Alaska Law Blog

This is still a free country, so long as you have your immigration papers in order. Freedom of contract is one of the central principles of American law that is even recognized in the Constitution (in a kinda, sorta way). But this does not mean that you can put any damn thing into a contract and expect to be able to enforce it.

We’ve touched on this theme before, but a recent Ninth Circuit decision underscores the point. In Narayan v. EGL, Inc. three guys in California who drove delivery trucks for EGL, a Texas based company, sued for overtime compensation, reimbursement of business expenses, and other obligations California law says employers have to pay. EGL stiff-armed the drivers by pointing out that the contracts the guys signed said they were independent contractors, not employees. The contracts also said that Texas law governed their relationship.

Amazingly enough, the trial judge – apparently another platinum level member of the Adam Smith fan club -- accepted EGL’s position. He ruled that Texas law applied and shackled the drivers with the distainful servitude of being mere independent contractors.

The Ninth Circuit reversed on appeal, as well it should have. The Nines said that Texas law applied only to claims arising out of the contract itself, not ones based on statutes. Since the drivers' claim did not depend on interpreting any contract provision or even require a contract to exist, the appeals court said the provisions of Texas law didn’t matter. California law was what was important, and under California law it was a question of fact whether the drivers were actually employees or independent contractors.

(At the start of the opinion, I was thinking the Court of Appeals was going to get into a nuanced discussion of the exotic choice of laws notion, renvoi. Alas, the court skipped the discussion whilst going straight for a renvoi result.)

So EGL is going to face a jury on the drivers' claims. And while it’s understandable that EGL would take a flyer on putting these clauses into its contracts, you have to wonder about why it pushed things so far. I mean, regardless of what the contract says, you can’t really expect to avoid applying California labor law to folks working for a living in California, now can you? If EGL’s contractual sleight-of-hand had worked then you’d find Scrooge Industries Inc. and its like always electing to apply Somalia maritime law to its employment contracts, just to avoid those pesky U.S. statutes about overtime, minimum wage, child labor and such.

It’s right there at the end of your contract. A funky little clause that most people probably skip right over. Jane Widgetmaker has exhausted herself studying the main business points covered in the contract so she just skims the rest of it. It’s just boilerplate legal stuff anyway, right?

What I’m talking about, of course, is the lowly INTEGRATION clause. Often they read something like this:

This document contains the complete and final agreement of the parties on the subject matter. All prior negotiations, representations and understandings are expressly superseded and may not be relied upon.

(Actually, this is a damn fine example of an integration clause. Too often, the ones I see leave out some of the important lingo. For instance, you need to use both “complete” and “final” in the first sentence to really have an effective integration clause. Otherwise you end up with a “final” contract, but not a “complete” one. This means the Yo-Yo on the other side of the deal can say something else has to be added to make it a “complete” writing, which then changes the “final” deal entirely. And I’m not just talking about transactions with Master Cellists here.)

Now, “integration” has nothing to do with the 1960s civil rights movement. When Governor Wallace stood in the schoolhouse door to stop integration he was not trying to thwart effective contract drafting. No, “integration” in this instance means that the contract is a complete unit. It’s the whole kit and caboodle, the entire shooting match, the 100% genuine article. When you’ve got an integrated contract, there is theoretically nothing outside of the written document that can have any affect on the deal.

Well, that’s the theory any way. The practical reality is something else again. The legal rule that is supposed to control is known as the “Parol Evidence Rule.” The Parol Evidence Rule comes into play once you have a integrated contract; it says that evidence of prior or contemporaneous oral discussions can’t be used to vary the written words of the contract. Yet in spite of the legal sounding bodaciousness of the Parol Evidence Rule, its application can often be sidestepped. Whether a contract is integrated or not, the courts in Alaska will still admit outside evidence to show what the words of the contract mean, or to determine whether there is a basis for setting the whole contract aside.

Notwithstanding the courts’ floccinaucinihilipilification of the Parol Evidence Rule, integration is still important in contract drafting. If you want to have any hope of the words used in the contract being given actual effect, then a proper integration clause is necessary. Also, the clause brings it to both parties' attention that every aspect of their transaction needs to be stated in the written document. For instance, if Jane Widgetmaker really wants the guy on the other side of her deal to throw in his CD collection of Yo-Yo Ma Plays Elvis' Greatest Hits, then she had better make sure the contract says so. (Just imagine, "Burning Love" sawed out on a cello!)

So check that there is a proper fine version of the funky little clause is at the end of each of your contracts.

Somehow it is comforting to know that there are contract geeks out there championing the cause of better contract writing.

The specific guy I’m thinking of is Kenneth A. Adams, who has written extensively on contract drafting. Adams teaches seminars and classes on the subject. He now maintains a website devoted to writing contracts. Adams used to be a real lawyer who had actual clients, but he packed that in to focus exclusively on becoming the Great and Powerful Contract Writing Wizard (“Great Contract Wonk”). Just like the late Herb Shaindlin, Adams has taken a personality defect and turned it into a career.

I have one of the Great Contract Wonk’s books. I often check out his website to stay up on the “hot” contract writing issues (an oxymoron, if ever there was one). The guy covers an awful lot of territory. Some of it is incredibly useful and bedrock fundamental for a practicing lawyer. Such as the real meaning of things like “materiality” and “material adverse change.” Some of it is almost entirely useless. Such as a two page discussion of why you see ‘curly’ quotation marks and ‘straight’ quotation marks in documents.

Adams is on a crusade to get the legalese out contracts. He discounts the use of stock legal phrases when he thinks a “redraft” will result in a better technical document. I am marching alongside Adams as to a general dislike of legalese – that "relatively plain English" thing -- but I do not accept his premise that a “redraft” of all the stock legal phrases is necessarily going to be better. In the real world lawyers don’t have time to fuss over all the minutiae. They have an obligation to get the paperwork out the door and the deal done. The client does not want to be charged for the time it takes to rewrite the stock phrases just to say the same thing a different way, or to clean up the stylistic defects that might exist.

Take one example. Almost every contract has an indemnity clause in it. The standard phrase used contains what amounts to the legal equivalent of a Holy Trinity: “indemnify, defend and hold harmless.” The Great Contract Wonk correctly states that the Holy Ghost in this arrangement -- “hold harmless” – is redundant. It does not have a distinct meaning from the Father, “indemnify.” But that does not mean I am going to spend my time going through every contract to strike it out. Doing so may very well trigger a pointless and protracted discussion with the other side as to what function “hold harmless” might possibly serve.

Besides, the word Adams favors using by itself – “indemnify” – is inherently ambiguous. As I mentioned before, it is not exactly clear under Alaska law whether “indemnity” means the sucker who has to pay out the money must cover just what the smart guy owes to a third party, or whether the smart guy’s own direct costs are also included. If you’re going to “redraft” the legalese as the Great Contract Wonk advocates, it would be far better to junk “indemnify” as well. You could use some plain English instead: “Sucker must reimburse smart guy for what he has to pay out to others as well as any direct costs and losses smart guy incurs.”

Adams also says that the Son of the legal trinity – “defend” – should be left out of the indemnity clause. He thinks defense can be addressed in a separate provision on the “indemnification procedures.” I part company with Adams on this point as well. Defense is something distinct from indemnity. For the smart guy to have the right to have the sucker hire a lawyer to defend the smart guy as the case is going along, the smart guy needs to keep “defend” in the mix. Otherwise, the smart guy may have to get his own lawyer to defend the case as it unfolds and worry about collecting for the expense after the fact.

But don’t get me wrong. I am not down on Ken Adams. As I said, a lot of what he covers is absolutely essential for a practicing lawyer to know. It’s laudable that there is a bold champion out there who is making a real effort to improve the writing lawyers use over and over again in their contracts. Yet, I can still disagree with the Master on some of the details of his approach. He may be the one, the true, Great Contract Wonk, but I ought to be able to a bit of a contract geek in my own right.

This post is a follow-up to a couple of prior postings. I realize this makes it look like I lack creativity since I’m not saying anything new. But I can’t help it. The fascist running dog who is the Virtual Managing Editor of the alaskalawblog.com has insisted that I do more linking back to prior blog postings. He says this is necessary for “search engine optimization.” I don’t even know what that means. Goofy legal stuff -- like maiden rents or the fertile octogenarian -- I understand. Website technospeak, I don’t get.

In any event, updating of a couple of earlier blog postings is my attempt at keeping the e-tyrant at bay.

On the first of October, I wrote about limitation of liability clauses in this post. I ran into a problem with one of these horrid clauses a week or two ago and had to forcibly cut its heart out. In the process, though, I found a 2008 Colorado case that I think illustrates the points I was making in the earlier post.

In the Colorado case, a retail merchandise distributor, Core-Mark, had a large warehouse where it stored inventory. Core-Mark entered into a contract with a security company, Sonitrol, to install and monitor an alarm system in the warehouse. The alarm system utilized sound detectors. If sound over a certain level was detected, the system recorded it and alerted a central monitoring facility. The operators at the central monitoring facility were then supposed to listen in live to determine if anything underhanded was afoot and call the authorities if necessary.

One night three miscreants broke into Core-Mark’s warehouse. They spent hours inside, making a heckuva racket, looting the place. The alarm company’s sound detectors picked it all up and repeatedly alerted the central monitoring facility. The operators there (who must have been busy updating their blogs) just kept turning the alarm off. When the burglars finally left they set the warehouse on fire. The alarm company never called the police or the fire department. The warehouse and everything in it burned to the ground. The total loss amounted to about $20 million.

Core-Mark sued the alarm company since – Gee! – Sonitrol was hired to protect the warehouse and did not actually do it. Sonitrol pulled the “can’t touch this” dance, pointing to the limitation of liability clause in its contract. The clause said Sonitrol’s “liability shall be limited to a sum equal to the total of one-half year’s monitoring payments, or five hundred dollars ($500) whichever is less.” So Sonitrol argued that it was A-OK to pay Core-Mark a grand total of $500 for its loss.

The trial court judge -- who was apparently a platinum level member of the Adam Smith fan club -- accepted the alarm company’s position. Core-Mark appealed and the Colorado Court of Appeals reversed. The appellate court paid lip service to freedom of contract but dug around in the dusty corners of the law library to find a restriction that applied. Judge Ney’s opinion said it was against public policy (in Colorado, anyway) to have a contract provision that exonerated a party from its own “willful and wanton” conduct. So the appellate court sent the case back – some six years after the fire occurred and about five years after the lawsuit started -- for a jury trial on whether Sonitrol’s actions were “willful and wanton.”

(By the way, isn’t “Ney” just a great name for a judge, especially if Monty Python were the outfit doing the judicial appointments? “We are the judges who say NEY.” )

The Core-Mark case demonstrates my original point. You can put these things in contracts but you better not count on them as always covering your southern quadrant. The case also points up the reason I detest these clauses. I mean, who wants to hire a burglar alarm company who says we can’t really be responsible for calling the cops when the burglars break in? You’re better off doing business with someone who will actually stand behind their promises. Or just putting the fake "Protected By" stickers on the windows and doors.

One other follow-up note I need to squeeze in. After writing about tribal sovereign immunity in this post a couple weeks back, I found that some people were thinking I was referring to ANCSA corporations. (OK, OK, I only know of this one guy who actually got confused.) ANCSA corporations are formed under state law and do not get the benefit of sovereign immunity. I was talking about federally recognized Indian tribes and the entities that the tribes set up as authorized under federal Indian law. ANCSA corporations and tribes are different organizations, although the shareholders/members of the two overlap.

Hey, it’s an easy mistake to make. As one of my esteemed colleagues is fond of saying: “The law is tricky she-it.”

Some weeks back I mentioned one of the “stack the deck” provisions that is often included in business contracts. This time I want to focus on a critical “unstack" the deck provision that is mandatory in certain types of transactions. What I’m referring to is a waiver of sovereign immunity when doing business with any tribe or tribal entity.

By “tribe” I don’t mean a group of people with similar interests, such as the coterie of fine gentlemen who own classic Harley-Davidson motorcycles with Panhead engines. No, I’m talking about Native American tribes. Or more specifically, Native Alaskan tribes. The federal gummint has explicitly recognized literally hundreds of different tribes and tribal entities in Alaska, any one of which might enter into a business transaction for one reason or another.

Alaskans sometimes overlook the importance of tribes in the Last Frontier. The tribes play a critical role in Alaska life. The Native Alaskan tribes often deliver services that no one else can provide or is willing to provide -- like, for example, health care in the Bush.

But Native Alaskan tribes have another attribute that figures into commercial transactions. They are recognized under the law as being their own sovereign nations. They enjoy immunity from suit in much the same way the State of Alaska or the U.S. of A. does. Even in Alaska where there is no Indian Country north of Metlakatla (at least the federal courts have not yet been able to find any), the tribes enjoy sovereign immunity. The tribes, and some tribal entities they establish, cannot be sued in either state or federal court without the tribe’s own permission.

So the lawyers handling commercial transactions in Alaska have to be alert to who exactly is involved in the deal. Any contract with a tribe or a tribal entity simply must include an express waiver of sovereign immunity. And the waiver has to be precise in order to be effective. If there is no effective waiver of immunity, then the options for enforcing the contract are going to be either very limited (tribal court, perhaps) or entirely nonexistent. (For more on tribal sovereign immunity in business transactions, I recommend reading this article in the most recent edition of Business Law Today.)

A November 14 decision of the Ninth Circuit illustrates the strength of tribal sovereign immunity. In Cook v. Avi Casino Enterprises, Inc., the employees of a tribal corporation operating a casino in Nevada got together in the casino after work to celebrate a birthday. The manager on-duty announced that drinks were "on the house” for the employees. One of the employees became obviously drunk. The drunk got on the casino's shuttle bus and the driver delivered her to the employee parking lot, where she promptly got into her car to drive home. Just a few miles down the road, she swerved into on-coming traffic and collided with Mr. Cook on his motorcycle. (I doubt the bike was a Harley Panhead, but the court’s opinion does not give the make or model.) Mr. Cook suffered catastrophic injuries, including the loss of a leg. The drunk employee, who had a blood/alcohol level of over three times the legal limit, pled guilty to aggravated assault and DUI. She was packed off for a four-year stretch in the Stripey Hole.

When Mr. Cook sue the tribal entity running the casino for serving alcohol to an intoxicated person and letting her get into a car to drive, both the trial court and the Ninth Circuit said: “No dice.” The tribal entity was protected by sovereign immunity and could not be sued. Every argument Mr. Cook’s lawyer made for finding an implied waiver of immunity came up snake eyes. The courts even extended immunity to the fellow employees of the casino who had served up the liquor.

The Cook case, of course, was a tort lawsuit, not one involving a business deal. But if the courts aren’t going to help out poor Mr. Cook in overcoming sovereign immunity -- when all he did was ride his motorcycle down the road -- how much help are they are going to be to a businessperson who willingly enters into a deal with an immune tribal entity? Not much, I’m afraid, which is why an explicit waiver of sovereign immunity is required in these transactions.

By the way, did you know that the Harley Panhead engine was preceded by the Knucklehead engine of the 1930s and 1940s? The name came from the protruding “knuckles” on the sides of the valve covers that accommodated Harley’s first overhead valve design for the V-twin engine. The Knucklehead bikes are prized collectors' items today. I suppose the Harley enthusiasts who have motorcycles with these old engines are, in one sense, members of the Knucklehead tribe. Perhaps they would accept an honorary member?

“You need a novation,” I say.

I can hear the client literally scratching his head on the other end of the line.

“You mean I need an crappy old Chevy?” He asks, clearly puzzled.

“No, no, no,” I say. “You're thinking of a Nova, or maybe a Citation. I’m talking about a novation. It’s an agreement in which a new party is substituted in for another.”

Because we are discussing a real estate lease in this case, I go on to explain the nuances of the law about privity of contract and privity of estate. I tell the guy that an assignment of the lease to another party gets his business out of “privity of estate” but it does not get him out of “privity of contract.”

“Since your business made a contract with the landlord, you are in privity of contract with the guy," I tell him.

"You promised the landlord you would do certain things, like pay the rent every month and keep the premises insured. You can’t get out those obligations just by assigning the lease to someone else, even if the landlord approves of the assignment. The transfer of possession breaks the privity of estate you have but not the privity of contract. You have to get the landlord to let you out of privity of contract through a novation.”

He asks: “What if I skip that part and just let the new company move in? As long as the landlord gets his rent he will be happy, I think.”

“Well, the landlord could claim a breach of the assignment provision in your lease and evict the new guys.” I caution him. “More importantly, you could face liability down the line. How many more years does your lease have to run?”

“Another seven years,” he says. “But we need a bigger space, which is why I had my real estate gal find this new company to take over.”

“Well, you are on the hook for the next seven years, whether you want to be or not, unless you do a novation,” I say. “If the new company defaults on the lease anytime in the next seven years, the landlord can come after you. So down the road, this lease that you thought you were all done with could come back to haunt you.”

“OK, OK,” he concedes. “You talked me into it. Write up your crappy old Chevy agreement.”

“I’ll be glad to.” I say. “But you’ve got to talk your landlord into accepting it along with the new company.”

“Besides,” I add. “A mid-sixties Chevy Nova SS with a small block V8 shoehorned under the hood and four on the floor was a legitimate muscle car. It was a thing of beauty, as long as you were going in a straight line.”

“Spare me the history lesson,” he tells me. “Just get me out of this lease!”

One businessman shakes hands with another. They have just struck a deal and signed a contract. Each guy thinks he’s going to get something out of the transaction. But one guy could be dead wrong about what he’s getting.

You see, the cagey guy of these two has built an escape hatch into the contract. He’s limited his downside risk by stacking the deck in his favor. If he breaches his obligations under the contract, he’s got it set up so that the other guy can’t do much about it. He’s slipped in a provision that says the most he can liable for is the equivalent of the fees he was paid in the deal. Perhaps the provision even restricts that further to just a month or so of the fees that have been paid. So if it happens that the other guy loses out on $5 million in profits because the cagey guy did not perform as promised, all the other guy can claim under the terms of the contract is the $999.95 that the cagey guy charges every month for his services (which, of course, he fails to actually perform).

Is this legal? Can Mr. Nanny-Nanny-Boo-Boo really skate out of his responsibilities that way? As with many other areas of the law, the answer is a resounding MAYBE!

In looking at this problem, you have to start with the assumption that the limitation on liability is going to be upheld, unless there is some specific exception that can be found. The law still recognizes freedom of contract, more or less. If you want to make this kind of a deal, the law will let you, as long as you don’t step into some recognized exception.

There are a long list of exceptions, though. In a transaction for the sale of goods, the Uniform Commercial Code (UCC) applies. The UCC lets a seller limit the warranties given and the remedies allowed for breach of a warranty. (At least it allows this in a non-consumer deal.) But the UCC does not let a seller leave the buyer with his hindquarters completely hanging out there flapping in the breeze. The UCC says that a remedy limitation will not be honored if the circumstances cause the remedy to “fail of its essential purpose.” In other words, if the limited remedy provides for no real remedy at all, it won’t be upheld.

But the UCC does not apply when a contract is one for services. So are service contracts the land of the free and the home of the brave when it comes to limitations of liability? Not always. The free and the brave can get their choke chains pulled up short when they aren’t looking. YOWCH!

For example, the Alaska Supreme Court has said that it is not going to permit limitation of liability clauses in a construction contract, or even in any contract that is a first cousin to a construction contract, like a construction manager’s contract, or an architect’s contract, or an engineer’s contract. It took an expansive reading of the Alaska Anti-Indemnity Statute (AS 45.45.900) to get to this result, but the Supremacies got there nonetheless.

Another example. A limitation of liability clause in a contract may not apply when a tort claim can be based on the exact same conduct. The court may just ignore the contractual limitation and apply the regular tort rules regarding a recovery.

This very thing happened to the poor title companies who tried to limit their liability for goofing up a title report. The title report said that the title company was only liable for the amount stated in the report, which was a measly $250. The Alaska Supreme Court jerked the title company’s choke chain on that one. The Supreme-O-Mites effectively said:

“Fine, you can limit the damages that can be recovered in a breach of contract action. But there’s a tort claim here too, for negligent misrepresentation. Under the tort claim, you -- Nanny-Nanny-Boo-Boo Title Company -- are liable for the full amount of the loss your foul up caused.”

(OK, OK. It was actually First American Title Insurance Co.)

My approach to these things is to advise business folk to think twice before doing a deal with someone who insists on a limitation of liability clause. If they aren’t going to stand behind their word, is this really someone you want to do business with? I mean, who really needs a Swiss cheese contract full of holes. Sometimes you have to just live with it, but it's something that you should only accept with eyes wide open.

And if my client happens to be the Mr. or Ms. Nanny-Nanny-Boo-Boo in the transaction? I tell them that this is still the land of free and the home of brave so you can charge right ahead. But you better not always count on being able to skate out your obligations, lest the choke chain of the law get pulled up rather smartly.

Bob Dylan, genius poet and songwriter that he is, had a terrific line in the song Shelter From The Storm. Well, actually, the whole song is downright terrific but I want to focus in on this one particular line. (The song was from Dylan’s masterpiece album Blood On The Tracks.) The line I refer to goes as follows:

“I bargained for salvation an’ they gave me lethal dose.”

(To get the full effect, you have to wail out the line with squinting eyes and keening voice.)

I suspect the lawyers who put together the Stock Purchase Agreement that Argan, Inc. used in selling to Western Filter Corporation have a similar view of the United States Court of Appeals for the Ninth Circuit. Those lawyers bargained for a time limit on their client’s obligations under the agreement. The Ninth Circuit took their time limit and gave them a karate chop in the throat with it.

The case I’m talking about is Western Filter Corp. v. Argan, Inc., decided on August 25, 2008. The case stems from Western Filter’s purchase of the corporate stock of a competitor in the filter business, Puroflow, Inc., an Argan subsidiary. The Stock Purchase Agreement used in the transaction contained the usual representations and warranties on the seller’s part. The Agreement went on to say that some of the representations and warranties “shall survive the Closing for a period of one year.”

Within the one year period, Western Filter discovered what it said was a breach of the representation and warranty on the accuracy of Puroflow’s financials. (The specific issue was overvalued inventory.) Western Filter figured it had been gypped to the tune of about $2 million. But Western Filter did not actually bring suit against Argan until more than one year after the deal closed. Argan defended by saying the one year survival period in the contract ran out. The trial judge agreed and tossed the claim.

The Ninth Circuit reversed. Going out of its way to avoid applying the terms of the contract as any normal person would, the Ninth Circuit panel said the survival clause in the agreement did not unambiguously change the California period of limitations for bringing suit. The court therefore ruled that Western Filter had the right to maintain its claim.

The Ninth Circuit’s interpretation of the survival clause makes little sense in the real world. In essence, the court said the one-year “survival” period only set out the time period for discovering a breach of a representation and warranty; it did not establish any limit for asserting a claim for breach. But I can tell you from firsthand experience that absolutely no one in a deal of this nature would ever negotiate over the “discovery” period for bringing a claim. The negotiations are all about how long there is to make a claim for a violation.

What the Ninth Circuit actually said was that the one-year period established the time within which a breach could occur. But that is completely impossible. A breach of a representation and warranty as to financial condition has to occur, if at all, no later than the date of closing. On this point, the Ninth Circuit's opinion betrayed a less than clear understanding of merger and acquisition transactions. What the Ninth Circuit's decision has to be understood to really mean, and what it sort of said elsewhere, was that the one-year period was for discovering a breach had occurred.

Hey, I readily concede that the survival clause in the Stock Purchase Agreement could have been better worded. The agreement could have expressly defined the word “survival” to mean the time within which to assert a claim for breach. I also might have added my favorite phrase: “And we really, really mean it here, judge.” (In Alaska, though, even this might not have done any good.)

Yet, the Ninth Circuit’s interpretation of the clause is screwy. It would have been far better if the court had just fessed up, saying that it knew what the clause really meant, but that it disliked these kinds of limitations so it wasn't going to apply the clause. That would have been an honest and still lethal dose, although not really in accordance with California law.

By the way, I want to be on the record as saying that I think almost everyone out there is wrongly reporting the lyrics for Shelter From The Storm. Most sources give this line for the song:

“And the one-eyed undertaker, he blows a futile horn.”

I am sure that the correct phrase is “feudal horn.” Horns can be “feudal” (old) but they can’t really be “futile.” (That is, I guess, unless they don't make any sound, in which case they cannot be "blown.") I realize its poetry and literal meaning is not required. But I’m sticking with my interpretation of the song. At least, I'm sticking with it until the day old Robert Zimmerman hisownself comes into my office and shows me his notebook from 1974 to prove me wrong.

(I’m offering up my innocence here. Please don’t repay me with scorn.)

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.

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.)

I discussed the topic of contract conditions in an earlier blog posting. This got me thinking about conditions that require the personal satisfaction of one party to the contract. For example, the contract may provide that Harry Houdini only has to pay Magic Tricks, LLC for a new water escape chamber if Harry is satisfied with the chamber’s construction. If Harry does not like the completed chamber because it leaks water all over the stage, then Harry will be excused from his obligations under the contract.

Personal satisfaction conditions bedevil the law for a variety of reasons. Often the contracts are not written clearly enough to make the satisfaction condition truly personal. The law generally takes the view that an objective standard is to be used to determine whether the condition has been met or not. Like in Harry’s case, where a leaking water escape chamber is something no one really wants. If you are going to use one of these things, you pretty much want it to be watertight. The theatrical effect of the whole escape is lost when all the water drains out of it so that you can breathe normally while you wiggle out of the padlocks and chains.

But the situation would be different if Harry did not like the chamber because Magic Tricks, LLC used brass rivets instead of copper ones. The functionality of the chamber would not be diminished then. Its just that Harry has a weird thing for copper since he thinks copper better transmits the “good vibes” of the spirit world. Harry will have a hard time avoiding having to pay for the chamber with the brass rivets because objectively there is nothing wrong with the chamber. Harry needs to have his contract clearly written to say that his personal judgment is the one and only standard by which satisfaction can be measured.

Only when the contract is one that involves "personal or artistic" matters does the law assume the personal judgment of the party to the contract is the measuring stick for satisfaction. In this area, the law sensibly recognizes that there is no accounting for taste. So if you make a contract to commission a piece of artwork you can pretty well count on your personal satisfaction being the only measure of satisfaction.

A good example of this would be the sculpture the Anchorage Museum commissioned for its new expansion project. The Museum picked a UK artist, Antony Gormley, and paid him $350,000 to come up with a suitable work of art to sit on the lawn outside the new addition. The sculpture Mr. Gormley designed for Anchorage was a cubist, block-style rendition of a squatting man. It’s a design that I have taken to calling the “Gerund Man,” ever since the Dear and Esteemed Wife pointed out to me that it looks like the figure is in the process of evacuating his bowels.

The name “Gerund Man” seems to fit since the guy is demonstrating any number of gerunds. (If you recall junior high school English, gerunds are verbs that are transformed into nouns and take the ending “ing”.) You see, Mr. Gormley has designed for us a fellow taking a dump, pinching a loaf, dropping a deuce, firing off a missile, launching a p-u boat and spawning a brown trout.

The proposed sculpture caused a bit of a stink when it was announced. There was a high-toned debate between two University artist types in the Sunday paper one week, although neither one mentioned the excretory aspect of the proposed work. The objection of the guy writing against the artwork was that it did not seem very Alaska oriented. But that issue can be easily remedied. Just put a cubist rendering of an outhouse around the guy, or maybe round out the base he’s squatting on so that it artistically resembles a five gallon pail. There’s nothing more Alaskan than depositing a dookie in a honey bucket.

Still, one might hope that the Museum’s contract with Mr. Gormley has a personal satisfaction clause. As long as the Museum Board isn’t afraid to declare that the Emperor has no clothes, they should be able to invoke their own personal dissatisfaction to get their money back. There's no accounting for taste, I know, but I’m pretty sure that an artistic rendering of pumping out a pile on the Museum’s lawn is not acceptable, even under a purely objective standard.

Anchorage would not be the first community to reject one of Mr. Gormley’s sculptures. The hip and progressive city of Seattle found that Mr. Gormley tested even its limits. For Seattle, Mr. Gormley designed the sculpture of a 39-foot-high standing figure of a man that would have been placed along the waterfront, facing Elliott Bay. The sculpture would have been plumbed with a fountain that shot a stream of salt water from the figure’s loins into the bay every five minutes. (The UK reports on the design described the water as shooting out of the figure's "metal todger.") The city council decided not to proceed with the project because it felt that even Seattle was not yet ready for “Ejaculating Man.” Perhaps the termination of the project came through the failure to satisfy the condition imposed by a personal satisfaction clause in the contract.

You see it again and again in lawsuits over contracts. Almost everyone gets confused when its comes to conditions. The courts frequently mess up on the rules that apply to conditions. The lawyers often don’t realize the problems they are dealing with involve conditions. And the clients don’t even know what conditions are. The result is that some poor schmuck who has charged off suing the other side thinking he was given the shaft gets smacked down in court. The poor schmuck finds out that, because of the failure of a condition, the shaft was part of his deal all along.

A condition in a contract is simply something that has to happen before something else happens. Easy to say, but not so easy to apply. Conditions are imposed on one party’s obligation to perform under the contract. The contract might say, for example, that Andy Hardy does not have to buy Aunt Milly’s house until Andy Hardy first sells his existing home. If Andy Hardy cannot sell his existing home then the condition has failed and he is never obligated to actually fork over the money for Aunt Milly’s house.

But what if Andy Hardy does not really try very hard to sell his existing home because he’s too busy “pitching some woo” with Polly Benedict? Can Aunt Milly take Andy to court and complain that Andy’s out-of-control hormones kept him from making a decent effort to fulfill the condition? This gets us into conditions creating "implied promises" and the ever popular "excuse of conditions." Aunt Milly might have a good case here, if you can ignore the fact that Andy’s dad is Judge Hardy.

Conditions can be tricky because the contract may not make it clear exactly what is a condition. Time deadlines are often put in contracts but the deadlines are not always stated as being a condition to performance. The courts are no help in straightening the situation out because judges don’t really like conditions very much. The failure of a condition means the jackass on one side of the deal does not have to deliver on his promise. For some odd reason, this raises a judge’s hackles. So a judge can go to some lengths to say that the time deadline in the contract that every normal person would think is pretty darn important does not really mean much at all.

The sale contract says: “The closing deadline shall be April 1, 2008.” When Andy Hardy fails to show up at the title company on that date with his dough, Aunt Milly calls the deal off and makes a separate deal to sell her house to Beezy Anderson for more money. So Andy takes Aunt Milly to court to force her to sell the house to him. Not surprisingly, Judge Hardy sides with his boy Andy on the matter. The old judge (who might well have sat in contracts class with a young Charles Kingsfield) rules the closing deadline wasn’t a condition after all. It was more like an aspirational guideline. So it was okey-dokey for Andy to take a couple of extra weeks to get his cash together and wander into the title company with it. (Besides, Andy had to go to the doctor to get treatment for the social disease he caught along with Polly’s “woo.”)

Poor Aunt Milly’s lawyer is left outside the courthouse scratching his head as to what part of the word “deadline” the judge did not understand. But what the guy really needed in his appearance before the Honorable Old Fogey was a contract provision that said: “The closing deadline shall be April 1, 2008, time being of the essence. The parties’ obligations to close are expressly conditioned on the deadline being met.” (That last sentence is actually redundant, since "time being of the essence" is a phrase of art that means performance on time is an express condition. But you can't count on judges actually knowing this, since its not explained on red wine labels or anything else a judge is likely to actually read. So it does not hurt to use the lawyer's trick of saying the same thing over again in a different way. In fact, if I was writing the contract, I would be tempted to drive the point home by adding the line: “And judge, we really, really mean it.")

The law on contract conditions can get trickier still when you delve into the necromancy of “constructive conditions” and the accompanying two-headed beast of "substantial performance/material breach." The law here is filled with vague lists of "factors" that have to be considered, along with brain-numbing concepts. Its enough to make strong men and women of the Bar promise the Lord-High-Chancellor-of-Us-All that they will swear off “woo” forever if they can just get a clue about what the heck this legal mumbo-jumbo means. If you have the ill-fortune to stumble into this area, you might be able to figure out the nuances of the law after a good bit of study. But you are going to have a damned hard time getting old Judge Hardy to follow along, especially after he's had a glass or two of red wine.

Mark Twain said, “The difference between the right word and the almost right word is the difference between lightning and a lightning bug.” I’ve been mulling over Twain’s words as I sit here at the Commercial Law Juggernaut that is the southwest corner of Atkinson, Conway & Gagnon.

It is appropriate that this topic comes up just before the fateful Ides of March because any number of misfortunes can befall the hapless, gentle businessperson who ends up using the wrong set of words. Like a big unexpected expense, if the gentle businessperson who is selling a few truckloads of logs uses the phrase “FOB” when she meant to say “FAS.” I had a client actually do that once. By chance, I got a look at the contract right before it was to be signed. I was just in the nick of time to explain that “FOB” means “free on board” and that the client had to pay for the cost of loading the logs. This is in contrast to “FAS,” which means “free alongside” and obligates the buyer to pay for the loading. The client was glad there was a Commercial Law Juggernaut backing her up on that day.

There can be any number of ways of saying the same thing, but the words used can give a completely different sense to it. For instance, let’s take the beginning of William Shakespeare’s famous funeral oration from Julius Caesar. In the oration, Mark Antony is eulogizing Caesar, who Brutus and others murdered on the Ides of March (depicted below in a painting by Vincenzo Camuccini).

Shakespeare started the oration this way:

Friends, Romans, countrymen, lend me your ears; I come to bury Caesar, not to praise him. The evil that men do lives after them; The good is oft interred with their bones; So let it be with Caesar.

Contrast Shakespeare's words with those of Beat Generation cult figure Lord Buckley, who re-wrote the passage this way:

Hipsters, flipsters, and finger-poppin’ daddies, Knock me your lobes. I came here to lay Caesar out, Not to hip you to him. The bad jazz that a cat blows, Wails long after he’s cut out. The groovey, the groovey is often stashed With their frames. So don’t put Caesar down. To swing, or not to swing, that is the hang-up!

(That last line is, of course, a take off from a different Shakespeare play, Hamlet. But you can’t expect an inventive mind like Lord Buckley's to always color inside the lines.)

Now Shakespeare -- who Buckley called “Willie the Shake” -- and Buckley were both writing about the exact same thing. The words each chose, however, gave the oration an entirely different tenor. The same thing can happen with commercial contracts. You might mean to say that your obligation to deliver that load of logs is conditioned on the weather allowing you to cut the timber, but it might not come out that way on paper. If you use the almost right word instead of the right one, your contract could excuse you from performing when a plague of lightning bugs descends rather than when unusual lightning and rainstorms occur.

So whether you are a gentle businessperson, or a Roman, or a finger-poppin’ daddy, beware the Ides of March and the opacity of the English language. The jazz a bad contract blows can wail long after the deal has been cut out.

* * * *
Brush up on your Shakespeare! You can read all of Willie the Shake’s plays in their entirety on-line: Shakespeare On Line.

Information on the one and only Lord Buckley can be found here: Dig Lord Buckley!

A short biography of Neoclassic painter Vincenzo Camuccini is posted on Wikipedia: Camuccini Bio.

February 2008 has been the month for closing commercial real estate deals here at Atkinson, Conway and Gagnon. In the first two weeks of this month alone, I have personally closed a half dozen transactions in which something like $20 million has changed hands. I say “something like $20 million" because they do not actually let me handle the money itself in these deals. I just make it possible for the money to get passed around amongst the other kids on the playground.

The deals this month have ranged from helping a client sell a couple of office buildings to assisting a client in buying a Midtown trailer park. (Earl Hickey, Come On Down!) Its always gratifying to see a deal come together and successfully close.

Some deals are harder to get closed than others. The deals over the office buildings were particularly troublesome. While my client was in Anchorage, the buyers were a couple of Delaware limited partnerships run by a guy in New York with a lender in Seattle and a lawyer and title company in Washington D.C. The money also had to go through a bond broker and bond trustee before any of it could find its way into my client’s pockets. All the e-mails scurrying back and forth amongst this crowd trying to pull these deals together could have crashed and melted the entire computer infrastructure of any number of Central Asian countries. Like the Republic of Uzbekistan for instance, where the President-For-Life has his very own Apple IIe sitting on his desk.

(I made that last part up. The Uzbeks can actually boast that a whole 15% of their universities in the capitol city of Tashkent have access to e-mail and the Internet: Uzbek Internet )

And speaking of Uzbekistan -- truthfully, how often does that country come up in the course of a day? -- I just had to mention that the Uzbeks issued a terrific postage stamp a few years back. The 20 kopeck stamp shows just how highly regarded the Unibrow is in the rest of the world and how backwards we Americans are when it comes to the appreciation of female body hair. (Note that this gal -- Princess Nodira, the wife of Omar Khan -- bears a strong resemblance to Princess Jasmine of the Disney movie Aladdin, except that the lame Disney animators gave Jasmine a wax job on the eyebrows in order to be more politically correct for Western audiences. It just goes to show that the PC police can take the fun out of everything, including facial hair and trailer parks.)

Anyway, the deals for the office buildings turned into ordeals. I had my client twice sign the impressive pile of the closing documents just to have the buyers fail to come through with the money to pay for the buildings. Arghh! We sat on our hands for a few days until – REJOICE! -- the money appeared. After a third round of document signing, the deals were completed.

And so my friends the lesson to be learned is that the Art of the Deal takes many forms, one of which may include chewing your fingernails whilst doing nothing else in particular. Other than perhaps working on your stamp collection, or maybe keeping an eye out for a clean, low mileage double-wide to fit in that open trailer park space you just happen to know is available.

The Alaska Supreme Court issued two new opinions today. Moore v. Peak Oilfield Service Co. reaffirmed prior Alaska Supreme Court case law that a defendant in a civil personal injury lawsuit who is convicted of driving while intoxicated must be found to have acted negligently and reckless as a matter of law. The Court further clarified that such a ruling did not preclude the defendant driver from arguing that his or her negligence/recklessness was not a legal cause of the plaintiff's injury.

In Amerada Hess Pipeline Corp. v. Regulatory Commission of Alaska, the Alaska Supreme Court affirmed the Superior Court's finding that shipping rates charged by the owners of the Trans-Alaska Pipeline were unreasonable and unjust from 1997 to 2007 and that refunds must be given. The Alaska Supreme Court did not address the issues raised by the pipeline owners, but incorporated by reference the Superior Court's 44 page opinion.

A popular form of incorporation that Atkinson Conway & Gagnon often deals with, both in creating them and in structuring deals using them, is the Limited Liability Corporation. There is, however, a nasty little penalty lurking in Alaska’s Limited Liability Company statute that both other practitioners in this state and owners and managers of those LLCs should be aware of.

As with most business forms, members of an LLC have a statutory right to review the books and records of the LLC. What is different about LLCs, is that if a manger or member of an LLC refuses a member’s rightful demand to examine the books of the LLC, that manager or member is personally liableto the demanding member for a penalty in the amount of either $5,000 or 10% of the value of the demanding member’s interest in the LLC, whichever is greater. Consequently, by refusing a rightful demand to review the books and records of an LLC, a manager or member of an LLC runs not only the risk of litigation to compel production of the books but personal liability that, for a highly valued LLC, could be hundreds of thousands of dollars.

So think twice about shooting off that snide letter to your business partner, telling him to go stick his head in the sand when he asks to see the books. You just might get a costly bill in return.

Continue reading for the full statute.

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The topic of the day rattling around this end of Atkinson, Conway & Gagnon is indemnity clauses in contracts for business transactions. Just about every contract has an indemnity clause and hardly anyone other than the lawyers really cares. But I'm here to tell you that indemnity = money. Write that down, folks. When you think of indemnity clauses that way, it's worth paying attention to them.

Hey, I understand there are many, many more interesting things out there on the World Wide Web than reading what a nerdy business lawyer has to say about the nuances of indemnity clauses. I mean, you could be on eBay right now bidding on a vintage Roy Rogers metal lunch box with the matching thermos! (The dome lunch boxes are especially cool; search for one here: eBay) But if you happen to be in the middle of a business deal, taking a few moments to ponder indemnity clauses is probably more productive.

What the heck is indemnity anyway? Indemnity means that you (the indemnitor/sucker) has to pay for some sort of a loss that is visited on the other guy in your business deal (the indemnitee/smart guy). Typically, the loss involves a third person who sues the indemnitee/smart guy for something bad that happened. Or something bad that the third party thinks happened because, as we all know, you have to start hemorrhaging money to defend any lawsuit even when the claim asserted does not actually amount to a hill of beans.

But is indemnity limited to third party claims? Not necessarily. In some states, the word "indemnity" has been interpreted to mean that the indemnitee/smart guy can pass off on you some direct monetary loss he suffers that does not involve a third party claim. In other states, indemnity is usually interpreted to refer only to third party claims. In Alaska, the answer is unclear since the Alaska Supreme Court has never directly spoken to the issue. This means the indemnity clause in your Alaska contract needs to be carefully written to spell out whether it just applies to third party claims or also extends to direct losses. If your indemnity clause is not carefully written, then when a dispute over the indemnity obligation arises, you will find yourself sucked down the swirling bowl of the common law, waiting for some judge to pronounce what the clause in your contract actually means. That common law process is going to spit you out many years later, probably with an answer you did not expect, and certainly with a thinner wallet from paying your lawyer to argue the point in court.

But what about the situation where the indemnitee/smart guy is totally at fault for whatever loss he suffers? The law can't require you to indemnify that jerk for his own fault, can it? That must be covered in the U.S. Constitution somewhere, like maybe in some penumbra to the Bill of Rights? Well, unfortunately, penumbras to the Constitution have fallen out of favor these days. Alaska law actually will allow that jerk to make you pay for his mistake. That is, if the indemnity clause in your contract requires it (and if you are not dealing with a contruction contract). The cure to this problem is, again, carefully writing the indemnity clause so that the jerk on the other side of your deal has to twist in the wind on his own if it's all his fault.

So don't skip over that boring old indemnity clause in your business deal. If you don't make sure it's written correctly, whether you are the indemnitor/sucker or the indemnitee/smart guy, it is likely to end up costing you money. That's less money you'll have to spend on cool stuff like vintage metal lunch boxes. (Let me know if you run across a good deal on a Jonny Quest box).