Over the years we have advised numerous clients on contract issues and handled many breach of contract cases in the courts and in arbitral forums around the country. Often, we see many of the same issues arise time and again. One area that is ripe for dispute involves the termination provision of a contract. What looks crystal clear on the first read often ends up being more complicated.
Extreme care must be taken when terminating a contract, and the business person or in-house lawyer responsible for the termination needs to ensure that he or she complies with the requirements of the termination provision exactly. Otherwise, the termination may be ineffective and lead to expensive and time consuming litigation, and the terminating party may find itself in breach.
Many of the cases that we have litigated contain language requiring 30-days’ notice and an opportunity to cure before the contract may be terminated. Read these provisions very carefully and follow them exactly, if you want to perfect your right to terminate.
I remember very clearly litigating a multi-million dollar breach of contract case in an arbitration. The other side claimed that a letter they had sent my client was a cure notice, and I argued that it was not. The arbitrator, a former California appellate justice, glowered at my opponent and in a booming voice dismissed the notion that the letter was a cure notice. He said something to this effect: “Counsel, this is not a cure notice. A cure notice is plainly labeled as such in the Re line of the document. It cites to the relevant provision, and is delivered in accordance with the notice provision of the contract. It specifically identifies the provisions of the contract, which have been breached, and for which a cure must be effectuated. It provides a date certain when the cure must be made, or else risk termination of the contract.” We won a $33 million-dollar arbitration award for our client, and were also awarded attorneys’ fees in that case. Sweating the details does matter.
Another error that seems to occur frequently is failure by the party terminating the contract to comply with the notice provision of the agreement. Most termination clauses require written notice of the breach and the opportunity to cure, but they may not specifically reference the notice provision, which appears elsewhere in the contract and/or relevant statutory provisions. As a result, many people overlook the manner by which notice must be given. It is very important before sending the cure notice or the termination letter to check and see if the contract contains such a notice provision or if there is an applicable statutory requirement. If there is, make sure that you comply fully, and do not take any short cuts.
Today, most parties to a contract communicate via email. However, notice provisions may be copied from older contracts and require personal delivery or via overnight or certified mail. Same for statutory requirements. Make sure that you are sending the correspondence to the designated persons at the designated address using the proper method of delivery, and if there are time limits or other procedural requirements in the termination provision, be sure to comply with these as well.
If you are considering terminating a contract, or if your company receives a cure or termination notice, Fulmer Ware LLP is here to help and to guide you through the process.
When responding to any software audit, companies must look to the terms of the license agreement that governs the relationship between the parties. As a threshold matter, it is vitally important to keep all of the actual contractual documents and Order forms together in one place for ease of reference. Also emails and other written communications between the licensor’s audit team and the business being audited should be retained as well. Often what we have found is that the licensor’s audit team tends to correspond in emails and other writings with our clients who are being audited. The licensor is making a written record and demanding documents and other information, and may be doing so in a way so as to cast the company being audited in a negative light in the event of later litigation.
We have also found that although the licensor’s audit teams tend to rely on writings as they attempt to make a record of non-cooperation by the licensee, the licensor’s sales teams, which the licensor may be concurrently deploying will often use the phone and leave voicemail messages, so as not to create a paper trail, which can later be used against the licensor. We recommend that such voicemail messages be transcribed, and if possible an audio recording of the voicemail preserved for use as evidence later on should litigation be initiated.
For example, in the first public filing against Oracle Corporation relating to the VMware virtualization issue in the Mars vs. Oracle case, Mars was able to make use of the written record to support its position that Oracle was in breach of the license agreement by exceeding its audit rights. Care must be taken in any discussions with the licensor, to view every communication to the licensor, with a lens as to how a Judge or jury might view the communication in the event of litigation.
We know from the public filings in the Mars vs. Oracle lawsuit that the contract at issue in that case had a choice of law provision selecting California law, and that the venue selected was San Francisco. As a result, when choosing counsel, companies may want to consider retaining lawyers who are familiar with relevant law and with the local courts and jury pool, in the venue specified in the operative license agreement. We are California lawyers who have been practicing California law in the venue for almost 25 years.
The public filings in the Mars vs. Oracle case also demonstrate how a licensor may attempt to use its audit rights to obtain documents and other information that it might not be entitled to under the license agreement. Licensees may want to weigh whether and to what extent to grant the licensor access to their confidential and proprietary information. Such issues need to be explored very carefully, as the technical and legal teams work closely together to prepare their response strategy.