Common Contract Clauses: Part 4-Module 6 of 6

VI. Common Clauses: Part 4

Notice and Publicity Clauses

Notices. The parties to sophisticated and complex contracts that are to be performed over a substantial period of time have need to communicate with one another in a formal way, especially where a dispute has erupted or is on the verge of erupting. When and whether a party receives or timely receives some sort of notice from the other party can be extremely important.

          In Plantation Pipe Line Company v. Stonewall Ins. Co., 780 S.E.2d 501 (Ct. of App. Ga. 2015), the question was whether, as the notice provision in the contract between the parties required, the notice was “prompt.” Interestingly, the contract also stated: “Failure to so notify the company of any occurrence which at the time of its happening did not, in the opinion of the insured, appear to involve this policy but which, at a later date, appears to give rise to a claim hereunder shall not prejudice such claim provided notice is then given. For purposes of this policy, the word ‘opinion’ shall mean informed opinion or opinion formed on advice of counsel.”

When the insured notified the carrier of a possible claim, the carrier denied coverage on the basis that notice to the carrier of the possible exposure of the carrier had not been “prompt.” The insured had not given notice when the underlying issue first arose because it did not think that particular policy (among others it owned) would be implicated, but following subsequent events, the insured, in its view pursuant to the above contract language, notified the carrier. After a lengthy discussion of the issue and all of its tributaries, the court ruled that the insured, for a variety of reasons, had not given prompt notice to the carrier and, therefore, upheld the carrier’s denial of liability. A vigorous dissent was filed.

Sample notices clause: The parties shall give all notices between the parties in writing by (i) personal delivery, (ii) a nationally-recognized, next-day courier service, (iii) first-class certified mail, postage prepaid, (iv) fax or (v) electronic mail to the other party’s address as specified in this Agreement or as specified by the other party as that party’s address for purposes of this section. A notice given under this Agreement will be effective on the other party’s receipt of it, or if mailed, on the earlier of the other party’s receipt of it and the fifth business day after its mailing. 

          Publicity. Some companies want all the publicity they can get; others, not so much. One of the reasons for this is that well-known companies do not necessarily view themselves as benefitting from publicity about their contractual relationships with less well-known companies, while smaller companies often believe it is to their advantage to publicize the fact of their contractual relationships with household-name companies. As a result, contracts between large companies and smaller ones may contain a provision, insisted upon by the larger company, that requires, for example, that the smaller company engage in no publicity of any kind about the contractual relationship absent the express written consent of the larger company. Litigation on this subject is sparse.

Sample publicity clause: Neither party will make any press release or other public announcement regarding this Agreement without the other party’s express prior written consent, except as required under applicable law or by any governmental agency, in which case the party required to make the public disclosure shall use commercially reasonable efforts to obtain the approval of the other party as to the form, nature, and extent of the public announcement prior to issuing the press release or making the public announcement.

Relationships. Even though the context of a given contractual agreement should make it clear what the relationship is (and is not) between the parties, some companies want relationship language included for the avoidance of doubt on the subject. Mainly, this concerns whether a third party might construe the relationship between the parties to the contract to be, for instance, a joint venture such that a third party could sue both parties to the contract rather than being limited to suing the party with whom the third party principally has the dispute. Without such language, the issue of, say, whether a joint venture exists or not could be problematic. Where the contract expressly spells out that the relationship is not a joint venture, there exists a rebuttable presumption against the same.

          In Clapp v. Jmk/skewer, Inc., 484 N.E.2d 918 (Ct. of App. 3d Dist. Ill. 1985), the plaintiff, a person who suffered a personal injury in a mall store, was trying to reach the mall itself by asserting that the relationship between the mall and the store in the mall was a joint venture. Had the lease between the mall and the store contained the relationship language discussed above and presented by sample below, the plaintiff likely would not have asserted such a relationship. As it was, the court had no problem finding and ruling that the relationship was not one of joint venture because none of the essential characteristics of a joint venture was present. The court stated: “Ordinarily, whether or not a joint venture exists is a question for the trier of fact [citation omitted]. However, where the complaint and attached exhibits reveal that [the] necessary constituents of a joint venture cannot be alleged, defendant is entitled to a dismissal of the complaint.”

Sample relationships clause: Nothing contained in this Agreement shall be deemed to constitute either party a partner, joint venturer, or employee of the other party for any purpose.

Severability and Termination Clauses

          Severability. When a contract dispute results in litigation, the litigation usually involves only one or just a few provisions of the agreement. If the court invalidates one or more provisions of a contract, the question arises as to whether the court is invalidating the entire agreement or whether the court is tossing out certain provisions but leaving the remainder of the agreement intact. If the contract itself does not speak to this very situation, it can be open to interpretation, and there is a very big difference between a contract being voided altogether as opposed to losing only certain of its provisions. As is the case with the sample clause below, most such clauses speak to severability only where one or more provisions of the agreement have been held by a court to be, say, unenforceable. Once that determination has been made, the severability provision would apply.

          In Puleo v. Chase Bank USA, N.A., 605 F.3d 172 (3d Cir. 2010), the appellant was seeking severance of a provision of an arbitration agreement as being unconscionable, leaving the remainder of the agreement intact, but the court ruled that severability was not in play until and unless the court had first ruled the provision unenforceable, which it had not. The severability clause in question stated: “[I]f any portion of this Arbitration Agreement is deemed invalid or unenforceable, the remaining portions shall nevertheless remain in force.” The process, the court ruled, had two steps, the second step being unreachable without the first step (unenforceability, etc.) having been reached by the court, which it had not been.

Sample severability clause: Any invalid or unenforceable provision of this Agreement shall be deemed severed from this Agreement to the extent of its invalidity or unenforceability, and this Agreement shall be construed and enforced as if the Agreement did not contain that particular provision to the extent of its invalidity or unenforceability. If possible, any unenforceable provision within this Agreement will be modified to reflect the parties’ original intention.

          Termination. Whether one party to a contract can terminate the contract generally depends on events that are spelled out in the contract, such as a material breach by the other party remaining uncured for a certain period of time. Termination has all sorts of ramifications, so contract language concerning the circumstances under which termination can occur and how the termination will be handled can be quite useful. Termination also can occur for non-breach reasons if that is how the provision reads.

          In Data Foundry, Inc. v. Silicone Integration Initiative, Inc. (Ct. of App.—Austin 2010), the appellee had terminated its contract with the appellant for the provision of Internet services not for breach but based on its contractual right to terminate by a date certain. The appellant responded by indicating that the date certain had passed and that the contract therefore had been renewed for an additional full term of years. Based on that, the appellant invoked the “termination fee” provision of the contract (full payment of the remainder of the full term). While the court found that renewal indeed had occurred pre-termination, it also ruled that the termination fee, for a variety of reasons, was an unenforceable penalty.

Sample termination clause: Party A may terminate this Agreement for any reason and at any time during its term. Any payments due and owing party B by party A shall be paid upon termination. Either party may terminate this Agreement in the event the other party commits a material breach of this Agreement which remains uncured for 30 (thirty) days. Any payments due and owing from either party to the other at the time of termination for material breach shall be paid upon termination.

Third-Parties    

Third-Party Rights. Complex agreements may refer to entities that are not parties to the contract. Since these third-party entities do not have “privity of contract” with the actual parties to the contract, such entities should not necessarily have any rights in relation to the contract. However, since such contracts are complex, it may not be clear to a court or jury as to whether any third-party rights exist. For avoidance of doubt, boilerplate language often speaks to this potential issue. Of course, if there are to be any third-party rights under the contract, specific language should spell them out.

          In In re Publishers Consortium, Inc., 364 B.R. 854 (D. Conn. 2007), the question was one of payment priority. The contract was between a book distribution company and retail book sellers. The authors who supplied the books (and retained the copyrights thereto) were third-party beneficiaries of the distributor’s contracts with the retail book sellers. This relationship went on for years. Along the way, the distributor contracted with a bank for a revolving line of credit. That contract granted to the bank a security interest in the proceeds of the contracts between the distributor and the sellers. Later, another party in effect took over the distributor’s functions. That entity eventually defaulted on the bank line of credit, whereupon the bank filed suit asserting a first prior lien in all its assets including receivables from the book sellers. After proceedings, the bankruptcy court entered an order affirming the position asserted by the bank. The bankruptcy court’s ruling was appealed to federal district court and returned to the bankruptcy court on remand for a final determination of whether the authors or the bank would be preferred. The bankruptcy court, calling it a difficult and close question, ultimately ruled in favor of the bank and against the authors.

Sample third-party rights clause: This Agreement is made for the benefit of the parties and is not intended to benefit any third party or be enforceable by any third party. The rights of the parties to terminate, rescind, or agree to any amendment, waiver, variation or settlement under or relating to this Agreement are not subject to the consent of any third party.

Timing

          Time of the Essence. When a contract calls for something to happen by a certain date, the question can arise as to whether the slight breach of that provision should be meaningful at all or whether it should be so meaningful that it constitutes a material breach of the agreement. When a party (or both parties) to a contract wants to press the point of the importance of date compliance, it desires language be included in the contract labeled “time of the essence” and describing the time of the essence situation. In some cases, an explanation of why the time of the essence provision is essential is included. When a contract is silent on this subject, courts rarely find that date compliance is critical unless considerable time has passed beyond the stated date. These clauses are common in real estate transactions.

          In Aromino v. Van Tassel, 930 N.Y.S.2d 173 (Civ. Ct. City N.Y. 2011), the court stated: “It is conceded by both parties that the original contract was not a ‘time of the essence’ agreement. The initial closing date was an ‘on or about date’ and a review of the contract terms indicates that there were numerous clauses entitling one or both of the parties to substantial delays in setting a closing date as well as adjournments of any scheduled closing date. Caselaw holds that ‘time of the essence’ may be made in two ways. The first is by mutual agreement, such as [a] contract provision making ‘time of the essence.’ The second [stemming from caselaw] permits one party to unilaterally make ‘time of the essence’ provided certain criteria are met. These include the closing date set forth in the contract having passed, the setting of the closing on a particular date and giving the [other] party a reasonable time within which to close [citation omitted]. The notice also must indicate that the failure to perform by the designated date will be considered a default [citation omitted].” While “time of the essence” was sought to be introduced by the seller post-contract and unilaterally, the court’s analysis concluded that “time of the essence” never took effect. Ultimately, the court ruled there were no triable issues of fact, the result being the cancellation of the contract with the seller retaining the earnest money.

Sample time of the essence clause: With respect to the stated closing date of the real estate transaction which is the subject of this Agreement, time is of the essence, and each party agrees to perform any acts herein required of such party and to execute and deliver any documents required to carry out the terms and provisions of this Agreement promptly by the closing date herein described. The buyer’s failure to comply with this provision grants to the seller the right immediately to terminate this Agreement and the right to retain all funds paid to the seller (or which have been paid into escrow by the buyer). The seller’s failure to comply with this provision grants to the buyer the right immediately to terminate this Agreement and the right to the immediate return of all funds paid to the seller (or which buyer has paid into escrow).

Waivers, Warranties and Representations

          Waiver. The parties to contracts want the contracts to succeed and be fully performed. As a result, there are many breaches of contract that are not pursued by the non-breaching party, such as one or more monthly payments not being made on time even though the non-breaching party could, for example, ask a court to agree that an anticipatory breach had occurred and that, therefore, all the payments under the contract were then due and owing. The non-breaching party, of course, does not want to give up any rights by not pursuing a particular breach. The seeming remedy to this problem is “waiver” language, but then the question can become whether the waiver can be waived.

          In Enserch Corp. v. Rebich, 925 S.W.2d 75 (Ct. of App.—Tyler 1996), the contract between the parties contained the following provision: “The waiver of either party of any breach of any of the provisions of this agreement shall not constitute a continuing waiver of other breaches of the same or other provisions of this agreement.” When Rebich breached the agreement, Enserch did not complain. Later, when Enserch sued Rebich for breach, the court ultimately held that, notwithstanding the contract language, Enserch, by implication, had waived his right to sue for the breach. So while a contract may unequivocally state a particular proposition, courts sometimes rule that the behavior of a party may have the effect of waiving that language.

Sample waiver clause: No breach of any provision of this Agreement shall have been waived except with the express written consent of the non-breaching party.

          Warranties and Representations. “Representations” are statements about the current status of one (or both) of the parties. Representations are statements of fact made to induce the other party to enter into the contract. “Warranties” generally guarantee that a product will work and what the guaranteeing party will do should the product not work or stop working within a given period. When a contract goes sour, much of the resulting litigation often concerns allegedly false statements made by way of representations or warranties not lived up to.

          In DeWolfe v. Hingham Centre Ltd., 985 N.E.2d 1187 (Mass. 2013), the contract stated: “The BUYER acknowledges that the BUYER has not been influenced to enter into this transaction nor has he relied upon any warranties or representations not set forth or incorporated in this agreement or previously made in writing, except for the following additional warranties and representations, if any, made by either the SELLER or the Broker(s): NONE.”

The parties argued that the meaning of this sentence was exactly opposite, one from the other. The court’s ruling hinged on the grammar involving the use of the word “not” for the second time in the sentence. “We…read the warranties and representations clause as permitting reliance on prior written representations not set forth or incorporated in the agreement. It follows that the warranties and representation clause of the agreement does not relieve the defendants of liability for [the] written misrepresentations. The defendants have accordingly failed to establish that they are entitled on this basis to judgment as a matter of law.”

Sample warranties and representations clause: Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of __________, has corporate power to carry on its business as it is now being conducted, and is qualified to do business in every jurisdiction in which the character and location of the assets owned by it or the nature of the business transacted by it requires qualification or in which failure to so qualify would have a material adverse impact on it. No legal proceeding is pending, or to the knowledge of Company, threatened, involving Company. Company has the full right, power, and authority to enter into this Agreement and each agreement, document, and instrument to be executed and delivered by Company pursuant to this Agreement and to carry out the transactions contemplated hereby and thereby. No waiver or consent of any person is required in connection with the execution, delivery, and performance by Company of this Agreement and each agreement, document, and instrument to be executed and delivered by Company pursuant to this Agreement. Company’s financial statements fairly present the financial condition of Company at the dates of said statements and the results of its operations for the periods covered thereby and will be prepared in accordance with generally accepted accounting principles and practices consistently applied and consistent with the books and records of Company. Company warrants all goods delivered under this Agreement to work normally and to be free of defects for the period of one (1) year from the date of purchase.

This concludes this course. Thank you for participating.