Articles Posted in Commercial Transactions

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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.

somalia-pirates.preview.jpgAmazingly 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.

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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 All prior negotiations, representations and understandings are expressly superseded and may not be relied upon.

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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.

contract.jpgI 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.

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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 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.

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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.

48_black_panBy “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.

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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!

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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.)

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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.

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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.