June 24, 2019
Contractual Gap Fillers: Beware the “Mohawk Doctrine”
I’ve always kind of enjoyed making fun of my colleagues who practice real estate law. That’s because real estate issues involved in the most complex, cutting edge transactions can almost always be resolved by asking the question: “What would the common law have said about this in 14th century England?”
But this Weil Private Equity blog says that I shouldn’t be so smug – hoary common law doctrines often surface as “gap fillers” in M&A transactions as well. These gap fillers can have some surprising results, even in some pretty sophisticated jurisdictions. For instance, behold the Empire State’s “Mohawk doctrine”:
If you fail to agree on a specific matter expressly as to which the common law provides a gap filler, you have in fact agreed to that gap-filling term. In most cases, however, the agreements of sophisticated parties represented by sophisticated counsel (well-trained in the common law) expressly address these issues so they would rarely come into play. But such is not always the case, and the gap-filling terms that are supplied in some states may come as a surprise to the uninformed.
And that brings us to a unique gap-filling term implied in a New York law governed sale of a business—the Mohawk doctrine. The Mohawk doctrine derives its name from a 1981 New York Court of Appeals decision, Mohawk Maintenance Co. v. Kessler, 419 N.E.2d 324 (N.Y. 1981). In Mohawk, the court, relying on a common law doctrine know as “derogation of the grant,” held that the seller of a business that includes its “good will” is subject to an implied obligation “to refrain from soliciting his former customers.”
The blog points out that the Mohawk doctrine doesn’t prohibit customers from migrating independently or impose a true non-compete on the seller, but here’s the thing – the non-solicitation obligation lasts forever. So if your deal is governed by New York law, this is one gap you’d be well-advised to make sure that you fill.
If your jurisdiction has some common law quirks of its own that can have hair-raising results for an M&A transaction, I’d love to hear about them. . .
– John Jenkins