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Beware the Zombie Contract: When an Old Contract Can Come Back to Haunt You

It is usually clear from the terms of a contract how long the parties want the contract to remain in effect—the contract provides for a set term or task to be performed, possibly with options to extend it when certain criteria are met. However, in some instances, parties may remain bound by the terms of an old contract even after it expires.

A recent decision by New York’s Appellate Division, 3rd Department highlighted how a contract may live on after termination. The case of Harris v. Reaganinvolved parties who owned two automobile dealerships. When one member of the ownership group (the plaintiff) was charged with murdering his wife, the parties entered into an agreement to modify the share ownership so that the accused plaintiff held only a minority interest in the business. (The ownership group determined this was a necessary step in order to avoid a negative impact on their dealerships’ franchise agreements.) The members then entered into a side agreement which provided that if the plaintiff was acquitted, he could reacquire a majority interest; but if he was convicted, his shares would be placed in trust and purchased by defendants.

The plaintiff was convicted, and executed documents to transfer his shares to a trust as provided for in the agreement. Nine years later his conviction was overturned, and he sought to have the stock transfer set aside and recover his shares under the side agreement. The trial court dismissed the complaint, holding that the side agreement terminated after the initial conviction. However, the Appellate Division reversed, finding that even where a written contract term expires, the parties conduct can create an “implied contract” on the same terms.

Although the facts of the Harriscase aren’t typical, the problem of contracts that live on after termination can arise in more common situations, such as where parties are discussing a contract extension or new contract as the term of the current agreement expires. In the interest of good faith, the parties may continue to honor their obligations under the old contract during negotiations. However, when negotiations fall apart, or some other problem comes up, an unwitting party could find itself bound to a “zombie contract,” which expired on its terms, only to be resurrected by the parties’ conduct. This could create issues in contracts which contain notice provisions, restrictive covenants, or other terms that may be deemed to have been extended by the conduct of the parties.

If you are approaching the end of a contract, it’s important to take appropriate steps to protect your rights and interests, especially if you will have a continued business relationship with the other party to the contract. Speak to a qualified attorney about drafting an agreement that will govern your negotiations and set forth each party’s rights under the expiring or expired agreement.


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