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Contract clauses specifying “good faith” can result in greater discovery expenses in litigation

In class yesterday we discussed a clause in a hypothetical escrow agreement that reads as follows:

The Escrow Agent is not liable for any loss arising [from its doing of certain things] if it relied in good faith upon its counsel’s advice. [Emphasis added.]

The “relied in good faith” language has such a nice, ethical ring to it, no?

But that phrase might well commit the escrow agent to a good deal of extra burden and expense in litigation.

Suppose that, in a lawsuit, the escrow agent invokes the contract clause, asserting that it relied in good faith on its counsel’s advice.

That would give the other side an excuse to go digging through the escrow agent’s documents, looking for any evidence that the decision might not have been taken in good faith.

The other side might insist that the escrow agent search for and produce copies of (among other things) all documents referring or relating to:

  • the advice itself;
  • the escrow agent’s consideration of the advice; and
  • the escrow agent’s decision to act on the advice.

And of course, the other side might demand to depose — that is, interrogate at length, under oath and on the record — anyone who had anything to do with giving, considering, or acting on the advice of counsel — quite possibly including the counsel him- or herself.

(In class we also discussed briefly the consequences of the waiver of attorney-client privilege that likely would result as well, but that’s a topic for another day.)

That’s what can happen when a contract drafter casually drops in the “good faith” language, without thinking about the possible consequences.

A better approach might be to omit the good-faith-reliance language. For example:

The Escrow Agent is not liable for any loss arising [from its doing of certain things] if, before taking the action, it received advice of counsel that the action was lawful. [Emphasis added.]

That way, both reliance and good faith would (technically) be irrelevant.

Omitting the good-faith-reliance language probably wouldn’t deter the other side from demanding documents and depositions.

But the omission might give the escrow agent a shot at convincing a judge that the other side’s demands should be dismissed.

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