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Contract drafting tips from recent cases

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Employers: Be sure your arbitration agreement is actually binding — it might not be if it’s in a “policy”

Here’s a drafting lesson from a California court of appeal:

The question in this case is whether an arbitration provision in an employee handbook is legally enforceable.

  • The employee handbook containing the arbitration provision included a welcome letter as the first page, which stated, “[T]his handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees.”
  • The employee signed a form acknowledging she had received the handbook, which mentioned the arbitration provision as one of the “policies, practices, and procedures” of the company.
  • The acknowledgement form did not state that the employee agreed to the arbitration provision, and expressly recognized that the employee had not read the handbook at the time she signed the form.

Under these circumstances, we find that the arbitration provision in the employee handbook did not create an enforceable agreement to arbitrate.

We therefore affirm the trial court?s denial of the employer?s petition to compel arbitration.

Esparza v. Sand & Sea, Inc., No. B268420, slip op. at 2 (Cal. App. Aug. 22, 2016) (emphasis, extra paragraphing, and bullets added).

I’ve added this case to the commentary to the Common Draft arbitration provisions.

The client might not care about the other side’s onerous contract term

In my contract-drafting class next week, I’ll be using a prop that I’ve received in the U.S. Mail. The prop is a notice from the bank that issued the credit cards my wife and I use. The notice informed us that certain interest rates and fees would be increasing. For example:

  • The annual percentage rate (APR) for cash advances went from 19.49% to 25.24%. In the future, the APR would be determined by adding 21.74% (vice the former 15.99%) to the prime rate.
  • The up-front transaction fee for cash advances went from 3% to 5% of the amount of the cash advance (or $10, whichever is greater). This is in addition to the interest charges, mind you.

Leaving aside the political debate about high interest rates and fees, I plan to show the notice to my students to illustrate two points:

  1. My wife and I don’t care what the bank charges for cash advances, because we never take cash advances. The notice could also have said that the interest rate would go to 100% if our minor children dropped out of school; we wouldn’t have cared about that, either (because our kids are both adults and college graduates). This principle is worth remembering when reviewing another party’s onerous contract draft.
  2. BUT: Circumstances can change, in which case (what used to be) a meaningless contract provision can become painfully relevant.

The parentheticals-generating machine runs wild …

See this portion of an 11th Circuit opinion:

Ex-Husband dodged, delayed, and opposed Ex-Wife’s unrelenting efforts to obtain discovery in support of her claim, and their red in tooth and claw feud played out in countries around the world, including Cyprus, Latvia, Switzerland, the British Virgin Islands (“BVI”), the Commonwealth of the Bahamas (“Bahamas”), and the United States of America. In the United States, Ex-Wife sought information from Gabriella Pugh (“Ms. Pugh”) and her employer in Atlanta, Georgia—Appellant Trident Corporate Services, Inc. (“Trident Atlanta”)—that she expected would reveal Ex-Husband’s beneficial ownership of Bahamian corporation, Tripleton International Limited (“Tripleton”). When met with resistance, Ex-Wife initiated a § 1782 action in the Atlanta division of the District Court on July 25, 2013. Ex-Wife filed substantial evidence in support of her “Ex Parte Application for Judicial Assistance” (“Application”), including a lengthy and detailed declaration from her attorney, Dmitry Lovyrev (“Lovyrev”). On referral, the Magistrate Judge granted the ex parte Application and authorized service of two subpoenas (“Ex Parte MJ Order”).

The subpoena issued to Trident Atlanta (“Subpoena”): (a) referenced Tripleton, and other Bahamian corporations, including Guardian Nominees (Bahamas) Limited (“Guardian Bahamas”) and Trident Corporate Services (Bahamas) Limited (“Trident Bahamas”); (b) ….

Hat tip: @Greg651 via Marilyn Bush LeLeiko (“@LawWriting”). As @Greg651 said, “Thank god for these parentheticals, otherwise I’d have no idea what Bahamas or Ms. Pugh were in reference to.”

Ms LeLeiko adds: ‘When NOT to use parenthetical defined term: “The subpoena issued to Trident Atlanta (“Subpoena”): . . .’

Botched idioms

See 7 (sic; Seven) idioms almost everyone gets wrong (hat tip: Marilyn Bush LeLeiko).

I’ll add my own:  When people criticize (let’s say) President Obama because of something they think he should have prevented, the correct term is that it happened on his watch (it’s a Navy term), and not under his watch (which implies, probably incorrectly, that he was devoting any time and attention to it).

A new agreement can wipe out favorable provisions in an old agreement

In this case, the facts of the business transaction aren’t especially important, but the result is a reminder that signing a new Contract B while Contract A is still in place can result in wiping out some or all of the legal rights in Contract A. That happened in HDRE Bus. Partners Ltd. Grp., L.L.C. v. RARE Hosp. Int’l, Inc., No. 15-30487 (5th Cir. Aug. 19, 2016):

  • A landlord brought suit against a tenant for al­leg­ed­ly violating the lease agreement.
  • The lease agreement stated in part that in any dispute, the pre­vail­ing party would be able to recover its attorney fees. (See the Common Draft attorney-fee provisions and commentary.)
  • The tenant was able to get the dist­rict court to dismiss the lawsuit and to award the tenant its attorney fees under the prevailing-party provision in the lease agreement.
  • The Fifth Circuit reversed the award of at­tor­ney fees to the ten­ant, because the jury had found that the parties had entered into a “novation”; the appeals court said that the parties’ new agree­ment replaced the lease agreement and thereby wiped out the at­torney-fee provision in the latter.

For additional cases in which this occurred, see the Common Draft annotation.

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