June 12, 2008

Confessions Of A Hipster Doofus

Look, I’m willing to admit it. It’s nothing to be ashamed of, not really. Just because most everyone else does not feel this way is no reason that I should deny my true nature. You see, the thing is, I have to confess something: Arbitration clauses in contracts make me nervous.

Yes, I know, I know. Arbitration is trendy, arbitration is hip. It’s as cool as wearing sunglasses on a rainy night in Belltown. It’s as fashionable as those ugly plastic clogs with the holes in them. It’s as scenester as post-post-emo rock. Arbitration is so cutting edge that all those boutique lawyers who are putting the clauses into their copyrighted, intellectual property have paper cuts all over their hands. I mean, Dawg, what sort of hipster doofus doesn’t think that arbitration is just da wicked phat bomb?

Well, actually, that hipster doofus would be me. I paw through a lot of contracts. And every time I get to one where there is an arbitration clause (it's happening with greater frequency), I wince. Usually I reach in my desk drawer and pull out the faithful red pen, a/k/a d’Artagnan. A swift stroke of d’Artagnan’s blade and the clause is excised from the contract, tossed back into the ever flowing river of the law like so much salmon guts.

HalfLoaf.jpg I don’t like arbitration clauses because arbitration can be a half-a-loaf deal. No matter how right your client may be in whatever the dispute is, arbitration carries with it a built-in pressure to compromise. People don’t like absolutes and usually look for a way to reach what they consider to be a happy medium. And arbitrators are people just like everyone else (or at least most of them are). So arbitration cases often result in a half-assed compromise decision that pleases neither side.

Plus, arbitration is outlaw territory. The rules the rest of us have to live by don’t apply in the land of arbitration. For example, the law is well-established in Alaska that a landlord of a commercial property can distrain for rent due, at least when the lease provides for it. (To “distrain” means to hold the tenant’s personal property until he pays up.) But an arbitrator is not obligated to follow the law. Some of them seem to know this. An arbitrator can decide that distraint is a barbaric custom that should have gone out with maiden rents. So the arbitrator can rule the landlord was wrong to distrain the tenant’s property and must pay the tenant damages for doing so.

And once the arbitrator rules this way there is almost nothing you can do about it. The courts won’t overturn an arbitrator’s decision absent showing out-and-out bribery occurred, or something close to it. The fact that the arbitrator was a stubborn pinhead who ignored the governing law on the subject gets you precisely nowhere in court. The arbitrator has ruled and the client is just plain stuck with that decision.

Sure, there can be instances where arbitration makes sense for some clients. When the client wants efficiency above all else, or when the client is a big corporation that is concerned about what a jury might do, arbitration would be logical. But in too many instances, arbitration is just a way to double-down on the regrettable uncertainty that is already built into the legal system.

So I have to confess that I’m way out of step with enlightened society on this. But what else would you expect from a hipster doofus lawyer who gives names to his pens?

By the way, did you know that the real person who inspired the character of d’Artagnan in Dumas’s books was killed in 1673 at the siege of Maastricht? The Musketeer caught a musketball in the throat. You can almost see him standing at the gate to the city, leading the charge with his rapier pointed forward. "One for all, and all for [bang!] . . . . gurgle . . . gurgle . . . gurgle." It would have been ironic that a gun was used to kill the greatest swordsman in all of France, if they actually had irony back in those days. (I think of this every time I get red ink on my fingers.)

June 5, 2008

The Supreme Court Catches A "Waive"

The Alaska Supreme Court does not often delve into the world of commercial lease clauses. When it does so, we commercial real estate lawyers have to sit up and take notice. The rest of you out there can safely ignore these court decisions because they are B-O-R-I-N-G. But those of us toiling in the field have to read them whether we want to or not.

A few weeks ago the Court decided Carr-Gottstein Foods Co. v. Wasilla, LLC. The case turned on the application of a . . .wait for it now . . . WAIVER clause in a commercial lease. And I mean, really, is it possible to get any S-E-X-I-E-R than that? (OK, maybe a waiver clause tied into an insurance subrogation claim would be just a bit more dazzling, but we can’t always get everything we want.)

It seems that in 1996 Safeway's predecessor (Carr’s) moved out of the stand-alone liquor store it had been leasing in Wasilla from some formerly affiliated company, which I’ll just call Landlord LLC for simplicity. Safeway moved its liquor store into part of its main grocery store space that it was also renting from Landlord LLC. Landlord LLC knew about the move and even helped with it. Landlord LLC later affirmed for lenders that Safeway was not in default on its lease. The head man at Landlord LLC (a lawyer no less) said he thought the move was a technical default under the lease but he decided that he would “keep his options open” and not declare the tenant in default until the “economic ramifications” shook out. (The technical legal term for this is "lying in the weeds.")

Some six years later, after letting the situation ride without complaint, Landlord LLC sued Safeway for breaching the lease. Landlord LLC based its case on the use restrictions in the lease (supermarket only) and the prohibition against subleasing (the liquor store was technically owned by a separate entity). Landlord LLC offered up a creative damage theory to go with its claim. Since Safeway had fully paid its rent to Landlord LLC all along for the main store, Landlord LLC said its damages were the loss of rentals on the stand-alone store that had been vacated years earlier. Sure, the lease for that stand-alone store had expired six years ago, but Landlord LLC claimed that if Safeway had not moved its liquor store to the main building then it would have continued to rent the stand-alone store to sell liquor and it would have paid rent on it all those years.

So the reality was that Landlord LLC was suing to recover rent under a lease that did not actually exist for premises that the supposed tenant did not actually occupy. Can you spell C-H-U-T-Z-P-A-H?

cover.jpgIt was not hard for the Supreme Court to decide that this was not a situation crying out for the terrible swift sword of justice. (Or even the terrible slow sword of justice, which would be a more accurate characterization.) But the Court did two interesting things in leaving Landlord LLC hanging out there with its chutzpah flapping in the breeze: (1) the Court decided Landlord LLC had waived its default claims as a matter of law; and (2) the Court sidestepped the anti-waiver clause in the lease by saying it only applied to future breaches.

In finding waiver as a matter of law, the Court’s decision deviated from the conventional wisdom that waiver is a fact issue, one that has to be decided by the jury. The Court in effect held that some instances of waiver are just soooooo obvious that even a lowly Superior Court judge can make that call. (As opposed to letting unsophisticated jurors flip a coin in the back room.) Unfortunately, though, the Court gave no practical guidance for distinguishing waivers as a matter of law that the judge should decide from the more garden variety waivers that are fact issues to be punted to the jury.

In characterizing the waiver clause as being applicable only to future breaches, the Court ducked the more difficult question of on-going obligations under the lease. Sure, the past breaches of the “use” and “sublease” covenants of the lease were waived. But those covenants impose on-going obligations on the tenant that are theoretically violated anew with each day the liquor store remains in operation on the main premises. Isn’t the anti-waiver clause meant to apply in exactly that sort of situation? The Court did not really come to grips with this.

But don’t get me wrong. I am not criticizing the Supreme Court’s decision. I have no doubt the outcome of the case was entirely correct. Even if the anti-waiver clause should not have been sidestepped, the clause itself can be treated as being waived. It’s the same thing as orally amending a contract that says it can only be amended in writing, because the writing requirement itself can be orally modified. It sounds wacky, I know, but there is a lot of 24-carat legal authority vouching for it as the real deal.

And, you know, if the circumstances are so egregious that a mere trial court judge should be able to figure it out, then there’s got to be a waiver of the anti-waiver clause as a matter of law. Because the fundamental truth is, at bottom, the law just does not let you get away with this C-R-A-P.

(Hey, I warned you upfront that it was B-O-R-I-N-G.)