Avoiding Zombie Contracts: A Simple Guide

Content

• What are zombie contracts?
• What are the risks of zombie contracts?
• How do you efficiently navigate zombie contracts?
• Constant reviews
• Non-ambiguous exit clauses
• Automated reminders
• Conclusion

A solid contract usually has provisions for the duration of the contractual relationship. During the negotiation, the parties determine how long they want the terms to be in effect. It can be days, months, years, or the time it takes to fulfill their obligations. Clearly defining these dates in the legal agreement helps prevent future contract violations and disputes.

However, that’s not always the case. Sometimes, whether intentionally or inadvertently, the parties continue to fulfill their responsibilities after the expiration date. It can be due to losing track of dates or a desire to stick with current terms. Whatever the reason, the fact remains that the terms linger even after contracts expire. That is the unique aspect of zombie contracts. In this blog post, we’ll explore such agreements, their legal implications, risks, and essential tips to protect themselves.

What are zombie contracts?

A zombie contract is a legal agreement that is no longer active or enforceable yet continues to exert influence over the parties involved. When parties enter a contractual relationship, the written agreement usually specifies the effective date, duration, obligations, and termination.

In certain instances, though, the terms might not terminate as intended and might go on. It could happen for several reasons, including the parties' failure to uphold the terms, an unofficial agreement to prolong the contract, the original goal being achieved or rendered obsolete, or one party's inability to fulfill their end of the bargain.  However, the lack of clarity in these situations can become a headache for businesses, they can face financial, legal, and operational consequences.

Ambiguous provisions

Contracts have provisions for duration and termination that outline how long the terms will be in effect. It includes the effective and termination dates for all the involved parties. Mostly, the obligations and responsibilities are enforceable as long as the duration. Any uncertainty in these provisions, though, could result in parties being caught in a web of duties. 

Obsolete terms or conditions

The terms of the contract may no longer reflect the current state of affairs due to changes in law, business practices, or technology. For example, if a company signed a contract based on certain technological capabilities, but those technologies have since evolved or been replaced; the contract might continue to exist but no longer serve any real function. A long-term service contract that references outdated technology or practices, but the parties continue to abide by the terms even though they no longer align with the current needs or business environment.

Failure to perform

One or both parties may simply stop fulfilling their obligations under the contract, but, for various reasons (e.g., fear of litigation, unwillingness to terminate), the contract is not formally terminated. A supplier stops delivering goods, but the buyer does not formally terminate the agreement or invoke legal action because it's too costly or complex to do so.

Unilateral contract changes

Sometimes, parties make informal adjustments to contracts over time, but the original contract never gets updated or amended formally. The contract may technically remain in place, but its original terms no longer reflect the reality of the relationship. A company continues to operate under a service agreement that no longer reflects the current pricing structure, service level agreements (SLAs), or responsibilities of either party, yet the contract is never formally revised.

What are the risks of zombie contracts?

A zombie contract can still be in effect even after expiration due to an improper termination procedure, ambiguity in terms, or because it has lost its practical relevance or enforceability. Often, these contracts linger in the background without the parties actively managing them. As a result, businesses may become vulnerable to a range of risks that can have serious consequences.

1. Financial liabilities

One of the most pressing risks associated with zombie contracts is the potential for unexpected financial liabilities. It may include clauses that impose financial obligations long after the initial purpose of the contract has been fulfilled. It can lead to unanticipated costs that can impact a business's bottom line. If a zombie contract has payment deadlines or performance obligations that are no longer relevant, failing to recognize them can result in hefty interest charges or penalties. Companies may allocate budgets based on active contracts but neglect zombie contracts, leading to financial strain when these hidden obligations resurface.

2. Renewed obligations

In the case of zombie contracts, businesses might end up with unfavorable terms and conditions. When a contract remains in effect, parties may find themselves bound to perform duties that they believed were no longer applicable. Businesses may unwittingly commit resources or time to fulfill obligations they thought had expired. Employees and management may face disruptions as they scramble to meet outdated demands, diverting focus from current projects. Failing to meet obligations, even if they are outdated, can damage a company’s reputation and reliability in the eyes of clients and partners.

3. Legal consequences

Zombie contracts may be legally enforceable, which means that parties may still be held accountable for obligations that no longer make sense. It can lead to costly litigation if one party attempts to enforce the terms of the contract, even when the context has changed dramatically. If a party fails to comply with the terms of a zombie contract, they may face breach of contract claims. This is particularly problematic if the contract imposes obligations that are no longer relevant or practical, leaving the liable party in a precarious legal position. In certain industries, failing to update or terminate zombie contracts can lead to compliance violations. For example, in financial services, outdated agreements may not align with current regulations, potentially exposing a company to penalties or sanctions.

How do you efficiently navigate zombie contracts?

As we have discussed, zombie contracts can have lasting implications for a business. If there’s an implied contract in place and you don’t perform your duties, it counts as a breach. Or you can end with renewed terms that no longer benefit your company. Considering the consequences of these undead contracts, parties must take special care while handling them. That is why businesses must take active steps to filter out and mitigate the risks of these agreements.

Constant reviews

Regularly reviewing contracts is a major part of successful commercial relationships. Contracts, whether for purchasing goods or services, onboarding customers, or partnering with a company, are designed to add value to the business. However, parties can achieve these outcomes only if they oversee the contract lifecycle. Constant reviews and audit trails of all existing contractual agreements will help them identify zombie contracts before they start leaking revenue.

Manually keeping track of them through spreadsheets and files can be overwhelming and prone to error. Assigning responsibilities to particular individuals through automated workflows and obligation tracking will bring accountability to the process. Consequently, businesses are less likely to lose sight of their commercial arrangements.

Non-ambiguous exit clauses

Exit clauses establish specific conditions or events upon which a contract can be terminated. This clarity prevents a situation where parties are unsure of when or how they can end their obligations, which can lead to the unintended perpetuation of the contract. When a contract has clear, actionable termination points, parties are better able to manage their commitments and avoid extended obligations that may become detrimental over time.

Without non-ambiguous exit clauses, contracts can linger, creating "zombie" obligations that no longer serve their purpose. By including precise exit terms, parties ensure they retain control over their commitments and avoid the burden of unintended long-term obligations. It allows companies to pivot or adapt to new opportunities without being locked into outdated agreements. Maintaining pre-approved templates and clause libraries can enable businesses to ensure consistency and accuracy in termination provisions. 

Automated reminders

Automated reminders are a practical tool to help prevent zombie contracts, as they ensure that key deadlines, renewal dates, and other important milestones don’t go unnoticed. Implementing a system of automated reminders can keep all parties informed and enable proactive action to renew, renegotiate, or terminate contracts on time. 

Set up reminders several months in advance of the renewal date (e.g., 90, 60, and 30 days) to allow time for reviewing the contract, negotiating new terms, or terminating if necessary. Termination Notice Periods: If a contract requires notice before termination, set reminders well in advance to ensure compliance with notice periods.

Conclusion

Efficient contract management is the ideal way to navigate zombie agreements. Specialized solutions like Dock 365 allow businesses to centralize all their legal documents in a single digital repository. They can oversee the entire contract lifecycle without switching between multiple platforms. Parties can keep track of renewals and terminations to ensure they’re working with expired contracts.

Businesses can guarantee competent exit provisions in all agreements with pre-written templates and clauses. Automated workflows and reminders ensure the contracts get to relevant stakeholders for reviews and renewals. Consequently, companies are less likely to work with obsolete and draining commercial agreements.