Breach of Contract Lawsuits: Serious Traps Commonly Found in Contracts

Breach of contract disputes are extremely common. At Buffington Law Firm, the Orange County breach of contract attorneys have handled countless business disputes deriving from breach of contract. In this brief article we will discuss some of the common issues and pitfalls that our business litigation attorneys often deal with in breach of contract cases.

Nearly all of the time when parties enter into a contract, they are not thinking about future litigation and they do not want or expect litigation. Nevertheless, it happens. When it does, sometimes the contract between the parties, which seemed so clear-cut when they inked the deal, suddenly becomes a minefield of unexpected problems.

At Buffington Law Firm, our experienced breach of contract trial attorneys recommend that if you are entering into an important contract, you should have an attorney review it before you sign it. Our firm offers this service at a very reasonable price. Here are some of the pitfalls to watch out for. It is rare that a contract does not contain at least one of these components. It is not too much to say that most of the myriad of breach of contract cases that our firm has handled contained one or more of these common issues. This list is in no way complete.

1. Failure to Accurately Identify the Parties to the Contract. A common error in contracts, especially contracts drafted by non-lawyers, is to fail to clearly and accurately identify who the parties to the contract actually are. This may sound simple. It is not. For example, sometimes one side intends to create a corporation or limited liability company to do business concerning the contract but has not yet done so at the time of signing. Under this scenario the party signs the contract as though this entity already existed. Not uncommonly, this entity never gets formed or gets formed under a different name, or as a different type of entity than that which appears on the contract. This can vastly complicate matters if the parties later have a breach of contract dispute. Another common error is for one side to sign the contract personally while intending only to sign as an officer of a corporate entity. This can lead to the other side claiming that the signer is personally liable on the contract along with his or her corporation. Paying attention to these kinds of details is crucial. Needless to say, this can greatly increase the risks of litigation and the personal exposure of the signer.

2. Careless Guarantees on the Contract. Too often a contract contains a provision whereby one side is agreeing to personally guaranty the performance on the contract. Often the party considers this routine “boilerplate” language. Not so. It may seem obvious when reading this, but there are few more risky things that an individual can do than to sign a personal guaranty on a contract. The guarantor will inevitably be named in any breach of contract lawsuit in which the party being guaranteed is sued, and guarantees are usually very enforceable. When a stockholder of a corporation or other entity gives its contract his or her personal guaranty this does away with the protection of the “corporate shield,” at least for the unlucky person who guaranteed the contract.

3. Hostile Venue and Jurisdictional Clauses. One of the most common errors or pitfalls that a contract may contain is a hostile venue or jurisdictional clause. This is a clause that provides that in the event of a breach of contract lawsuit it must occur within the venue and jurisdiction of a certain state. All too often businesspeople assume that such a provision is “boilerplate” that constitutes “standard language.” Not so. In fact, a venue and jurisdictional clause just about always represents an attempt by one side to slip in a clause that is very favorable to that side. For example, an Illinois business may enter into a contract with a California business in which the Illinois firm will deliver goods in California. Normally, in the event of a breach of contract lawsuit, a contract like this would be governed by California law, as the place for performance of the contract. If the contract provides for Illinois venue and jurisdiction this means that if the California firm sues, or is sued, for breach of contract the suit must occur in Illinois. This can have far-reaching consequences. Illinois is likely a distant, inconvenient forum for the California firm, while it is the Illinois firm’s home turf. The California firm’s attorneys are probably not licensed to practice in Illinois. At a minimum it will likely be necessary for the California business to obtain local Illinois counsel, which will represent a considerable extra expense. Witnesses will have to travel to Illinois for any trial. And never forget about the very real possibility of being “home towned” in court, which means exactly what it sounds like. It happens. While it is sometimes possible to defeat a venue and jurisdiction clause, the general rule is that courts will enforce them.

4. Jurisdictional and Venue Clauses that specify foreign countries. An extreme example of a hostile venue and jurisdictional clause sometimes involves a contract which provides, in a deal involving a US company buying a foreign product, that “any dispute concerning any party’s performance under this contract shall be subject to the laws of, and adjudication shall be administered by, the courts of [European country].” A clause like this usually makes it next to impossible for an American company to economically sue for breach of contract. Not only will it be necessary to find and hire a foreign attorney, but breach of contract and warranty laws in European and other foreign countries can be, to put it mildly, strange and interesting and not a little confusing.

5. Attorneys Fee Provisions. An attorney’s fee provision which provides that in the event of a lawsuit that the loser must pay the winner’s attorney fees, often sounds like a good idea. Unfortunately, often it is not. California’s Code of Civil Procedure, like most states, provides that under most circumstances each side pays its own attorney fees regardless of the outcome. [Cal. Code Civ. Proc. Section 1021]. This is known as the “American Rule.” (By contrast, in Great Britain the loser usually pays the winner’s attorney fees.) Contract drafters often insert attorney fee provisions into a contract without much thought. This can vastly increase the dangers and the costs of litigation. In moderate sized contract disputes if the lawsuit lasts any length of time sometimes the attorney fees that are at stake are as much money as the parties are fighting about! It happens often. The decision as to whether to include an attorney fee provision is a very important one that we recommend be made after considerable thought and consultation with counsel.

6. Arbitration Clauses. At Buffington Law Firm, our commercial litigation attorneys have broad experience in arbitrating breach of contract, investment, employment, and other types of cases. We have learned that the decision to arbitrate is an important one, and we believe that this decision requires careful thought by the parties in consultation with their attorneys.

Contract drafters often include an “Arbitration Clause” in a contract without much thought, reasoning that “litigation is expensive” and that Arbitration will help lower these costs. In fact, the decision to include (or not include) an Arbitration Clause in a contract is one of the most far-reaching decisions that the parties can make. If one of the parties finds it necessary to sue on the contract, the Arbitration Clause will change many things about the litigation. Firstly, it is a myth that Arbitration is always less expensive than litigating in court. In commercial and many other kinds of arbitration, there is about as much discovery and law and motion as there is in ordinary court cases, and many Arbitration Clauses specify that discovery will be consistent with the Code of Civil Procedure. Even for relatively small cases, Arbitrator fees can be expected to cost a minimum of $25,000 and often they are much more than this. Every time one side or the other brings a motion (i.e. a discovery dispute, Motion for Summary Judgment, etc.) the Arbitrator will charge several thousand dollars to hear and rule on the Motion. Arbitrators normally charge, as of 2013, $450/hour and up. Do not assume that Arbitration is always cheaper than court!  It is not.

Incidentally, in California, in the context of employment agreements, the employer always pays the entire cost of the arbitrator fees. While employers often like to require arbitration in order to avoid a jury trial, this decision carries significant costs. Right out of the gate, before attorney fees or anything else, the employer has committed to significant arbitrator fees. This provides a strong incentive to employers to settle such disputes with employees.

There are many factors to be considered concerning whether or not to arbitrate besides cost. For example, an arbitration decision usually cannot be appealed. There is no right to a jury in arbitration. These can be good or bad things. It is true that arbitration can sometimes lead to a more informal style of litigating a case, and this too can be good or bad.

All Arbitration Clauses are not the same. One thing to keep in mind about Arbitration Clauses is that they are almost never drafted by litigation attorneys. The no doubt very skilled attorneys who draft almost all Arbitration Clauses are transactional attorneys, who usually have very little if any experience in a courtroom, or with litigation in general. They will often specify, for example, in an Arbitration Clause that “arbitration shall take place before the American Arbitration Association…” or words to that effect. While this may sound plausible (after all “American Arbitration Association” has an authoritative ring to it, does it not?) in fact AAA is in our Firm’s opinion distinctly third string as Arbitration forums are concerned, at least here in California. As of 2013, unlike the major Arbitration firms, AAA has very few retired judges on its panel; it mostly employs attorneys who are trying to break into the lucrative arbitration business. AAA does not maintain many facilities within California, which means that there is a problem concerning the issue as to where the Arbitration Hearing will take place. Beware of Arbitration Clauses which specify AAA as the forum. In our opinion, this constitutes a mistake.

The main point that this article is trying to make about Arbitration is that the decision to include an Arbitration Clause in a contract is a very important one. How the Arbitration Clause is written is also very important. Unfortunately, many contract drafters make the decision to include such a clause without giving this decision the consideration it deserves. This carelessness sometimes has serious consequences.

At Buffington Law Firm, our breach of contract attorneys tend to view the six “pitfalls of contract drafting” discussed herein as traps for the unwary. If you are involved in a breach of contract dispute, we invite you to contact our firm for a free legal consultation. All consultations are protected by attorney-client privilege, and you meet directly with an experienced trial attorney. There is never any obligation.