Reinier advises national and international companies
reinier.russell@russell.nl +31 20 301 55 55If a contract has ended, there may still be obligations you want your contract partner to fulfil, such as warranties or confidentiality. You can regulate this through survival clauses. What should you look out for when including such clauses?
Usually, the end of parties’ contractual relationship also means the end of parties’ obligations to each other. This is however not always in the best interest of parties. Parties may then choose to include survival clauses in their contract, to ensure that some of the parties’ contractual obligations persist – even after termination of the contract. Survival clauses can thus help business owners proactively protect their company.
The use of survival clauses in contracts has become customary. Especially provisions regarding the protection of the labour force (non-competition/non-solicitation) and intellectual property (confidentiality) are often designed to survive the termination of the contract. Parties can also choose to have contract provisions regarding exoneration and arbitration survive the termination of the contract. Furthermore, provisions regarding post-termination deliverables and post-termination payments are intended to survive the termination of the contract by nature.
Commonly, attorneys add “this section shall survive the closing or termination of this agreement” at the end of every section which the parties want to survive. However, sometimes survival clauses are not clearly stated and/or have unintended consequences. In addition, survival clauses can make it difficult for parties to verify their post-termination contractual obligations. In the following, we will discuss three topics for which survival clauses are often used.
A non-competition clause prohibits employees of the company from being directly or indirectly active or involved in a business performing similar activities to the activities of the company for a certain period of time after the end of the employment contract. A non-solicitation clause, on the other hand, prohibits an employee from being active for or having contact with clients and business associates of the employer for a certain period after the end of the employment contract. A non-poaching clause prohibits an employee from recruiting other employees to go with them to the new company. Finally, the confidentiality clause is included in almost every employment contract.
By their nature, these provisions are intended to survive the termination of the contract. As a result, in the vast majority of cases parties implicitly agree that these provisions survive termination of the contract. However, instead of implicit agreement, it is important that parties explicitly specify their post-contractual obligations following these survival clauses.
If parties have not clearly laid down the post-contractual obligations following the confidentiality, non-competition and/or non-solicitation provisions, it may be difficult for the aggrieved party to enforce these provisions post-termination. After all, confidentiality, non-competition, and non-solicitation provisions sometimes – depending on the governing laws – can only be remedied by a court injunction ordering a party to stop violating the provision. Many courts will not issue such an injunction unless a party has a “clear legal right” to that remedy. Clear survival language is thus needed to be able to argue that a party has such a “clear legal right”.
The governing laws must also be taken into account when formulating clear survival language. For example, in the Netherlands, a non-competition survival clause is not valid when the geographical scope of the prohibition is too large and/or if the prohibition persists more than one, or in exceptional cases 2 years after termination of the contract.
Many contracts include indemnification clauses. However, parties do not in all cases wish for these clauses to be continued post-termination, especially if that would allow the other party to file a claim for compensation for breach of the terminated contract. This applies, for example, to a rental agreement, where both the landlord and the tenant do not want the other party to be able to make a claim after a long time.
On the other hand, in transaction contracts parties often wish indemnification clauses to survive termination of the transaction contract. In real estate, the transaction contract often includes warranties by the seller. However, the buyer in most cases will not become aware of a breach of these warranties until after the transaction contract has terminated. In such situations, it is wise to include a survival clause in the contract which specifies for how long after the closing of a transaction parties may make a claim for indemnification based on a breach of warranties.
Most contracts contain a provision on the applicable law. The effect of a choice of law is that, in principle, the contract is governed by the law chosen. However, if conflict between parties arises after the termination of the contract, the governing law clause in principle has also terminated. This may have unintended consequences, for example that parties are forced to initiate legal proceedings in a far-off country. As a result, it is wise to also grant the governing law provision survival clause status.
Survival clauses are absolutely necessary in some cases but – if not explicitly and/or clearly stated – can have undesired consequences. Whether a survival clause is necessary for a certain topic depends on the parties’ needs. Therefore, parties should, while negotiating their contracts, evaluate where survival is needed to accomplish their goals. After agreeing upon survival of a specific clause, it is important to make clear arrangements with regard to the extent and scope of the survival clause. As different countries have different rules regarding the validity of survival clauses, it is important to incorporate clear survival language in which parties also take into account the governing law.
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