Surviving Contract Termination

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As governments banned large group gatherings, live performances were an early casualty of the COVID-19 pandemic. Already living “hand-to-mouth” and dependent upon donations, orchestra leaders quickly feared that many or even most orchestras might not survive the pandemic.

By June, British conductors Sir Simon Rattle and Sir Mark Elder warned that “There’s a real possibility of a devastated landscape on the other side of this; orchestras may not survive, and if they do, they may face insuperable obstacles to remain solvent in our new reality.” In early September, famed composer Andrew Lloyd Webber warned that due to the pandemic the arts were at the “point of no return” as he described his efforts to reopen theaters safely.

But Rattle, music director of the London Symphony, didn’t give up. And in mid-September, the London Symphony announced that it would be able to safely return to live music rehearsals and performances with the help of a rapid COVID-19 test. The “COVID Nudge,” already being used in some London hospitals, would be administered to musicians before rehearsals and performances to enable them to safely work together to create live broadcast performances.

The Annapolis Symphony in Maryland started its season in late September with live-streamed concerts on a subscription basis. The orchestra changed its program to eliminate wind instruments, which cannot be played while wearing a mask and which, when played, could send droplets blown through the instrument several yards away. The orchestra also moved its performance venue from Annapolis to the large stage at Strathmore Music Center in Montgomery County, where musicians could remain socially distanced while their performance was live-streamed to subscribers.

The Berlin Philharmonic settled on yet another option to allow live performances, albeit in an empty concert hall. The philharmonic allowed wind players back on stage, provided they remain five meters (approximately 16-1/2 feet) apart because air forcefully expelled from their instruments could spread coronavirus. Other performers sat two meters apart. And only 15 performers were allowed on the stage at once.

These orchestras are surviving because their leaders found creative ways to address challenges and to evolve. Other arts organizations that survive will do so because of their creativity and willingness to change. And sadly, perhaps arts organizations that lack the ability or refuse to be creative and to adapt and evolve to survive, shouldn’t survive anyway.

In The Merger Doctrine and Surviving the Closing and in Surviving Mahler Symphonies and Contract Terminations, I discussed a different type of survival–survival of terms in a real estate purchase agreement after delivery of a deed. This article discusses how parties and their attorneys should decide which contract clauses should, and which should not, survive the termination of the contract.

What is a Survival Clause?

Usually, when a contract ends, the parties’ obligations to each other end too. But sometimes parties to a contract want to end a contractual relationship but have some of their contractual obligations continue after the relationship is over. When that happens, we say those obligations “survive” the termination of the contract.

Where You Can Find Survival Language in a Contract

Commonly, attorneys add “this section shall survive the closing or termination of this agreement” at the end of every section which the parties want to survive. Adding survival language as the need appears makes for easier contract drafting, since the parties will be thinking about the post-closing nature of the obligation when writing it. However, this method can also make it more difficult for parties easily to verify their post-termination obligations.

That’s why I frequently prefer to put the “survival” information in one place. That can be in a general section at the end of the contract, which references the sections which survive contract termination. That section also can include survival conditions, such as those listed below.

The Process for Determining What Provisions Survive

There are two main ways attorneys address survival: by including survival language in each section that survives or by having a single section that lists the sections which survive. Although I might use either method depending on the contract, for lengthy contracts, I prefer to put all survival language in a single section. That section not only lists which provisions survive termination, but it also can include survival conditions, such as how long the provision survives.

Regardless of which method is used, the attorney preparing the contract and the parties must agree upon which provisions survive. There are contract terms that must, due to their nature, survive termination of the contract because they contemplate possible performance after contract termination. Other contract provisions don’t inherently need to survive, but the parties might agree that they will.

Indemnification provisions or post-closing proration adjustments in real estate purchase agreements are among the provisions that need to survive. For instance, without survival language, a party could allege that the post-closing adjustment couldn’t happen because the contract has been terminated and that clause didn’t survive.

When preparing a contract survival clause, I read the contract from the beginning and put each provision into one of three categories: must survive, shouldn’t survive, and “it depends on what the parties want.” When I complete my review, I include the “must survive” provisions in the survival section. It’s up to the parties whether the “it depends” provisions will survive contract termination.

Provisions that Should Survive Termination

Frequently, I come across contracts where the parties neglected to specify that a “must survive” provision survived termination of the agreement. Often, the parties agree on what they intended, move forward in good faith, and the issue never arises. But occasionally, a party uses that omission to justify their post-termination violation of those provisions. Therefore, any time a contract contains a post-termination obligation, the related contract provision should survive termination for the duration of the obligation.

Post-Termination Confidentiality, Non-Competition, or Non-Solicitation

For instance, many contracts include confidentiality, non-competition, or non-solicitation provisions that continue for a year or more after the contractual relationship ends. If those provisions don’t survive the closing, it may be difficult for the aggrieved party to enforce the provision post-termination. That’s because confidentiality-non-competition, and non-solicitation provisions sometimes can be remedied only by a court injunction ordering a party to stop violating the provision. Many courts won’t issue an injunction unless a party has a “clear legal right” to that remedy. The lack of survival language may prevent a finding that the aggrieved party has a clear legal right, since the contract may be far from clear.

Post-Termination Deliverables

Most real estate and other management agreements include post-termination requirements. For instance, the manager must return the owner’s financial records and other accounts. Any time there are post-termination obligations, the related contract provision should survive termination for the duration of the obligations.

Indemnification

Many contracts include indemnification language. If the indemnification language covers only breaches of the contract, a party might not want it to survive termination, since that would allow the other party to file a claim for breach of the terminated contract.

However, most indemnification provisions cover tort claims or allocate risk for third-party claims. Since a party might not become aware of these claims until after the contract termination, those indemnification provisions should survive termination. That way, a party faced with a claim months after contract termination still can pursue indemnification from the other party.

Also, sometimes, parties purchase contractual liability insurance that covers claims under indemnification provisions. Parties with this insurance may want the indemnification to continue post-termination because if the indemnification obligation ends when the contract terminates, any insurance coverage is likely to end.

Post-Termination Payments

A party that purchases goods or services usually must pay for the goods or services even though the contract is cancelled. Contracts selling businesses and sometimes, real estate, include a post-termination “earn-out” or other payment based upon the business or real estate’s financial performance after the sale. Any provision imposing post-termination financial obligations should survive contract termination.

Other Considerations

Although the London Symphony, Annapolis Symphony, and Berlin Philharmonic each sought to perform socially distanced, each found a different solution to the challenge. These differences reflect each orchestra’s unique funding, patron, and audience, as well as local requirements.

Although many contracts contain similar provisions, like orchestra strategies for performing during COVID-19, survival language isn’t one-size-fits-all. Each contract must meet the parties’ needs.

Some contracts may not have confidentiality or non-competition provisions. Or, they may not have post-closing deliverables. But they may have other, unique provisions that the parties want to survive contract termination. However, all parties should, while negotiating their contracts, evaluate where survival is necessary to accomplish their goals.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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