This article is written by Pratha Kotecha who is pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.
“The default rule is that a party’s rights and obligations under a given contract only last as long as the contract.” Contractual obligations can be defined as the legal responsibilities of each party involved in the contractual agreement. In an agreement or a contract, both parties will exchange an item or service of value, but certain expectations must be met in order for the exchange to be properly completed. Such expectations will be defined by the terms of the contract. A contractual agreement has a starting point and upon its conclusion, it terminates either as a consequence of its natural and foreseen end or is ended prematurely upon the happening of a certain specific event. At first sight, it appears to be clear-cut, however, the boundaries of a contract are not so straightforward in actual practice. Especially when one thinks about international contracts, demarcation lines are not so easy to establish.
It is not simple to pinpoint the exact beginning of a contractual agreement, and similarly, it is often not entirely correct to conclude that, after the termination of a contract, all contractual relationships between the parties come to an end. On the flip side, there are certain duties and obligations which survive, or even arise, after the contract has terminated, known as post-contractual obligations. These post-contractual obligations will extend into the future after the primary obligations of an agreement have been performed and fulfilled or it might even cease to exist. This is the reason they are sometimes referred to as post-contractual situations to signify the difference with the obligations, which have been terminated or have been declared non-existent for other reasons.
The legislators and literature on contract law had the tendency to ignore the post-contractual phase, maybe because of the excessive and extensive attention paid towards the pre-contractual phase. And yet the topic is of particular relevance for international contract drafters.
The aim of this article is to analyze and attempt to arrive at an overview of the different post-contractual obligations, what are the consequences of their existence, and the problems they pose. The article sets out several general principles that contracting parties should consider when evaluating how to address the difficulties of post-performance posed by the wide-ranging effects of various situations.
The expression ‘post-contractual obligations or clauses’ is not, strictly speaking, accurate. In French, ‘clauses survivant au contrat’, translated as ‘surviving clauses’, is a better expression as it conveys the fact that the contract remains the source for all the obligations, even after it has terminated or ended. However, the expression ‘post-contractual clauses, obligations, or duties, as well as ‘post-termination clauses, obligations, or duties, has gained international recognition and is now commonly used.
Whether the contract has come to an end through performance, avoidance, or termination, whether with a retroactive or a prospective effect, the question of surviving obligations or clauses may arise. A list of obligations that might remain after the contract has been terminated is wide and possibly non-exhaustive. However, it is possible to group those obligations under two distinct categories.
Firstly, there are obligations that arise out of past events and will usually require a one-time performance i.e. the obligations that wind up the past. The existence of post-contractual obligations will be particularly noticeable in long-term contractual relationships, as opposed to contracts that require a one-time performance from both parties. In a long-term contractual relationship, there will be leftovers to deal with. For example, a distributor might have products of a manufacturer left in its stock. What happens to those products after the expiration of a distribution agreement? The agreement will usually contain a clause dealing with such matters, by including a clause obliging the manufacturer to repurchase its products or allowing the distributor to sell the remaining units.
In addition to this first group of post-contractual obligations, there are obligations that will provide for certain future legally binding arrangements of a more continuous nature. It might so happen that they will take the form of obligations or duties that already existed from the commencement of the contract, but it may also be possible that there might be completely new obligations, coming into effect with the termination of principal or the primary obligations.
One of the important examples in this regard is the non-compete clause. Many commercial contracts, as well as employment contracts, have a clause on a post-contractual non-compete obligation. It is not surprising that a seller of a certain commercial will be bound not to compete with his buyer. In the case of the sale of goods, where goods are manufactured by a manufacturer on the request of the buyer and according to his specifications, it is understandable that after the sale of goods, the buyer will be determined to make sure the manufacturer does not engage in a business with buyer’s competitors.
It is, of course, unreasonable to prevent the manufacturer from conducting business with buyer’s competitors indefinitely, but a certain period of time, depending on the market, goods, quantity of purchase, etc. can be provided for extending obligations of the manufacturer in the future. As regards competition, several other descendant clauses which impose post-contractual obligations are of high prominences, such as a non-solicitation clause, which will impose a duty not to approach current or potential customers of a previous employer; or a non-dealing clause will prevent one from establishing a business relationship with such customers even if they approach a person, bound by the non-dealing clause, themselves. Also, a non-poaching clause will forbid contacting and trying to recruit other staff of a previous employer. These obligations are often seen in a combination, as they all intend to prevent an individual from using contacts and information obtained from an ex-employer.
Example of Non-competition clause
- At no time during the life or after the termination of this contract may the agent use any confidential information obtained in connection with the performance of the contract for any purpose other than to solicit customers for the products.
- Upon termination of this contract, and for as long as principal is paying commission under this contract or for twelve (12) months after termination, whichever is longer, the agent shall not act in the territory for the account of any other person or entity that offers products identical or similar to any one or more of the products, or directly sell such products to customers in the territory.
Another important example of post-contractual obligations is the confidentiality obligation. Confidentiality clauses are particularly relevant in labor, employment, technology, and research, specifically where information of high value is shared and transferred between the parties. The main aim of confidentiality clauses is to prevent and restrict third parties from obtaining valuable and secret information. Such secret information includes information on products and their characteristics, on technology, market research, price lists, customer lists, and such other valuable information, which might allow successful exploitation of business. During the term of the contract, it will normally be in the interest of an enterprise to preserve and safeguard the secrecy of all the relevant information. For this reason, the employees will be bound by confidentiality clauses in their contracts. However, after the termination of an employment contract, it would be imprudent for an employer to free his previous employee from any confidentiality obligation, due to apparent risks of being exposed to its competitors.
The confidentiality obligations, for this reason, will normally be extended in time and that will be provided in the employment agreement. The scope and the period of such obligations will depend on the position held by the employee in question. The post-contractual confidentiality obligations, as well as the non-compete or other relevant obligations, will be particularly restrictive for senior employees as they will likely be in control of valuable confidential information, and have a closer relationship with important customers, and can even influence other staff members.
Example for the confidentiality clause
The parties acknowledge that the existence and the terms of this agreement and any oral or written information exchanged between the parties in connection with the preparation and performance of this agreement is regarded as confidential information. Each party shall maintain the confidentiality of all such confidential information, and without obtaining the written consent of the other party, it shall not disclose any relevant confidential information to any third parties, except for the information that:
- is or will be in the public domain (other than through the receiving party’s unauthorized disclosure);
- is under the obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or other government authorities; or
- is required to be disclosed by any party to its shareholders, investors, legal counsels, or financial advisors regarding the transaction contemplated hereunder, provided that such shareholders, investors, legal counsels, or financial advisors shall be bound by the confidentiality obligations similar to those set forth in this section. Disclosure of any confidential information by the staff members or agencies hired by any party shall be deemed disclosure of such confidential information by such party, which party shall be held liable for breach of this agreement. This section shall survive the termination of this agreement for any reason.
Another example of post-contractual obligation which extends into the future is that of guarantee. The effect of such an obligation will depend on the good or service that the guarantee is provided for. Some other examples that can be added under this category of post-contractual obligations include obligations in technology transfer agreements to communicate improvements that parties develop during the exploitation of technology whether before or after the principal obligations have been terminated, as well as a right of first refusal for a future contract.
The post-contractual obligations above-mentioned are just a few of the many possible ones. In addition to the great variety of different types of obligations, there is an outstanding number of variations on each specific type. Notwithstanding a great diversification of obligations, there are problems that are more or less common to them all.
Issues to consider in post-contractual obligations
When devising rules for the post-contractual phase, the parties may wish to consider a number of issues. The identification of which clauses should survive and which obligations should arise after termination. Firstly, the clauses on the settlement of disputes, such as applicable law, forum, and arbitration clauses, then clause on confidentiality and noncompetition, on payment of interest, in relation with the intellectual property rights are also considered. Secondly, the clauses relating to the winding up of the contractual relationship, which includes the return of the pending stock, or of documents or advertising materials, of documents containing confidential information, the payment of indemnities, the duty to maintain spare parts available, etc. In a complex relationship, as for example a contractual joint venture, an important part of the contract will be devoted to the winding-up phase.
On listing down the surviving clauses and obligations by the parties, the next question which needs focus is whether the surviving provisions are binding on one party or more (e.g. certain duties may be imposed only on the defaulting party). And the duration as to how long do the provisions survive (fixing a certain time limit may prove difficult to determine and negotiate). The question as to who bears the cost of restitution or other post-contractual duties and concerns regarding the remedies in case of breach of a surviving duty. Because termination of the contract, the most drastic of all remedies, is no longer available in the past-contractual phase, other remedies will have to be considered, for example, specific performance of the breached duty or liquidated damages. All these issues play a role in the determination of the price and of the general equilibrium of performances that are bargained for by the parties, which may or may not be subject to review by a tribunal depending on the applicable law.
Analysis of post-contractual obligations
One of the major challenges regarding the issue of post-contractual obligations is whether such obligations exist implicitly or an express clause is absolutely necessary. Theoretically, there are no requirements as to the form of the contract to bind the parties, but in practice, it is advisable that the parties put in writing various relevant clauses as required and possible, in order to make things clearer and stress-free in the future.
Therefore, a prudent drafter will without a doubt put clauses on post-contractual obligations in a contract to make sure that in the future there are no doubts or disagreements regarding their existence. However, what if that is not done. What if there is no such clause in the contract? Is it right to conclude that a post-contractual obligation might still exist? In such a case, it is necessary to remember the general principles of contract interpretation in relation to certain cases which are not covered by a contract, will be taken from the law governing the contract, or from the law of the forum. Therefore, it may so happen that in the absence of a specific provision in the agreement itself, national laws will impose certain post-contractual obligations. For instance, in many jurisdictions, the laws governing guarantees against defective goods are provided. It might also be possible that an obligation will be established in the case law if the national legislator does not expressly deal with the point. Consequently, a lack of an express provision in an agreement will not necessarily mean that a certain obligation will not exist. However, if an obligation is determined and governed by national law, then there is a risk that some effects and solutions might not be precisely what parties would have desired. For this reason, as for any other aspects of a contract, the parties must carefully consider post-contractual aspects in light of the law applicable to the contract.
Given the several possible types of contracts and post-contractual obligations, the effects of contracts after they have been terminated may be more or less extensive and certainly distinguished. Post-contractual confidentiality will limit the competitive position of parties to some extent, but this will also hinder access to new business or employment opportunities much less than in the case of the post-contractual non-compete. The jurisdictions of several countries have proved to be quite approachable of post-contractual confidentiality obligations. This is because it is important that certain information is protected from disclosure to third parties. The concept is deeply embedded in the laws against unfair competition and also in intellectual property laws. Therefore, it is normal for countries tending to advocate post-contractual obligations of such kind. When drafting post-contractual clauses, the parties must be visionary and should remember that there definitely is a life after the end of the contract. Long live the contract!
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