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INSIGHT: Litigators Can Help Transactional Attorneys Prepare Contract Language

Nov. 19, 2019, 9:00 AM

It sometimes feels like there is a great divide between litigators and transactional lawyers. Although we generally don’t like to admit it, those on one side of that divide often have only the most rudimentary understanding of what those on the other side do. But we should, at a minimum, be aware of when it might make sense to call upon each other’s different skill sets.

Some of those occasions are obvious. For example, often in litigation a transaction breaks out—in the form of a settlement. Litigators regularly turn to their transactional colleagues at that juncture, relying on them to advise on the tax consequences of particular provisions, or to draft the corporate documents necessary to effectuate particular terms.

As well, a transactional lawyer can sometimes assist at the outset of litigation in determining what remedies can or should be sought, advising on such matters as the real-world impact of invoking a buy-out clause, or whether specific performance is practicable or desirable.

Consider When Things Go Wrong

But when should a transactional lawyer consult a litigator? One place to think about doing so is when drafting contractual provisions that are especially likely to become relevant if a dispute arises.

It would of course be great to be able to identify all such provisions in advance. Unfortunately, no one yet has that crystal ball. Some provisions, however, are more likely than others to be invoked in litigation because they deal directly with what happens when things go wrong. These include language specifying a choice of law or venue, as well as attorneys’ fee and default provisions—to name only a few. If these provisions are triggered, it is likely because the parties are in court or on their way there. It may therefore make sense to have a litigator review them at the drafting stage.

Why? Consider this. You have drafted an agreement using language you have used before, you are confident about its application under the law of your state, and you have included a choice of law provision specifying that the law of your state will govern the interpretation and enforcement of the agreement. But the counterparty to the agreement is in a different state, and it is possible that any litigation that arises may be filed there.

Will the courts of that state view the operative provisions in the way you anticipated? Maybe. But they may not. If a provision is deemed to violate the public policy of the state where enforcement is sought, the courts there may decline to enforce it regardless of what the contract says about choice of law. (See, e.g., Pitzer College v. Indian Harbor Ins. Co., 8 Cal. 5th 93, 105 (2019)). Your client may then be stuck with an unexpected interpretation of the agreement.

This problem can arise in a variety of contexts. For example, in some states a provision specifying that the prevailing party in litigation will be entitled to attorneys’ fees is unenforceable as a matter of public policy. (See, e.g., Hand Cut Steaks Acquisitions Inc. v. Lone Star Steakhouse & Saloon of Nebraska Inc., 298 Neb. 705, 734-35 (2018)).

In others, if an agreement contains a one-way attorneys’ fee provision it will be interpreted to require an award of attorneys’ fees to whichever side prevails—no matter how deliberate or heavily negotiated the one-way nature of the provision was. (See, e.g., Ruiz Fajardo Ingenieros Asociciados S.A.S. v. Flow Internat’l Corp., 2019 BL 245130 (W.D. Wash. July 2, 2019)).

Whether courts in such states will enforce contrary language in agreements ostensibly governed by the law of another state is, at the very least, open to question.

Other Provisions That Could Encounter Difficulties

There are other kinds of provisions that may encounter similar difficulties. Language in a commercial lease that grants a tenant a rent abatement as a consequence of certain landlord defaults might be enforced as written; however, under certain circumstances it might be recharacterized as a penalty and deemed unenforceable—depending on the applicable law. (See, e.g., Grand Prospect Partners L.P. v. Ross Dress for Less Inc., 232 Cal.App.4th 1332, 1359-65 (2015)).

The same is true of a contractual waiver of liability or damages: it may be fully valid in most circumstances, but to the extent that it might be read to excuse a party from intentional wrongdoing or certain forms of “gross negligence” some courts may refuse to enforce it. (See, e.g., Colnaghi, U.S.A, Ltd. v. Jewelers Protection Svcs. Ltd., 81 N.Y.2d 821, 823-24 (1993)).

Litigation advice can be of great value in ferreting out these issues at the drafting stage.

Not all contractual provisions can or should be drafted with litigation in mind. After all, most transactions are (hopefully) entered into with the intent that the parties will live happily ever after with the deal they made. But contractual provisions that on their face apply only when that deal has gone awry may warrant the extra step of consulting a litigator in order to better anticipate (and prepare the client for) what might happen if they actually come into play.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Adrienne B. Koch is a litigation partner with Katsky Korins LLP in New York. She has a broad range of experience in all types and phases of commercial litigation and dispute resolution, both at the trial level and at the appellate level.