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.