Allen Matkins Leck Gamble Mallory & Natsis LLP

May 19, 2010

Contract provisions that may seem harmless but can wreak havoc

Risky Business:

We often use the “standard form” of these clauses without

considering the impact in a subsequent dispute or lawsuit.

Attorneys’ Fees Time of the Essence Choice of Law/ Choice of Forum Venue Selection Severability Non-waiver Entire Agreement/Integration No Third Party Beneficiaries Waiver of Right to Jury Trial Selection/Limitation of Remedies

Miscellaneous Clauses:Think Before You Sign

EXAMPLES:

“If any litigation or proceeding is commenced arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party a reasonable sum for attorneys’ fees and costs reasonably incurred.”

“In any action to enforce this Agreement, the prevailing party shall be entitled to recover from the other party its actual attorneys’ fees and costs of suit.”

Attorneys’ Fees Clause:What Do You Think You’re Getting?

Confirm you want the clause in general Decide whether you want clause to

apply to all claims “Arises out of” language generally includes

any tort claims arising out of agreement Alternative is to narrow clause – for breach

of agreement or declaratory relief only Recover “reasonable” or actual fees? Consider a cap on fees or only applies if

dispute exceeds dollar amount

Attorneys’ Fees Clause: What Do You Want?

Specify in detail prevailing party’s right to costs other than attorneys’ fees

Expert witness fees Professional fees

(such as appraisers’ and accountants’ fees) Arbitration and/or mediation fees

(if arbitration allowed by contract terms)

Attorneys’ Fees Clause:Don’t Forget About Other Fees

EXAMPLE: “Time is of the essence of this Agreement.”

If no time specified, courts will apply a “reasonable” time to perform.

What is a “reasonable time” is a question of fact – so it will be up to a jury

Time of the Essence Clause:Define Time Frame to Make This Clause Meaningful

How effective is this clause?

Despite an agreement that time is of the essence, courts often avoid finding a breach of this provision by:

finding the performing party waived its right to enforce the timeliness provision by conduct (e.g., by accepting late payment)

OR

crafting a decision in order to prevent forfeiture of the benefit of the non-performing party’s bargain.

Time of the Essence Clause

Time of the Essence provisions have no effect on option contracts because time for exercise of the option is an essential term of the option and is controlling.

Time of the Essence Clause

Where do you want to go? Where real property is located Where the company is incorporated Where the company is headquartered

What law do you want? Your state State with most favorable law

Choice of Law/Choice of Forum Clause

Courts will not enforce choice of law/forum clause if:

that state has no substantial relationship to the parties/transaction

AND there is no other reasonable basis for that choice

OR the law of the chosen state is contrary to a

fundamental policy of California.

Choice of Law/Choice of Forum Clause:Will Your Choice Work?

Venue statutes identify proper court for particular action.

EXAMPLE: “Borrower submits to the jurisdiction and venue of the courts of Humboldt County, California for the purposes of any action arising out of or relating to this agreement.”

Agreements selecting a non-statutory venue

are void as against public policy.

Choice of Venue Clause: Nice Try

EXAMPLE:

“If any provision of this Agreement is for any reason deemed illegal or invalid, such illegality or invalidity shall not affect the validity of the remainder of this Agreement.”

Cal. Civ. Code §1599: “Where a contract has several distinct objects, of which one at least is lawful, and one . . . unlawful, . . the contract is void as to the latter and valid as to the rest.”

Severability Provision: Not So Cut and Dry

If the unlawful or unenforceable portion of the contract is an essential part of the agreement, the entire agreement may be held unenforceable.

Give careful consideration to whether a party is willing to perform the rest of the contract if such provisions are set aside.

Remember: interpretation based on intent of parties.

Severability Provision: What Can Go Wrong?

EXAMPLE:

“No express or implied consent to or waiver of any provision hereof shall be deemed a waiver of any other provision.”

Non-Waiver Clause:Be Sure It Covers All Provisions

GOAL #1: To protect you from waiving the benefit of a contract provision in the future by failing to enforce it in the present.

Goal #2: To allow a party to waive one provision while preserving the ability to enforce others.

BUT… you can still waive through conduct inconsistent with the terms of that clause.

“Even a waiver clause can be waived by conduct."

Bettelheim v. Hagstrom Food Stores, Inc. (1952)

Non-Waiver Clause

EXAMPLE:

“This Agreement represents the entire understanding and agreement between the parties as to the subject matter hereof and may be modified or waived only by a separate writing.”

Looks OK, but is it really?

Entire Agreement/Integration Clause: Have You Captured Everything?

Be sure there are no other agreements you may want to reference in conjunction with the subject agreement.

This clause does not prevent a fraudulent inducement claim.

Entire Agreement/Integration Clause

EXAMPLE:

“Except as expressly provided herein, nothing in this Agreement shall confer any rights upon any person or entity not a signatory to this Agreement.”

Good enough?

No Third Party Beneficiaries Provision:How to Prevent Party Crashers

A person asserting third party beneficiary status must prove contract was made for his/her benefit.

A provision stating there are to be no third party beneficiaries should exclude him/her from seeking protection or benefit under the contract.

BUT…

No Third Party Beneficiaries Provision

EXAMPLE:

“Except as expressly provided herein, nothing in this Agreement shall confer any rights upon any person or entity not a signatory to this Agreement.”

No Third Party Beneficiaries Provision

Courts look to evidence of parties’ intent to determine whether a person is a third party beneficiary.

Also, don’t forget about future amendments to your contract.

Consider whether you or the other party may hire subcontractors.

Even where third party beneficiaries are not expressly

contemplated, it may be advisable to include a provision

prohibiting third party beneficiaries

No Third Party Beneficiaries Provision

EXAMPLE:

“Buyer and Seller each waive their respective right, to the fullest extent permitted by law, and agree not to elect a trial by jury with respect to any issue arising out of this purchase and sale agreement.”

Note: Pre-litigation contractual jury trial waiver must be expressly permitted by statute. See Cal. Civ. Proc. Code §631(d).

Waiver of Right to Jury Trial

Waiver or forfeiture of the right to a jury trial via a contract is generally prohibited:

Grafton Partners v. Superior Court (2005) – the “nonstatutory authority for waiver of the right to a jury trial is not permitted by [the California] Constitution.”

“California constitutional history reflects an unwavering commitment to the principle that the right of a civil jury trial may be waived only as the Legislature prescribes.”

Waiver of Right to Jury TrialGenerally Unenforceable If Alone

Agreements to arbitrate, which are essentially jury trial waivers, “are specifically authorized by statute.” Grafton Partners, 36 Cal.4th at 955; see Cal. Civ. Proc. Code § 1281.

Agreements for judicial reference, by which parties submit their dispute to a judicial referee rather than a jury. See Cal. Civ. Proc. Code §638.

BUT…CC&Rs cannot be treated as a contract for purposes of agreeing to judicial reference. Treo @ Kettner Homeowners Assn. v. Superior Court (2008)

Waiver of Right to Jury Trial:The Major Exceptions

EXAMPLE:

“In the event Seller fails to perform, Buyer may at its option and as its exclusive remedy:

(i) terminate this Agreement, or (ii) seek specific performance.

Buyer hereby waives any right to pursue any other remedy, including, without limitation, any right to seek, claim or obtain damages, punitive damages or consequential damages.”

Selection/Waiver of Remedies Clause:Be Sure You’re Clear on What You Want

Parties may select or limit remedies by contractual agreement, or by otherwise waiving certain remedies.

“Any one may waive the advantage of a law intended solely for his benefit.” Cal. Civ. Code §3513.

Statutes of limitation – can be waived

But, court may still not enforce all remedies despite parties’ agreement

Selection/Waiver of Remedies Clause

Make sure if you provide for a remedy,

you really mean it.

Selection/Waiver of Remedies Clause

This information is intended to provide a general summary of some commonly-used contract provisions and identify ways in which they might be interpreted in the context of litigation.  It is a general overview only and does not constitute legal advice.  It should not be relied or acted upon with regard to any particular set of circumstances without first consulting professional legal counsel.