Transactional lawyers often overlook standard contract clauses, but a recent court case highlights how these provisions can create strict obligations. In a decision by the Delaware Court of Chancery, the court ruled that a “further assurances clause” can require a party to actively support another party, rather than simply staying neutral.
These clauses are typically found in agreements governing ongoing business relationships. While they often appear in sales transactions to obtain documents needed to finalize a transfer, they are not limited to that purpose. Legal experts describe them as a general commitment to take actions necessary to perform the contract’s core terms. The language usually mandates that a party execute and deliver documents, or take further actions, to “effectuate the transactions contemplated by this Agreement.”
One commentator noted that such a provision acts as an exclamation point on the parties’ agreement, serving as a gap filler and backstop when specific contingencies arise. Courts have suggested that the interpretation of this specific language may be influenced by how they interpret the broader duty of good faith and fair dealing. A further assurances clause, unlike the implied covenant, often requires affirmative support rather than just a promise of non-interference.
The Facilities Holdings case
The dispute centered on a concession agreement for sports and entertainment venues. The operator leased the venues to a vendor, granting the vendor the exclusive right to sell food and beverages. The contract included a specific term: if the operator sold the venue to a third party, the term would extend by five years, subject to the landlord’s approval. When the operator was sold to a competitor, the vendor sought the extension. The operator claimed the landlords refused to approve it.
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However, the vendor alleged that behind closed doors, the operator convinced the landlords to withhold consent so the operator could replace the vendor with affiliates of the new owner. The vendor argued that the operator breached the contract by engaging in conduct that undermined the landlord’s willingness to consent.
The court denied the operator’s motion to dismiss the case. It found that the further assurances clause required the operator to provide some level of support for the vendor in obtaining landlord consent. The court stated that the provision did not permit the operator to seek to convince or induce a landlord to withhold its consent. The court reasoned that the implied covenant claim and the further assurances claim rested on the same alleged conduct, but the clause imposed a higher bar by requiring affirmative support.
Parties drafting these contracts should be aware that the language used matters. In this instance, the clause required not only the execution of documents to “evidence” the transactions but also “actions” necessary to “effectuate” those transactions. Legal professionals must read and understand the potential impact of these provisions rather than treating boilerplate as standard text. New Rules regarding business industries nationwide can also impact how these obligations are viewed in broader markets.
This ruling clarifies the potential liability of such standard language.
