A reader recently sent me the following email:
I’d appreciate your comments on an issue that’s been plaguing me off and on. I often see contracts with a fixed term. This works for a lease or license or a funding agreement where government agrees to provide funding to an entity for a specific period. At the end of that period, the obligations simply end as neither party has any continuing obligations. Sometimes there will be some wrap-up obligations such as adjusting for additional rent after the lease term has ended.
But I sometimes wonder whether it is necessary to describe every contract as being for a term. For example, if government is funding a project. There will be deadlines to be met and if they aren’t met, then government is not obliged to fund the project. But do you think it’s necessary to prescribe a term for every agreement?
If there is a term and one party is entitled to terminate the agreement, it may be necessary to provide that certain obligations survive the termination. This often leads to a lengthy clause about which clauses will survive.
I suppose there is some beauty to everything having a term and we shouldn’t leave contracts lying about that no longer have any obligations to be fulfilled. But it seems to me that the term is sometimes artificial.
This reader’s inquiry gives me the opportunity to consider the notion of superfluous provisions. Not provisions that are inherently dubious, such as “successors and assigns” provisions. And not provisions that you can do without unless you feel the urge to throw in the kitchen sink, such as provisions regarding the effect of headings or provisions stating that counterpart signatures are acceptable. Rather, I have in mind provisions that, while generally helpful, are often found in contexts where they serve no useful function.
First, let’s consider provisions that specify the term (meaning “duration”) of a contract.
It’s usually essential to give a fixed term to a contract that imposes ongoing obligations or grants ongoing rights, such as a license agreement, a shareholders agreement, a supply agreement, and any number of other kinds of agreements.
Even if any ongoing obligations are nominal, I always specify a term in such agreements, unless the parties can readily terminate. For example, I’d always want to give a term to a confidentiality agreement. For one thing, it would be a nuisance to have to forevermore include in any list of contracts to which one is party all no-term confidentiality agreements that one ever signed. And such agreements could conceivably come back to haunt one in unexpected ways.
But when instead of providing for ongoing rights or obligations an agreement serves to accomplish an act, as in the case of a securities purchase agreement, there’s no need to give the agreement a term. If such an agreement provides for the act in question to take place at a subsequent closing, the agreement would presumably specify a “drop dead date,” but that’s different from a term. The agreement might also provide for indemnification, subject to explicit time limitations, but one wouldn’t normally think of that as constituting a term either.
(Note that you don’t need to provide that provisions that address indemnification, dispute resolution, and similar matters survive termination. See this blog post.)
You also render a term provision superfluous if you specify a fixed term—say five years—yet allow the parties to terminate without cause on giving advance notice. (The provision at issue in the dispute between Rogers and Aliant was just such a provision, as I pointed out in this blog post.) It would be more sensible to give the contract a fixed term, with any party being able to prevent an extension term from kicking in, or to give it an indefinite term.
Another superfluous provision that comes to mind is a “force majeure” provision that is included in an agreement that either party can terminate without cause on very short notice or no notice. A force majeure provision states in essence that no party will be liable for breach of any of its obligations under the agreement if that breach was due to causes beyond its control. Force majeure provisions are intended to provide relief to a party that’s locked into a relationship with another but through no fault of its own finds itself temporarily—it hopes—unable to perform its obligations. That scenario obviously doesn’t apply if the contract allows the parties to terminate without cause—the party that’s indisposed could end the awkwardness by simply terminating.
I feel the same way about no-assignment provisions in an agreement that a party can quickly and easily get out of. You’re party to an agreement with Acme and you find out that Acme has assigned to Forces of Darkness, Inc. all its rights under the contract. And the contract doesn’t contain a no-assignment provision. So what?, you say. The contract allows you to terminate on giving ten days’ notice to Acme, and that’s what you do.
I’m sure that one could come up with plenty of other examples of similarly superfluous provisions.
Yes! I’ve drafted very stripped agreements where the key provision is a flexible termination for convenience. I think termination for convenience clauses can neutralize large chunks of form documents. However, I can have difficulty selling this drafting approach because the other side hasn’t internalized this philosophy. Eric.
You suggest that absent easy termination, you would always include a term in a confidentiality agreement, but it seems to me providing a term in a confidentiality agreement illustrates the reader’s point (i.e. that term is sometimes superfluous). In my experience, confidentiality agreements almost always have an easy out for the disclosing party, which goes to one of your points. But, even putting aside the easy termination argument, it seems to me a term in a confidentiality agreement is often superfluous. As I see it, confidentiality agreements serve two purposes: (1) to impose an obligation of confidentiality on certain information for a defined set of individuals and (2) to limit the use of the confidential information to a specified purpose. In my experience, the term provision in a confidentiality agreement takes one of three forms: (1) the term expires and the disclosing party no longer cares whether the information is held in confidence (rare, at least in my experience); (2) the term expires and the agreement imposes an obligation on the recipient to return the confidential information or destroy it (ok, but this would seem to be easier to manage from a practical standpoint by requiring that the disclosing party notify the recipient that it wishes to terminate the agreement and having the confidential material returned or destroyed at that point); or (3) the term expires, but the agreement provides that the confidentiality obligation survives indefinitely. I see this last one frequently, and I’m always perplexed by it. Why have a term if the fundamental obligation of the agreement, confidentiality, survives indefinitely. What is gained by having the agreement expire under this condition? If anything, I think it causes problems in that you’ve removed some of the certainty that other parts of the agreement provide (e.g. who can have access to the confidential information and for what purpose it may be used).
P.S. Thanks for blogging. I’ve enjoyed your analysis and others’ comments on some tough and puzzling issues.
Travis: Thank you for prompting me to clarify something. My reference to a term for a confidentiality agreement was sloppy. My preferred arrangement is to allow either party to terminate whenever it wants to, but to have the obligation to keep the information confidential continue for some specified time. My basic point remains the same, namely that I wouldn’t want to have the obligation to keep information confidential continue indefinitely.
One could alternatively require the receiving party to keep any piece of information confidential for some specified time after it received that information, but I’ve always thought that asking people to keep track of exactly when they received a piece of information would be to invite chaos.
Ken
Terms and confidentiality agreements are frequently not superfluous. Indeed, depending on the circumstance, they may in fact be required.
There is at least one scenario (which is often found in the others) in which the term /must/ be perpetual: trade secrets (at least where perpetual means that the information still constitutes a trade secret). Permitting easy termination or a fixed term may actually cause the TS owner to lose those rights (arguably, after “expiration/termination” they are no longer subject to restriction on use therefore not a TS). It’s probably malpractice to put a fixed term on TS information.
In the employment context, a fixed (of sorts) term may actually be necessary for public policy reasons. Usually, something like two years after employment ceases.
A final scenario occurs frequently for the reason Ken brings up. In ordinary circumstances it’s difficult to manage long term commitments of confidentiality (though, that’s part of the bargain, I suppose). Thus, where the engagement is part of a “shorter” relationship (e.g. like to evaluate some potential bigger relationship), recipients want a fixed term to limit the the information qualifying as confidential information. This is then coupled with a term for which the information is then kept secret at the end of the relationship. This works for information like looking at the books of a company you wish to acquire where the value diminishes quickly with time.
I can suggest one reason why superfluous terms often remain in deals. I will often draft form agreements that I know will only be the basis for negotiation. Let’s say it is a supplier agreement. In there, I will include an easy, cheap provision allowing me to terminate the agreement for convenience. But I don’t know, when drafting that agreement, exactly how it is going to be used. I’m concerned that it will be a situation where a clause alowing termination for convenience is not something we can get, or where it is a meaningless remedy because we are practically wedded to the supplier. So, I throw in the force majeure clause. And the non-assignment clause. And so on. Now I have protected my fall-back positions. Since very few people object to the force majeure clause, that protection comes at little cost.
This obviously does not apply to situations were you uniformly apply your own form. But it does in virtually all negotiated situations.