While the primary purpose of termination is to put an end to the agreement between the parties, certain obligations under the agreement may, in certain circumstances, survive termination and continue to operate. Obligations that survive termination are just as important as obligations that existed prior to termination. Hence, it is important to understand the circumstances which warrant the capability of survival, namely:
- obligations arising under a survival clause; or
- obligations arising under the common law.
Survival Clauses
A survival clause expressly identifies certain obligations, rights, warranties or clauses that will continue after a contract comes to an end. The term ‘survival’ refers to the enforceability of certain rights and obligations after termination. It is generally recommended to include a survival clause in the contract because it provides a greater certainty that termination will put an end to all contractual rights and obligations, except those specifically mentioned under the clause.
A survival clause may include wording to the effect of:
“Clause 3 Confidential Information survives termination or expiry of this agreement together with any other term which by its nature is intended to do so.”
However, the effectiveness of a survival clause may be limited in circumstances where:
- the survival clause is taken as an exhaustive statement of a parties’ intention regarding which terms are to survive termination; or
- public policy or statute negates the survival clause; or
- collateral promises survive the completion of the main purpose of the contract and render the survival clause void.
Common Law
If a survival clause is not included in a contract, certain obligations may nevertheless survive termination under the common law. This is a question of construction of the contract and will depend on the actual or implied intention of the parties in each particular case.
As a general rule, procedural contractual terms creating secondary obligations can demonstrate an intention of the parties to be enforceable and will survive termination, whereas substantive contractual terms creating primary obligations cannot demonstrate such an intention and will not survive termination.
Secondary obligations are obligations that are ancillary to the main purpose of the contract. The following is a non-exhaustive list of examples of secondary obligations that will generally survive termination under the common law:
- an agreement to refer disputes to arbitration;
- an agreement as to the choice of forum;
- an obligation not to disclose confidential information;
- an obligation for an employee not to compete with the employer;
- an exclusion clause;
- an indemnity clause;
- a warranty clause;
- a restraint of trade clause;
- a clause relating to the maintenance of records;
- a clause relating to payment obligations after termination (for example, damages for breach of contract, terms that regulate the extent of liability or consequences of breach);
- the implied duty of good faith; and
- rights that are unconditionally acquired under the contract (for example, the right to damages or the right to receive performance of a contractual obligation).
It is important to note that the survival of secondary obligations is excepted in circumstances where:
- it is implied that survival of the obligation or clause was conditional upon an absence of breach by the parting seeking to enforce the obligation; or
- the obligation or clause is prohibited by public policy, even if the parties intended that obligation or clause to be enforceable.
Alternatively, the following is a non-exhaustive list of examples of terms that will not survive termination under common law:
- terms that regulate the primary obligations of the parties;
- restraint of trade clauses that infringe public policy;
- damages clauses that infringe on the rule against penalties;
- unjust terms; and
- exclusion clause that are void or unenforceable under statute.
Key Takeaways
Even if an agreement has been terminated, it is important to check whether an obligation continues to operate after termination. If the terminated agreement includes a survival clause, it will expressly state which clause or obligation survives. However, where there is no survival clause, an obligation is only capable of surviving if that is what the parties intended.
Disclaimer
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.
Liability Limited by a scheme approved under Professional Standards Legislation.