“Non-Breaching Party”

Reader @mpietruczak told me about this newsletter by Duane Morris. It’s about the decision of the U.S. District Court for the Northern District of California in Powertech Tech. v. Tessera, Inc. (PDF copy here). The court interpreted the phrase “non-breaching party” in a way that’s inconsistent with how I’ve used it.

The issue was whether under the contract at issue one party could terminate for breach by the other party even though the first party was itself in breach.

Here’s the termination provision:

Termination for Breach. Either party may terminate this Agreement due to the other party’s breach of this Agreement, such as failure to perform its duties, obligations, or responsibilities herein (including, without limitation, failure to pay royalties and provide reports as set forth herein). The parties agree that such breach will cause substantial damages to the party not in breach. Therefore, the parties agree to work together to mitigate the effect of any such breach; however, the non-breaching party may terminate this Agreement if such breach is not cured or sufficiently mitigated (to the non-breaching party’s satisfaction) within sixty (60) days of notice thereof.

Here’s what the court said in holding that the party seeking to terminate had no right to do so:

The termination clause refers to a “breaching party” and a “non-breaching party” in every sentence after the first: “The parties agree that such breach will cause substantial damages to the party not in breach . . . the non-breaching party may terminate this Agreement if such breach is not cured . . . to the non-breaching party’s satisfaction [].” Id. Without reading the first sentence out of context, the clause requires the party seeking to terminate for the other party’s purported breach to be substantially in compliance with its own obligations first.

But I recall having used “breaching party” and “non-breaching party” to convey a different meaning. The way I’ve used them, they’re equivalent to “Party A” and “Party B,” or “the transferring party” and “the non-transferring party.” In other words, I’ve used “non-breaching party” simply to distinguish that party from the other party; it doesn’t refer to that party’s status under the contract. I suspect that other drafters use “non-breaching party” in the same way.

So I suggest that whether the party in question could terminate should have been decided based simply on contract law. Nothing in the contract itself precluded termination.

I’m not yet prepared to say whether I’m inclined to recommend that you adjust your drafting to avoid having another court follow in the footsteps of the Powertech court in interpreting “non-breaching party.” But one option would be to use instead “the party claiming breach.”

[Updated April 7, 2014: As Chris points out in his comment, “the other party” would be even simpler. But I have at the back of my mind the notion that there’s a context where that wouldn’t work. I’ll revisit this at some point.]

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.