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