May 11, 2014
When is a Contract Not a Contract?
Simple answer - when it is really two contracts. In Physiotherapy Holdings, Inc., the United States Bankruptcy Court for the District of Delaware examined the issue of contract integration.
The debtor in this case faced an unusual dilemma. The court had affirmed its Chapter 11 plan, but it still needed to address an essential software license with Huron Consulting Services. The debtor absolutely needed the software to operate - at least for the six to nine months needed to switch to new systems. But, the software license was governed by a Master Agreement, which, among other terms, required the debtor to indemnify Huron against certain claims a litigation trust was planning to bring. If the debtor assumed the Master Agreement/Software License as an integrated contract, the reorganized debtor would have to insure Huron against the coming storm - a prohibitively expensive proposition. On the other hand, if the debtor rejected the contracts it would have to cease operations - since access to the software was essential. And, because the debtor's plan had been confirmed, no further delay was obtainable.
The debtor attempted the middle road. It asked for leave to assume the software license while rejecting the Master Agreement. Ordinarily, a debtor must assume or reject an executory contract in its entirety. The debtor may not assume the parts of a contract it wants, while rejecting the rest. The same rule applies when several agreements are designed to work together as an integrated contract. The debtor must reject or assume the integrated contract in its entirety.
The court closely examined the provisions of the Master Agreement and the license agreement. Executed as part of a single business arrangement, the Master Agreement terms governed, and were incorporated into, the license agreement. However, the court noted that at several places in the combined contracts provisions made clear that where the specific contract had provisions conflicting with the Master Agreement's terms, the specific agreement's terms would control. In particular, the Master Agreement contained broad indemnification provisions while the license agreement contained only a subset of the indemnifications' scope. By carefully reviewing the contracts' provisions, the Court was able to support a finding that the license agreement constituted a stand-alone agreement, even if some of its terms were derived from the Master Agreement. The debtor could assume the license agreement, while rejecting the Master Agreement.
The debtor in this case faced an unusual dilemma. The court had affirmed its Chapter 11 plan, but it still needed to address an essential software license with Huron Consulting Services. The debtor absolutely needed the software to operate - at least for the six to nine months needed to switch to new systems. But, the software license was governed by a Master Agreement, which, among other terms, required the debtor to indemnify Huron against certain claims a litigation trust was planning to bring. If the debtor assumed the Master Agreement/Software License as an integrated contract, the reorganized debtor would have to insure Huron against the coming storm - a prohibitively expensive proposition. On the other hand, if the debtor rejected the contracts it would have to cease operations - since access to the software was essential. And, because the debtor's plan had been confirmed, no further delay was obtainable.
The debtor attempted the middle road. It asked for leave to assume the software license while rejecting the Master Agreement. Ordinarily, a debtor must assume or reject an executory contract in its entirety. The debtor may not assume the parts of a contract it wants, while rejecting the rest. The same rule applies when several agreements are designed to work together as an integrated contract. The debtor must reject or assume the integrated contract in its entirety.
The court closely examined the provisions of the Master Agreement and the license agreement. Executed as part of a single business arrangement, the Master Agreement terms governed, and were incorporated into, the license agreement. However, the court noted that at several places in the combined contracts provisions made clear that where the specific contract had provisions conflicting with the Master Agreement's terms, the specific agreement's terms would control. In particular, the Master Agreement contained broad indemnification provisions while the license agreement contained only a subset of the indemnifications' scope. By carefully reviewing the contracts' provisions, the Court was able to support a finding that the license agreement constituted a stand-alone agreement, even if some of its terms were derived from the Master Agreement. The debtor could assume the license agreement, while rejecting the Master Agreement.
Labels: assumption, executory contract
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