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Only a non-breaching party can terminate a contract for breach?

Ken Adams (with a hat tip to David A. Charapp of the Duane Morris law firm) alerts us to a federal district court case from the Northern District of California, Powertech Tech., Inc. v. Tessera, Inc., No. C 11-6121 CW, at Discussion part I-A (N.D. Cal. Jan. 15, 2014) (granting patent owner’s motion for summary judgment).

The relevant contract, a patent license agreement, included a typical termination-for-breach clause. The clause allowed “the non-breaching party” to terminate if a breach was not cured within a stated period.

The licensee sought to terminate for alleged breach on the part of the patent owner. The trouble was, at all relevant times the licensee was itself in breach (it had failed to pay all royalties due).

As a result, said the court, the termination clause did not authorize the licensee to terminate the agreement, because the licensee was not a non-breaching party as required by the contract language.

(Some might argue that this interpretation was a bit of a stretch. It seems entirely possible that the court was influenced by what looked to me to be an attempt by the licensee to “sleaze out of” its royalty obligation, which I won’t go into here.)

Lesson for drafters: Either draft the termination clause differently (as in, “the other party may terminate”), or take the opposite tack, namely to state clearly that the other party may terminate for breach only if it is not itself in breach.

I just checked the Common Draft termination for breach clause, and was pleased to see that it doesn’t use the phrase “non-breaching party,” but instead uses the defined term Terminating Party.

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