Audit Clause

TL;DR: An accrued rights clause preserves rights and obligations that have already vested or crystallized before a contract terminates or expires. Without one, termination can extinguish payment obligations, IP licenses, confidentiality duties, and indemnification rights that both parties assumed would survive. A well-drafted accrued rights provision is the contractual equivalent of a savings clause - it ensures that termination does not rewrite history.

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What Is an Accrued Rights Clause?

An accrued rights clause is a contractual provision that expressly states that the termination or expiration of an agreement does not affect any rights, remedies, obligations, or liabilities that have accrued prior to the date of termination. The clause operates as a protective mechanism, ensuring that rights already earned, obligations already incurred, and claims already arising are not extinguished simply because the contract comes to an end.

The legal concept draws on a fundamental principle of contract law: termination operates prospectively, not retroactively. However, the common law position varies by jurisdiction and is not always consistent. In England and Wales, the House of Lords in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 established that termination for breach discharges future obligations but does not retrospectively undo obligations already performed or accrued. U.S. courts have reached similar conclusions, but the analysis can differ depending on whether termination is characterized as rescission (which may unwind the contract) or as prospective discharge. An express accrued rights clause removes this ambiguity.

In practice, the clause functions as a catch-all that works alongside specific survival provisions. While many contracts include a survival clause listing particular sections that continue after termination (confidentiality, indemnification, dispute resolution), the accrued rights clause captures everything else that has already vested - unpaid invoices, earned commissions, accrued warranty claims, and breaches that occurred before termination but were discovered afterward.

The clause matters most in complex commercial arrangements where obligations accrue over time: supply agreements with outstanding payment terms, licensing deals with earned royalties, employment contracts with vested benefits, and M&A transactions where representations and warranties have a defined survival period. Without explicit accrued rights language, parties risk expensive disputes about whether termination extinguished a particular obligation.

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Why It Matters

• Protects earned payment rights: If Party A has delivered goods or performed services before termination, the accrued rights clause ensures that Party B's payment obligation survives. Without the clause, a terminating party might argue that its duty to pay was a future obligation discharged by termination.
• Preserves indemnification claims: Indemnification obligations arising from pre-termination events (data breaches, IP infringement, third-party claims) continue to be enforceable. This prevents a breaching party from terminating the contract to escape indemnification exposure.
• Maintains confidentiality obligations: Trade secrets and confidential information disclosed during the contract term remain protected. The clause works in tandem with survival provisions to ensure confidentiality duties are not inadvertently cut short.
• Safeguards IP ownership and licenses: Work product created before termination, IP assignments already executed, and perpetual licenses already granted are preserved. This is particularly significant in technology and development agreements where IP vests upon creation or delivery.
• Supports limitation and warranty claims: Warranty claims arising from products delivered or services performed before termination remain enforceable for the remainder of the warranty period. Similarly, limitation of liability provisions continue to govern pre-termination claims.
• Reduces litigation risk: An express accrued rights clause eliminates a common category of post-termination disputes. Courts in multiple jurisdictions have noted that clear accrued rights language substantially simplifies the analysis of post-termination obligations.

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Key Elements of a Well-Drafted Accrued Rights Clause

1. Express preservation language: State explicitly that termination or expiration "shall not affect any rights, remedies, obligations, or liabilities of the parties that have accrued up to the date of termination." Use comprehensive language covering rights, remedies, obligations, and liabilities - not just "rights."
2. Scope of accrual: Define or clarify what "accrued" means in context. This typically includes obligations that have become due and payable, claims arising from pre-termination breaches, rights that have vested by performance or passage of time, and remedies available for pre-termination defaults.
3. Relationship to survival clause: Coordinate the accrued rights clause with the contract's survival provision. The accrued rights clause is broader - it captures all vested rights regardless of whether the relevant section is listed in the survival clause. Make clear that the two provisions operate cumulatively, not as alternatives.
4. Inclusion of antecedent breach: Expressly state that rights and remedies arising from any breach of the agreement that occurred before termination are preserved. This prevents arguments that termination constituted a waiver of pre-existing breach claims.
5. Reference to specific obligations: While the general preservation language should be broad, consider adding specific examples relevant to the deal: accrued payment obligations, earned commissions or royalties, vested IP rights, pending indemnification claims, and accrued warranty rights. Specific references reduce the likelihood of disputes about scope.
6. Coverage of all termination scenarios: The clause should apply regardless of how the contract ends - expiration of the term, termination for cause, termination for convenience, termination by mutual agreement, or termination by operation of law. Use language like "howsoever arising" or list all termination scenarios.
7. Remedies preservation: State that the right to claim damages, specific performance, or other remedies for pre-termination breaches is preserved. In some jurisdictions, the availability of specific performance after termination is uncertain without express language.
8. Governing law consistency: Ensure the accrued rights clause is consistent with the governing law. Under English law, the clause reinforces the common law position; under certain civil law systems, additional language may be needed to address statutory rules about the effects of contract termination.

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Market Position & Benchmarks

Where Does Your Clause Fall?

• Favorable (to the party with accrued claims): Broad preservation language covering all rights, remedies, obligations, and liabilities. Express reference to pre-termination breaches. Specific enumeration of key accrued items (payments, IP, indemnities). Clause applies to all termination scenarios including termination for convenience by the counterparty.
• Market standard: General preservation of accrued rights and liabilities. Reference to antecedent breaches. Coordinated with a separate survival clause. Applies to all forms of termination and expiration without requiring separate enumeration of each accrued item.
• Unfavorable (to the party with accrued claims): No express accrued rights clause - parties rely on common law or the survival clause alone. Or the clause is limited to "accrued payment obligations" without covering claims, remedies, or IP rights. May be further restricted by a release or waiver in the termination provisions.

Market Data

• Approximately 80% of professionally drafted commercial contracts include an express accrued rights clause, typically in the termination or general provisions section.
• In M&A share purchase agreements, accrued rights provisions interact with representation and warranty survival periods - the market standard survival period for general representations is 18-24 months post-closing, with fundamental representations surviving 6-7 years or indefinitely.
• A 2023 survey of FTSE 350 outsourcing agreements found that 92% included both an accrued rights clause and a separate survival clause, with the accrued rights clause positioned in the termination section.
• In technology licensing agreements, approximately 65% of accrued rights clauses specifically reference perpetual licenses granted before termination, reflecting the importance of preserving vested IP rights.
• Under the Restatement (Second) of Contracts Section 373, a party in breach can recover for benefits conferred before breach (restitution), but only if the breach is not total - an accrued rights clause can modify this default rule by contract.

Sample Language by Position

Claimant-favorable: "The termination or expiration of this Agreement, howsoever arising, shall not affect or prejudice any rights, remedies, obligations, or liabilities of either party that have accrued on or before the date of termination, including without limitation any right to claim damages, indemnification, or other relief in respect of any breach of this Agreement that occurred prior to termination. All accrued payment obligations, vested intellectual property rights, earned commissions, and pending indemnification claims shall survive termination and remain fully enforceable."

Market standard: "Termination or expiration of this Agreement shall not affect any rights, obligations, or liabilities of the parties that have accrued prior to the date of termination, including the right to claim damages in respect of any breach of the Agreement which existed at or before the date of termination."

Narrow/unfavorable: "Upon termination, each party shall pay to the other all amounts that are due and payable as of the termination date. All other obligations of the parties shall cease upon termination, except as expressly set forth in the Survival section of this Agreement."

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Example Clause Language

The following examples illustrate accrued rights clauses as used in different transaction contexts.

Standard commercial agreement: "Termination of this Agreement for any reason shall not release either party from any liability which at the time of termination has already accrued or which thereafter may accrue in respect of any act or omission prior to such termination. Nor shall termination of this Agreement affect in any way the survival of any right, duty, or obligation of the parties which is expressly stated elsewhere in this Agreement to survive termination."

Software licensing agreement: "The expiration or termination of this Agreement shall not affect: (a) the obligation of Licensee to pay all fees accrued prior to the effective date of termination; (b) any perpetual license grants that have vested under Section 3.2 prior to termination; (c) the rights and obligations of the parties under Sections 7 (Confidentiality), 8 (Indemnification), 9 (Limitation of Liability), and 11 (Dispute Resolution); or (d) any other right or obligation that, by its nature, is intended to survive termination, including rights arising from any breach occurring prior to termination."

Employment or services agreement: "For the avoidance of doubt, the termination of this Agreement shall be without prejudice to: (i) any accrued rights of the Service Provider to fees, expenses, and other compensation earned prior to the date of termination; (ii) any claims either party may have against the other for antecedent breach; (iii) any rights of the Company in work product and intellectual property delivered or created prior to termination; and (iv) the continuing obligations of the parties under Clauses 6 (Confidentiality), 7 (Non-Competition), and 8 (Intellectual Property), which shall survive termination in accordance with their terms."

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Common Contract Types

• Supply and procurement agreements: Preserves payment obligations for goods delivered and accepted before termination, as well as warranty claims for defective goods supplied during the contract term.
• Software licensing and SaaS agreements: Protects perpetual license grants that vested before termination, accrued royalty obligations, and the licensee's right to retain copies of deliverables already provided.
• Employment and consulting agreements: Ensures earned compensation, vested stock options or equity, accrued benefits, and reimbursable expenses are not forfeited upon termination.
• M&A transaction agreements: Preserves the buyer's right to bring claims under representations and warranties for breaches discovered post-closing, subject to the contractual survival period and any cap or basket.
• Construction and engineering contracts: Protects the contractor's right to payment for completed work stages and the employer's right to claim for defective work discovered after termination.
• Distribution and franchise agreements: Preserves earned commissions, accrued rebates or volume discounts, and the distributor's rights in respect of inventory purchased before termination.
• Joint venture and partnership agreements: Ensures that profit distributions, capital account entitlements, and indemnification obligations arising before dissolution or withdrawal remain enforceable.

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Negotiation Playbook

Key Drafting Notes

• Use "without prejudice" language: The phrase "termination shall be without prejudice to any accrued rights" is well-established in English and Commonwealth jurisdictions and has clear judicial interpretation. In U.S. contracts, "shall not affect" or "shall not release" achieves the same result.
• Coordinate with the entire termination section: Ensure the accrued rights clause is not undermined by a broadly drafted release, mutual waiver, or "entire satisfaction" provision elsewhere in the termination mechanics. Review termination for convenience clauses carefully - some include a cap on the terminating party's exposure that could inadvertently limit accrued rights.
• Distinguish accrued from contingent: An accrued right has already vested; a contingent right depends on a future event. The clause should clearly cover accrued rights and, if intended, contingent rights arising from pre-termination events (such as an indemnity for a pre-termination act where the third-party claim has not yet been made).
• Address partial termination: In contracts allowing termination of specific work streams, services, or territories, confirm that the accrued rights clause applies to partial termination and preserves rights relating to the terminated portion.
• Consider the interaction with set-off rights: If one party has accrued payment obligations and the other has accrued indemnification claims, the right of set-off between these accrued obligations should be expressly preserved.
• Include a dispute resolution carve-out: Confirm that the dispute resolution mechanism (arbitration, mediation, expert determination) continues to apply to disputes about accrued rights, even after termination.

Common Pitfalls

• Relying solely on the survival clause: A survival clause that lists specific sections does not capture all accrued rights. If confidentiality survives for three years post-termination but the payment clause is not listed, does the seller lose the right to collect for goods already delivered? An accrued rights clause fills this gap.
• Ambiguous "accrued" language: If the clause only preserves "accrued obligations" without defining the term, disputes can arise about whether a right that was triggered but not yet quantified (such as an indemnity for a pending claim) has "accrued." Consider adding express language covering rights "arising from" pre-termination events.
• Conflict with termination for convenience payments: Many contracts provide that upon termination for convenience, the terminating party pays a specified fee or covers specified costs in "full and final settlement." If the accrued rights clause is not expressly carved out from this settlement language, it may be overridden.
• Overlooking limitation periods: The accrued rights clause preserves the right to claim, but the applicable limitation period continues to run. If termination occurs near the end of a limitation period, the preserved right may become time-barred before the aggrieved party can bring its claim. Consider whether the limitation period should be tolled or extended.
• Failure to address data and records retention: Accrued rights are only enforceable if supporting evidence is available. Ensure that document retention obligations survive termination for at least as long as accrued rights remain enforceable, so that the party with the claim can access the records needed to prove it.
• Ignoring bankruptcy and insolvency: In insolvency proceedings, a liquidator or trustee may challenge the enforceability of accrued rights under preference or avoidance provisions. While the clause itself cannot override insolvency law, drafting it clearly reduces the risk that accrued rights are disputed or overlooked in the insolvency process.

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Jurisdiction Notes

• U.S.: The Restatement (Second) of Contracts Sections 236 and 373 provide that termination for breach does not discharge claims for damages for prior breach, but the analysis can vary depending on whether the breach is characterized as "total" or "partial." Under UCC Article 2 (sale of goods), Section 2-106(3) distinguishes termination (discharging future obligations) from cancellation (retaining remedies for breach). An express accrued rights clause avoids these distinctions. Note that ipso facto clauses in bankruptcy (11 U.S.C. Section 365(e)) may affect enforcement where termination is triggered by an insolvency filing.
• U.K.: English common law, following Photo Production v Securicor and subsequent cases including Leofelis SA v Lonsdale Sports Ltd [2008] EWCA Civ 640, generally preserves accrued rights upon termination. However, the position is not absolute - the Supreme Court in Geys v Societe Generale [2012] UKSC 63 examined the interplay between contractual termination and accrued compensation rights. Express preservation language is considered best practice. The Law Commission has noted the value of clear accrued rights provisions in reducing post-termination disputes.
• Other: In civil law jurisdictions (France, Germany, Japan), contract termination (resolution/Rucktritt) may have retroactive effect, unwinding the contract and requiring mutual restitution. This default rule can be modified by contract, making an express accrued rights clause even more important in cross-border transactions governed by civil law. Under the CISG (Vienna Convention on International Sale of Goods), Article 81(1) provides that avoidance does not affect accrued rights to claim damages or any provision for settlement of disputes - a statutory accrued rights rule. Australian courts follow the English common law approach, and Australian Standard Form AS 4000 (construction) includes express accrued rights language in its termination provisions.

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Related Clauses

• Termination for Cause - Accrued rights clauses work in tandem with termination provisions to preserve pre-existing claims
• Termination for Convenience - Particularly important to coordinate accrued rights with convenience termination payment provisions
• Indemnification - Pre-termination indemnification claims are a primary category of accrued rights
• Intellectual Property - Vested IP assignments and perpetual licenses are preserved by accrued rights language
• Waiver - An accrued rights clause confirms that termination does not operate as a waiver of pre-existing breach claims
• Set-Off - Set-off rights between accrued mutual obligations should be preserved post-termination
• Release of Claims - Must be carefully coordinated with accrued rights to avoid unintended extinguishment of vested claims

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This glossary entry is provided for informational and educational purposes only. It does not constitute legal advice, and no attorney-client relationship is formed by reading this content. Consult qualified legal counsel for advice on specific contract matters.