1. Risky Business:
Contract provisions that
may seem harmless
but can wreak havoc
Allen Matkins Leck Gamble Mallory & Natsis LLP
May 19, 2010

2. Miscellaneous Clauses:
Think Before You Sign
We often use the “standard form” of these clauses without
considering the impact in a subsequent dispute or lawsuit.
 Attorneys’ Fees
 Time of the Essence
 Choice of Law/ Choice of Forum
 Venue Selection
 Severability
 Non-waiver
 Entire Agreement/Integration
 No Third Party Beneficiaries
 Waiver of Right to Jury Trial
 Selection/Limitation of Remedies

3. Attorneys’ Fees Clause:
What Do You Think You’re Getting?
EXAMPLES:
“If any litigation or proceeding is commenced
arising out of or relating to this Agreement, the prevailing
party shall be entitled to recover from the other party a
reasonable sum for attorneys’ fees and costs reasonably
incurred.”
“In any action to enforce this Agreement, the prevailing party
shall be entitled to recover from the other party its actual
attorneys’ fees and costs of suit.”

4. Attorneys’ Fees Clause:
What Do You Want?
 Confirm you want the clause in general
 Decide whether you want clause to apply to
all
claims
 “Arises out of” language generally includes any
tort claims arising out of agreement
 Alternative is to narrow clause – for breach of
agreement or declaratory relief only
 Recover “reasonable” or actual fees?
 Consider a cap on fees or only applies if
dispute exceeds dollar amount

5. Attorneys’ Fees Clause:
Don’t Forget About Other Fees
Specify in detail prevailing party’s
right to costs other than attorneys’ fees
 Expert witness fees
 Professional fees
(such as appraisers’ and accountants’ fees)
 Arbitration and/or mediation fees
(if arbitration allowed by contract terms)

6. Time of the Essence Clause:
Define Time Frame to Make This Clause Meaningful
EXAMPLE: “Time is of the essence of this
Agreement.”
 If no time specified, courts will apply a
“reasonable” time to perform.
 What is a “reasonable time” is a question of
fact – so it will be up to a jury

7. Time of the Essence Clause
How effective is this clause?
Despite an agreement that time is of the essence,
courts often avoid finding a breach of this provision
by:
 finding the performing party waived its right to enforce the
timeliness provision by conduct
(e.g., by accepting late payment)
OR
 crafting a decision in order to prevent forfeiture of the
benefit of the non-performing party’s bargain.

8. Time of the Essence Clause
Time of the Essence provisions have no
effect on option contracts because time for
exercise of the option is an essential term
of the option and is controlling.

9. Choice of Law/Choice of Forum Clause
Where do you want to go?
 Where real property is located
 Where the company is incorporated
 Where the company is headquartered
What law do you want?
 Your state
 State with most favorable law

10. Choice of Law/Choice of Forum Clause:
Will Your Choice Work?
Courts will not enforce choice of law/forum clause
if:
 that state has no substantial relationship to the
parties/transaction
AND
 there is no other reasonable basis for that choice
OR
 the law of the chosen state is contrary to a fundamental
policy of California.

11. Choice of Venue Clause: Nice Try
Venue statutes identify proper court for particular action.
EXAMPLE:
“Borrower submits to the jurisdiction and venue of the courts of
Humboldt County, California for the purposes of any action arising
out of or relating to this agreement.”
Agreements selecting a non-statutory
venue
are void as against public policy.

12. Severability Provision: Not So Cut and Dry
EXAMPLE:
“If any provision of this Agreement is for any reason
deemed illegal or invalid, such illegality or invalidity shall
not affect the validity of the remainder of this Agreement.”
 Cal. Civ. Code 1599: “Where a contract has several
distinct objects, of which one at least is lawful, and one . .
. unlawful, . . the contract is void as to the latter and valid
as to the rest.”

13. Severability Provision: What Can Go
Wrong?
If the unlawful or unenforceable portion of the
contract is an essential part of the agreement, the
entire agreement may be held
unenforceable.
Give careful consideration to whether a party is
willing to perform the rest of the contract if such
provisions are set aside.
Remember: interpretation based on intent of parties.

14. Non-Waiver Clause:
Be Sure It Covers All Provisions
EXAMPLE:
“No express or implied consent to or waiver of any
provision hereof shall be deemed a waiver of any
other provision.”

15. Non-Waiver Clause
GOAL #1: To protect you from waiving the benefit of a
contract provision in the future by failing to enforce it in the
present.
Goal #2: To allow a party to waive one provision while
preserving the ability to enforce others.
BUT… you can still waive through conduct inconsistent with
the
terms of that clause.
“Even a waiver clause can be waived by conduct."
Bettelheim v. Hagstrom Food Stores, Inc. (1952)

16. Entire Agreement/Integration Clause:
Have You Captured Everything?
EXAMPLE:
“This Agreement represents the entire
understanding and agreement between the
parties as to the subject matter hereof and may
be modified or waived only by a separate writing.”
Looks OK, but is it really?

17. Entire Agreement/Integration Clause
 Be sure there are no other agreements you may
want to reference in conjunction with the subject
agreement.
 This clause does not prevent a fraudulent
inducement claim.

18. No Third Party Beneficiaries Provision:
How to Prevent Party Crashers
EXAMPLE:
“Except as expressly provided herein, nothing in
this Agreement shall confer any rights upon any
person or entity not a signatory to this
Agreement.”
Good enough?

19. No Third Party Beneficiaries Provision
A person asserting third party beneficiary status
must prove contract was made for his/her benefit.
A provision stating there are to be no third party
beneficiaries should exclude him/her from seeking
protection or benefit under the contract.
BUT…

20. No Third Party Beneficiaries Provision
EXAMPLE:
“Except as expressly provided herein, nothing in
this Agreement shall confer any rights upon any
person or entity not a signatory to this
Agreement.”

21. No Third Party Beneficiaries Provision
Courts look to evidence of parties’ intent to determine
whether a person is a third party beneficiary.
Also, don’t forget about future amendments to your contract.
 Consider whether you or the other party may hire
subcontractors.
 Even where third party beneficiaries are not expressly
contemplated, it may be advisable to include a provision
prohibiting third party beneficiaries

22. Waiver of Right to Jury Trial
EXAMPLE:
“Buyer and Seller each waive their respective right,
to the fullest extent permitted by law, and agree not to
elect a trial by jury with respect to any issue arising
out of this purchase and sale agreement.”
Note: Pre-litigation contractual jury trial waiver must be
expressly permitted by statute. See Cal. Civ. Proc. Code
§631(d).

23. Waiver of Right to Jury Trial
Generally Unenforceable If Alone
Waiver or forfeiture of the right to a jury trial via a
contract is generally prohibited:
 Grafton Partners v. Superior Court (2005) –
the “nonstatutory authority for waiver of the right to a jury
trial is not permitted by [the California] Constitution.”
“California constitutional history reflects an unwavering
commitment to the principle that the right of a civil jury trial
may be waived only as the Legislature prescribes.”

24. Waiver of Right to Jury Trial:
The Major Exceptions
 Agreements to arbitrate, which are essentially jury
trial waivers, “are specifically authorized by statute.”
Grafton Partners, 36 Cal.4th at 955; see Cal. Civ. Proc. Code
1281.
 Agreements for judicial reference, by which
parties submit their dispute to a judicial referee rather
than a jury. See Cal. Civ. Proc. Code 638.
 BUT…CC&Rs cannot be treated as a contract for
purposes of agreeing to judicial reference.
Treo @ Kettner Homeowners Assn. v. Superior Court (2008)

25. Selection/Waiver of Remedies Clause:
Be Sure You’re Clear on What You Want
EXAMPLE:
“In the event Seller fails to perform, Buyer may at its
option and as its exclusive remedy:
(i) terminate this Agreement, or
(ii) seek specific performance.
Buyer hereby waives any right to pursue any other
remedy, including, without limitation, any right to
seek, claim or obtain damages, punitive damages or
consequential damages.”

26. Selection/Waiver of Remedies Clause
Parties may select or limit remedies by contractual agreement,
or by otherwise waiving certain remedies.
 “Any one may waive the advantage of a law intended solely for his
benefit.” Cal. Civ. Code 3513.
 Statutes of limitation – can be waived
 But, court may still not enforce all remedies despite parties’
agreement

27. Selection/Waiver of Remedies Clause
Make sure if you provide for a remedy,
you really mean it.

28. This information is intended to provide a general summary of
some commonly-used contract provisions and identify ways in
which they might be interpreted in the context of litigation. It is a
general overview only and does not constitute legal advice. It
should not be relied or acted upon with regard to any particular set
of circumstances without first consulting professional legal
counsel.