On Contracts

An employee’s employment agreement included both a non-solicitation clause and a non-competition clause; the latter clause read in part as follows: “Employee further covenants that for a period of one year following the termination of Employee’s employment for whatever reason ….” (Emphasis added.) The agreement also allowed either party to terminate the employment agreement at will.

Years later (following acquisition of the employer), the employee quit her job and, three days later, terminated her employment agreement. Reversing a preliminary injunction enforcing the non-competition clause, the Eighth Circuit held that the clause did not survive the employee’s at-will termination of her employment agreement:

By its terms, the non-compete provision survived the termination of Miller’s “employment.” But there is nothing in the non-compete provision to suggest the parties intended it to survive the termination of the Employment Agreement. And the contract treats the term of employment and the term of the Employment Agreement as two distinct concepts.

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We understand this may not be the result [the employer] envisioned when it drafted the Employment Agreement. Indeed, the Employment Agreement is no exemplar of precision; it is possible that [the employer] actually intended for the term of employment and the term of the Employment Agreement to be coextensive. But that is not what the contract actually says. We will not rewrite an unambiguous provision.

Miller v. Honkamp Krueger Financial Services, Inc., No. 20-3061, slip op. at 6, 8 (8th Cir. Aug. 24, 2021).

As a similar example: A contract between a union and a company gave the union the right to audit certain books and records of the company to confirm that the company had complied with a requirement in the contract to make certain contributions to employee-benefit funds. The contract didn’t specify that the audit right would survive termination of the contract — so, because (according to the court) the company terminated the contract, the union lost its right to conduct a final compliance audit. See  New England Carpenters Central Collection Agency v. Labonte Drywall Co., 795 F.3d 271 (1st Cir. 2015) (affirming judgment after bench trial).

Drafting lesson: In each of the above cases, the contract in suit could have been drafted to specify that the relevant clause would survive any termination or expiration of the contract.

Footnote: Years ago my senior partner and friend, Tom Arnold, opined that contracts are historical facts, much like the Constitution and the Declaration of Independence — so (in Tom’s view) there should be no such thing as the “term” of a contract itself, but only of specific rights, obligations, and relationships under the contract. The reality, of course, is that most drafters refer to “termination of this Agreement” or “expiration of this Agreement” as a shorthand; as we see above, that can cause problems.

A contractual obligation to “accept responsibility” for harm to another party — that is, to reimburse, or in legalese, “indemnify” that other party — can have serious financial implications. Even with only an implied indemnity obligation, the extent of liability could be significantly greater than anticipated. Example An English couple contracted with a tour operator for a 15-day vacation package in Sri Lanka, including airfare and hotel. During their stay at the hotel, the wife was raped by a hotel maintenance worker. The UK Supreme Court held that the tour operator was liable for breach of contract: the contract said, in relevant part:

[W]e [the tour operator] will accept responsibility if due to fault on our part, or that of our agents or suppliers, any part of your holiday arrangements booked before your departure from the UK is not as described in the brochure, or not of a reasonable standard, or if you or any member of your party is killed or injured as a result of an activity forming part of those holiday arrangements.

X v. Kuoni Travel Ltd., [2021] UKSC 34, para. 2 (reversing judgment of court of appeal) (emphasis added, citations omitted).

Notably, the supreme court held that the tour operator was directly liable for breach of contract, and that vicarious liability was not relevant. See id. at para. 50.

Drafting lessons for suppliers:

1. Be very careful when agreeing to accept responsibility for the actions of others — subcontractors, whatever — when asked to agree to language such as “we will indemnify you ….”
2. Consider trying to cap your aggregate financial exposure for indemnity obligations, the way insurance coverage is subject to policy limits. Keep in mind that liability for indemnity might not ordinarily be subject to foreseeability limitations, nor to a duty to mitigate (although the case law is unclear on this point). See generally Glenn D. West, Consequential Damages Redux …, 70 Bus. Lawyer 971, 975 (Weil.com 2015) (“III. A Basic Primer on Contract Damages”), archived at https://perma.cc/D2HC-Z5XD; id. at 998-99: “[I]t bears repeating that there is, in fact, a very clear distinction (whether or not there is an ultimate difference) between a claim for indemnification and a claim for damages for breach of a representation and warranty in an acquisition agreement.”
3. Consider offering to commit to maintaining a specific level of insurance coverage, with the customer/client as an additional insured, and limit your financial exposure for indemnity to the policy limits of the insurance coverage.

Background: HP filed a lawsuit against its former CEO, Mark Hurd, who had just joined Oracle after resigning from HP at the request of HP’s board of directors. HP, Hurd, and Oracle settled the lawsuit fairly quickly; paragraph 1 of the settlement agreement stated the following:

“Reaffirmation of the Oracle-HP Partnership. Oracle and HP reaffirm their commitment to their longstanding strategic relationship and their mutual desire to continue to support their mutual customers. Oracle will continue to offer its product suite on HP platforms, and HP will continue to support Oracle products (including Oracle Enterprise Linux and Oracle VM) on its hardware in a manner consistent with that partnership as it existed prior to Oracle’s hiring of Hurd.”

Hewlett-Packard Co. v. Oracle Corp., No. H044371, slip op. at 11 (Cal. App. June 14, 2021) (emphasis added).

But: Six months after the Hurd lawsuit settlement, Oracle announced that it would discontinue developing new releases of its products for HP’s Itanium servers. Oracle’s stated reason was that the Intel-HP microprocessor on which the server was based was reaching the end of its life. Industry observers noted that Microsoft had recently made a similar move, and also conjectured that Oracle’s decision could hurt HP.

And then: HP filed another lawsuit against Oracle, alleging that Oracle’s announcement was a breach of the Hurd lawsuit’s settlement agreement. A California trial judge agreed with HP’s interpretation of the “reaffirmation” clause quoted above; a jury awarded HP just over $3 billion for breach of contract.

Now: This week, in a 94-page opinion affirming the judgment below, an appeals court held:

Simply put, the reaffirmation clause creates an obligation to continue with an expressly identified course of dealing (offering and supporting Oracle’s products on HP’s existing platforms as long as they are sold by HP) no different from the course of dealing that had defined their strategic partnership for years prior to Oracle’s hiring of Hurd.

Id., slip op. at 44 (emphasis added).

For various reasons that I won’t go into here, it seems to me that on the merits, Oracle had the better argument. (Not least: It’s standard contract law that a contract of indefinite duration can be terminated at will by either party, as long as the terminating party gives reasonable advance notice; the appeals court gave merely a passing nod to that principle, see id. at 32, without providing even close to a satisfying explanation why the principle didn’t apply.)

Drafting lesson: With 20-20 hindsight, Oracle would have been well-served to include a pro forma clause — akin to a “management rights” clause in a collective-bargaining agreement between a company and a union — to the effect that Oracle retained the right to make business decisions in its discretion.

See Sara Randazzo, Amazon Faced 75,000 Arbitration Demands. Now It Says: Fine, Sue Us.

(Hat tip: Mark Kantor)