanks, Jay.

  • KenAdams

    Jay: I find it helpful to distinguish the various ways in which survival rears its head in contracts. That's something I considered in the following blog post: Ken

  • Excellent post, Ken. Very instructive, thanks

  • Excellent post, Ken. Very instructive, thanks