A hot-off-the-presses opinion of the U.S. District Court for the Western District of North Carolina, Tec Rep Servs. v. Dearborn Tool & Mfg., 2012 WL 171372 (W.D.N.C. Jan. 20, 2012), provides a useful opportunity to consider nuances in how you refer to termination.
Dearborn , the defendant, is in the machined-parts business. Tec Rep, the plaintiff, is an agency that handled sales, marketing, and engineering for some Dearborn accounts. The two accounts at issue in the dispute were the Borg Warner and Detroit Diesel accounts; this post relates to the Borg Warner contract.
A Tec Rep program manager named Russell Golden, who had previously worked for Borg Warner, was the main reason Dearborn hired Tec Rep to represent it on the Borg Warner account. When Golden stopped working for Tec Rep on January 31, 2010, the relationship between Dearborn and Tec Rep ended.
Here are the relevant provisions from an April 2005 agreement between Tec Rep and Dearborn regarding sales to Borg Warner:
[Automatic Termination Clause:] This agreement will automatically be terminated at the time that Russell Golden is no longer an employee or in any other way associated with Tec Rep Services without the requirement of a 90 day written notice. However, Tec Rep Services and Dearborn Tool & Mfg. may elect through an additional agreement to continue representation.
[Two-Year Clause:] It is further understood by both parties that in the event of termination of this agreement by either party, Tec Rep Services will be paid full commission on all orders from, or deliveries to, BorgWarner Turbo Systems which are substantially attributable in whole or in part to activities or services performed prior to the effective date of termination, regardless of the shipment and invoice date, for a period of 2 years (730 days) following the date of termination.
Tec Rep contended that under the Two-Year Clause, Dearborn was obligated to pay Tec Rep commissions for two years after the January 31, 2010 termination of the Borg Warner Agreement. Dearborn argued that the Two-Year Clause didn’t apply, as the Borg Warner Agreement automatically terminated when Golden ceased working for Tec Rep.
Here’s what the court had to say:
Dearborn’s argument is that when the Automatic Termination Clause and the Two Year Clause are read together, it becomes clear that the parties intended to exclude post-termination commissions in the event the contract terminated automatically upon Golden’s departure from Tec Rep. Dearborn contends that the Borg Warner Agreement provides two distinct methods of termination: 1) termination by either party, or 2) automatic termination. Whereas the Two Year Clause provides that Tec Rep will receive certain post-termination commissions if the contract terminates “by either party,” the Automatic Termination Clause, which states that the contract will automatically terminate if Russell Golden ceases working for Tec Rep, is silent on this issue. Dearborn argues that this indicates that the parties did not agree to the payment of post-termination commissions in this instance.
[I]t appears to the Court that Dearborn is obligated to pay certain post-termination commissions as a matter of law. It is evident from a plain reading of the contract that Tec Rep is entitled to receive commissions which are substantially attributable to services it performed prior to January 31, 2010 for a period of two years after the January 31, 2010 termination date. However, there is a genuine issue of material fact as to the amount of those commissions. It remains to be seen which commissions at issue were “substantially attributable in whole or in part to activities or services performed prior to the effective date of termination.”
Dearborn argues that if the post-termination obligation applies to any termination, regardless of how the termination was effectuated, the words “by either party” would become “meaningless, superfluous, unnecessary and without effect.” (Doc. No. 20 at 15). The Court disagrees. Reading the contract as a whole, the Borg Warner Agreement contemplates two methods of termination – “by either party” or “automatically” upon Golden’s departure. The “automatic” termination provision appears to the Court only to infer [sic] that if Golden ceased working for Tec Rep, termination would not need to be effectuated by either party – it would occur automatically. To adopt Dearborn’s strained reading of the contract language would be to ignore the entire Two Year Clause. As Dearborn notes, it is well-settled under North Carolina law that in construing a contract, “all parts of the writing and every word in it will, if possible, be given effect.”
I understand Dearborn’s argument, but I don’t understand the court’s attempt, in the final paragraph of the above extract, to refute it.
But as usual, I’m less interested in picking over the entrails of a contract dispute than in figuring out how the drafter could have avoided the dispute entirely.
If you say in a contract “termination of this agreement,” I suggest that a reasonable reader would conclude that you’re referring to termination by one or more parties and termination by operation of the contract without party action.
If you say “this agreement terminates,” that could be understood as applying only to termination by operation of the contract without party action. If that’s what you intend, it would be preferable to make that clear by referring to the one or more sections that provide for termination without party action.
If you say “this agreement is terminated,” that could be understood as applying only to termination by one or more parties. If that’s what you intend, I recommend making that clearer by using the active voice (“either party terminates this agreement”) rather than the passive voice with missing by-agent. You might also want to to cite the appropriate one or more sections.
If you say, as in the contract at issue in Tec Rep Servs., “termination of this agreement by either party,” I find it hard to see how that could be construed as meaning anything other than … termination by either party, and not termination by operation of the contract. Maybe the lesson of Tec Rep Servs. is that here, too, you’d be better off citing the approriate one or more sections.
Oh, and for reasons explained in MSCD (starting at 12.362) and in this 2007 blog post on AdamsDrafting, I’m not a fan of using “expiration” to refer to termination by operation of the contract.
2 thoughts on “How to Express Termination”
There seems no obvious commercial reason why termination on Russell Golden’s departure would not trigger the Two-Year Clause. So, if the drafters of the agreement really intended the Two-Year Clause not to apply to automatic termination, I am sure that would have been much clearer. I suspect that “by either party” was added to make clear that the Two-Year Clause would apply following termination by Dearborn (as there could conceivably be some commercial logic in excluding it).
Still, the contract was not terminated “by either party”, so I agree that on a plain reading the Two-Year Clause should not have applied in this case. I therefore suspect the court was trying to find a way to follow what it felt was the real intention of the Agreement, and its unconvincing reasoning is a figleaf to cover its route to the answer it wanted.
So my conclusion is that expressing yourself clearly and directly is even more important if you want to do something unconventional, or where the reason for it is not obvious. Otherwise courts may assume that the “obvious” approach was what was intended by the parties, regardless of the drafting, and attempt to find a way to reach the more obvious result.