Contract Diamond Lanes

Notice to the Payer is likely to be a legal prerequisite for a Biller to accelerate the due date of future payments.¹

To be sure, the Biller might prefer that an accelerated debt would become immediately due and payable without notice or demand. But in some jurisdictions, such a preference would likely be invalid: New York state's highest court explained that, for "[s]uch a significant alteration of the borrower's obligations … noteholders must unequivocally and overtly exercise an election to accelerate."²

Biller: To reduce the chance of disputes:

1.   It's best if your notice of acceleration states just which payment due date(s) are being moved up (or would be moved up if payment is not made); and – the new due date(s).

2.   It might also be helpful if the notice of acceleration explained, in reasonable detail, why the payment due date(s) in question are being accelerated.

3.   You might want to include the notice of acceleration as part of a notice of payment failure — if you do that, then the part of the notice that mentions acceleration will preferably be conspicuous.

4.   Caution: Be very clear about whether acceleration is or isn't happening, so that the parties will know whether or not the notice started the clock running on the statute of limitations for foreclosure on collateral. Example: In a 2021 decision, New York's highest court addressed a lender's warning letter to a debtor. The warning letter said, in effect "you're in default, and we might accelerate if you don't pay up." The court held that the letter did not satisfy the requirement of an "unequivocal overt act" to accelerate — and thus did not start the clock running on the lender's deadline, under the statute of limitations, to invoke remedies such as foreclosure.³ (But the lender "lost" anyway, because it had to litigate the matter.)

While we're on the subject of limitation periods: A Texas statute, Tex. Civ. Prac. & Rem. Code § 16.038, resets the statute-of-limitations deadline clock after acceleration if "the accelerated maturity date is rescinded or waived in accordance with this section before the limitations period expires …." This was explained by the Texas supreme court in a 2024 decision.⁴

Some acceleration provisions go into much more detail than is set out in this Clause. See, for example, this long acceleration clause in a loan agreement: It provides a "laundry list" of 13 specific events that can trigger the bank's right to accelerate.

On the other hand, an example of a more-streamlined acceleration clause can be found in another loan agreement; that clause states, in its entirety: "If any payment obligation under this Note is not paid when due, the remaining unpaid principal balance and any accrued interest shall become due immediately at the option of the Lender."

An acknowlegement could lock a party into a position that it might later want to modify or even disavow based on updated information. The above language follows the general rule in, e.g., U.S. federal-court cases, where the trial judge has discretion to allow a party to back away from a previous admission, under Rule 36(b) of the (U.S.) Federal Rules of Civil Procedure:

(b) Effect of an Admission; Withdrawing or Amending It. … the court may permit withdrawal or amendment if[:]

• it would promote the presentation of the merits of the action and
• if the court is not persuaded that it would prejudice the requesting party in maintaining or defending the action on the merits. …

Example: In a Tenth Circuit case:

• A German company, Peiker, contracted for a license under certain patents.
• In the license agreement, Peiker had "acknowledged" that two of its products came within the scope of the patent claims.
• Later, though, Peiker changed its mind and tried to back away from that acknowledgement, claiming that those products weren't covered by the patent after all, and thus that Peiker shouldn't have to pay royalties for them.

Peiker won in the trial court, which said that the acknowledgement in the license agreement was merely a "rebuttable presumption." On appeal, though, the Tenth Circuit reversed and remanded as to that part of the case, holding that Peiker did indeed have to pay royalties on those products:

But [certain other contract language] does not prevent the parties from agreeing that a royalty is due on a non-infringing product if doing so would benefit the convenience of the parties.

And we do not see anything in the License Agreement that can transform Peiker's acknowledgments to rebuttable presumptions. See I Oxford English Dictionary 108 (2d ed. 1989) (defining "acknowledge" as "to recognize or admit as true").

The Colorado Supreme Court has held that acknowledgements, when included in a formal contract, can be "the best kind of evidence." Because the parties acknowledged that all products falling within the terms of 1.17(i) utilize technology, designs, or architectures covered by one or more of the claims included in the Licensed Patents, no infringement analysis is necessary. By its own force, the contract requires Peiker to pay royalties on those products included in sections 1.17(i) and 3.5 of the License Agreement.⁵

"Acknowledging" terms and conditions in a contract might be interpreted as assenting to and agreeing to be bound by those terms and conditions. Example: An employee was held to have agreed that his employer would own certain intellectual property that the employee created, because the employee had clicked on an "acknowledge" button for the employer's invention-assignment agreement.⁶

Example: A client of a Royal Bank of Canada investment-banking unit signed the bank's standard customer agreement.

• The customer agreement included a first-person statement in which the client said, "I agree that all transactions with respect to any such Account shall be subject to the following terms."
• Among those "following terms" was that the customer's transactions with the bank would be "subject to" external rules, including FINRA rules.

Citing numerous cases, the Eighth Circuit agreed with the Second Circuit's holding that such "I agree" and "subject to" language was an acknowledgement that put the client on notice of how transactions would be handled — even though the language didn't constitute a contractual commitment by the bank to handle transactions in that way.⁷

Some inexperienced drafters include statements in which another party "acknowledges" a supposed fact that would be against that party's interest. Here's an overreaching example of a kind that's sometimes seen in confidentiality agreements ("NDAs"):

The intent here is presumably for Recipient to waive Discloser's burden of proof in seeking a preliminary injunction or comparable relief (see 12.15).

This would slow up getting the NDA signed, because confronted with such an acknowledgement clause in the draft NDA, many Recipient counsel would probably:

• delete this equitable-relief acknowledgement entirely, or
• change "would be …" to "could be irreparably harmed" — AND
• be irritated at Discloser's counsel for the obnoxious drafting.

Consider the following acknowledgement language in a set of purchase-order terms and conditions promulgated by retail giant Target:

10.  Representations, Warranties and Guarantees [sic]. a.  … Vendor acknowledges and agrees [sic] that it shall be a breach of its representation, warranty and guarantee if any Goods are in violation of any Laws at any time, including after the sale of such Goods by Vendor to Purchaser. … Vendor acknowledges that its obligations under this paragraph are an appropriate allocation of risk between Vendor and Purchaser.

(Emphasis added.)

Another example, this one from a stock-option agreement by hotel company Marriott:

1.  Employee Acknowledgment. Employee has been provided with, and hereby acknowledges receipt of, a Prospectus for the Plan, which contains, among other things, a detailed description of the Other Share-Based Awards provisions of the Plan. Employee further acknowledges that he or she has read the Prospectus, the Plan and this Agreement (including the Jurisdiction-Specific Addendum), and that Employee understands the provisions thereof.

(Emphasis added.)

An acknowledgement in a notary certificates (a.k.a. "notarization") will generally have somewhat-similar effect, in that someone signing a document:

• usually must provide identification to the notary public (or other official); and
• states to the notary that he or she (the signer) in fact signed the document that's being notarized.

For more about notarization, see [BROKEN LINK: notary-top].

So as not to delay getting to signature, a drafter representing a supplier should think about whether not to include this Clause in a contract for a customer. That's because:

• The law might already permit the supplier to revert to cash-on-delivery ("C.O.D.") or advance-payment terms if the customer's late payments constituted a "material" breach of the contract (see the definition of material at Clause 17.2.1.4 and its commentary); and
• Raising the issue with the customer might "poke the bear,"(20.3) i.e., it could remind the customer's contract negotiator to insist on editing the draft contract to override what the law says, in a way that might disadvantage the supplier.

This Clause intentionally doesn't try to define the term good reason for demanding payment up front. That's because it's likely not a good use of time to try to define the term up front — other than perhaps stating in the Con­tract that Particular Thing‑X is deemed good reason. That's because:

• A dispute on that point might never arise, so deferring discussion of the term can help the parties to get the Con­tract signed more quickly; and
• Section 3.5.1.4 provides for escalation of disputes, following the rule, if you don't want to (or just can't) specify the agreed outcome now, then consider specifying an agreed process to figure it out later.

But in appropriate circumstances, "good reason" for demanding advance payment could include, for example:

• The Payer was late more than once in making payments required in connection with the Con­tract.
• The Payer was significantly late with one or more such required payments — obviously the phrase "significantly late" is open to interpretation and thus to dispute; still, including the phrase gives the Biller some room to try to protect itself from game-playing by the Payer.
• The Payer is placing an unusually-large order.
• The Biller has other good reason to require payment in advance.

Sometimes contracting parties will care about what constitutes an "affiliate" of a party, because:

• The contract might give certain rights to "affiliates" of one or another party. This could be, for example, the right to acquire goods or services on the same terms as in the Con­tract. [DCT TO DO: Find examples in master service agreements / master purchase agreements]
• The contract might also impose obligations on a party, where those obligations are tied in somehow with affiliates of one or another party (e.g., an obligation to be financially responsible for actions of an affilate).

In either case, it might be important to know just who qualifies as an affiliate of the relevant party at the relevant time or times. But "roll your own" definitions of the term affiliate can lead to difficulties, as discussed below.

Here are some real-world example of affiliates under the control and common control branches in the above text:

Both Google and YouTube are subsidiaries of "parent company" Alphabet Inc. — so:

• Alphabet and Google are affiliates of each other under subdivision 1 because Alphabet controls Google; ditto for Alphabet and YouTube;
• Google and YouTube are affiliates of each other under subdivision 2 because they're both under the common control of Alphabet.
• Fitbit is a subsidiary of Google, so Fitbit is an indirect subsidiary of Alphabet as well as a direct subsidiary of Google.
• Fitbit is likewise an affiliate of YouTube because of their common control by Alphabet.

In some situations, drafters might want to consider whether future companies should be regarded as affiliates.

Example: Ellington v. EMI Music involved the estate of the legendary musician Duke Ellington. New York's highest court held that: "Absent explicit language demonstrating the parties' intent to bind future affiliates of the contracting parties, the term 'affiliate' includes only those affiliates in existence at the time that the contract was executed."¹⁰

Counterexample: In GTE Wireless, the First Circuit held that a company, Cellexis, had breached a settlement agreement not to sue GTE (now part of Verizon) or its affiliates when it sued a company that, at the time of the settlement agreement, had not been a GTE affiliate, but that later became an affiliate. The court reasoned that when read as a whole, the contract language clearly contemplated that future affiliates would also be shielded by the covenant not to sue.¹¹

Suppose that A and B enter into a contract under which B is obligated to do certain things for A's affiliates (e.g., grant special pricing, or allow access to B's trade secrets). And now suppose that A acquires a new affiliate — namely one of B's competitors, which acquired ownership of A in a merger transaction. Clearly B might be unhappy about having to share its trade secrets with its competitor, so B's drafter(s) should keep that possibility in mind.

Some contracts' definitions of affiliate refer to de facto "control relationships" — without defining what would qualify. That's generally not a good idea, even though that concept can be found in U.S. securities regulations.¹²

To be sure: In a regulatory context, just plain "management power," without the "legally-enforceable" part, might be acceptable, despite its vagueness. But in a commercial context, the vagueness of the generic term could lead to expensive, time-consuming litigation.

Example: In a 2010 Fifth Circuit case, the parties were forced to litigate which party had "control" of a vessel that was destroyed by fire — and thus which party or parties should be liable for damages.¹³ The outcome isn't important for our purposes here, just that the dispute was certainly costly to the parties.

Example: In a 2010 New York case, the uncertain meaning of "control," as used in a contract, meant that the parties had to litigate whether investment bank UBS was entitled to a $10 million fee from a company, Red Zone, headed by Daniel Snyder, the owner of what was then called the Washington Redskins NFL team.¹⁴

Another caution: A knock-on effect of the UBS lawsuit was that Red Zone scored a $17 million legal-malpractice verdict against its blue-chip NYC law firm for failing to nail down the definition of control to Red Zone's hindsight liking.

In corporate "families," different affiliates can share variations on the same name. Example: The global technology company Apple has subsidiaries including Apple Sales International Ltd. and Apple Operations International Ltd., both of which were directly involved in a decision by the European Court of Justice that Apple owed Ireland some €13 billion (USD $14.4 billion).

Not naming the correct company as a party to the contract can be disastrous for other parties:

Example: In the Seventh Circuit's Northbound Group case, the plaintiff, Northbound, was having business difficulties and badly wanted to be acquired by the defendant, Norvax. When Northbound entered into the acquisition agreement, the other named party was not Norvax, but Leadbot, which was a newly-created subsidiary of Norvax: Leadbot was to acquire Northbound's assets and pay the purchase price in the form of an earnout. Evidently Northbound couldn't get Norvax to [BROKEN LINK: guar-proto] Leadbot's payment obligations (see [BROKEN LINK: guar-proto]).

Later, a dispute arose over payments that Leadbot had withheld. Northbound went to court for the withheld payments; it sued not just Leadbot — which had no assets and so was judgment-proof — but also Norvax, i.e., the parent company of Leadbot.

Norvax successfully sought summary judgment dismissing it from the case; in affirming, the Seventh Circuit court didn't even reach the merits: "It goes without saying that a contract cannot bind a nonparty. If [Northbound] is entitled to damages for breach of contract, it cannot recover them in a suit against [Norvax] because [Norvax] was not a party to the contract."¹⁵ Quoting one of its prior cases, the court also implicitly noted that Norvax had not guaranteed Leadbot's payment obligations.¹⁶

(This tale — of a party's entering into a relationship, but not the one the party originally intended — brings to mind a famous story from the Hebrew Bible: As recounted in Genesis chapter 29, Isaac's son Jacob (later renamed Israel) worked for his maternal uncle Laban for seven years, so that he, Jacob, could marry Laban's younger daughter Rachel. But on the wedding night, Laban brought his older daughter Leah to an unsuspecting Jacob, who duly performed his marital duty, not realizing he'd been deceived as to which sister was with him. In the Northbound case, of course, Northbound presumably knew or should have known what it was getting into.)

Example: In the 2023 Frontline Technologies case in the Delaware chancery court, employees of an LLC were granted equity interests in the LLC's parent company. The employees' equity agreement included a covenant not to compete with the parent company, but said nothing about not competing with the LLC itself, i.e., the actual employer. The Delaware chancery court held that the covenant didn't prevent the employees from leaving and going to work for a competitor of the employer.¹⁷

It's usually a bad idea for a contract's preamble to state that the contract is between (for example) "ABC Corporation ('Customer') and its affiliates and XYZ Inc. ('Supplier').

Why might that even come up? Well, suppose that ABC is negotiating a master purchase agreement with XYZ. Not unusually, ABC wants its various affiliates to be able to place orders with XYZ on the same master agreement, so that the affiliates won't have to incur the cost and delay of renegotiating terms and conditions with XYZ.

It'd be easy — and ABC might ask — to recite, in the master purchase agreement, that the parties are as quoted above. But that's not a great idea, unless each ABC affiliate actually signs the agreement as a party, committing, on its own, to upholding the obligations in the master purchase agreement. Experienced commentators seem to agree.¹⁸

Thus, a safer practice would be to state the specific rights and obligations that affiliates have under the contract, instead of making them parties.

Example: Consider the Fifth Circuit's 2023 NOV decision: The issue was (still is?) whether a contracting party had authority to bind one of its affiliates; as near as I can tell, at this writing (fall 2024) the case seems still to be the subject of expensive and as-yet inconclusive litigation.¹⁹

When a contract addresses affiliates' rights, it might include language such as the following, adapted from the real-life Master Supply & Purchasing Agreement of one subsidiary of the alarm company ADT Corporation:

Each Affiliate shall only be liable for those obligations expressly set forth in the Purchase Order to which it is a party. In no event will Buyer be liable for any of the obligations or liabilities of any Affiliate pursuant to this Agreement.

In such a situation, the supplier might want to consider doing one or both of the following:

• Put in the draft contract a provision that the supplier may reject an affiliate's order — ideally for any reason or no reason, but at a minimum if the supplier has reasonable concerns about the affiliate's ability to pay; and/or
• Get the (solvent) parent company, or some other specific, creditworthy affiliate of the named customer, to guarantee payment of all orders when a customer affiliate is the buyer (see Option 20.21.6).

This could turn out to be important. Example: In a California case, a dispute arose between Huy Fong, a famed manufacturer of sriracha hot sauce, and Underwood Ranches, a pepper grower, because Huy Fong wanted Underwood to deal with a newly-created Huy Fong subsidiary, Chilico — but Chilico "did not have the assets to ensure that Underwood would be paid and Huy Fong refused to guarantee the Chilico contract." The dispute turned bitter, with the parties suing each other. In the end, it worked out sort-of OK for Underwood: After years of costly litigation, a California jury awarded Underwood $13 million in compensatory damages and $10 million for fraud. But the case illustrates why parties and their contract drafters should consider the risk of doing business with the "wrong" company in a corporate "family."

Relatedly, see also the discussion of the Northbound lawsuit at 3.6.2.6.

Disputes about oral contract modifications can arise because, for example:

• human memory is fallible, sometimes very much so;
• people tend to remember things the way they want to remember them;
• people can shade the truth, or even flat-out lie, if they think it will help them.

This is especially true as time passes after an event, often because the parties' circumstances change.

(These widespread human failings are discussed in more detail at 10.20.)

Technically, a binding written document amending the Con­tract could be an exchange of emails.

Amendments can even occur in text messages — this happened in a Florida lawsuit between a digital ad agency and one of its clients, an e-cigarette manufacturer, resulting in the manufacturer having to pay the agency more than $1 million dollars in additional fees.²⁹

Caution: A text-message amendment might not be a good idea because:

• it might disappear, and
• for that reason, even if it didn't disappear, it might be legally ineffective in some jurisdictions, as discussed at 23.1.

For the same reason, an amendment on something like a Post-It note would be inadvisable, even though technically it'd be binding if it was otherwise sufficient.

According to Black's Law Dictionary (the canonical English-language legal dictionary), an amendment is "[a] formal and usu. [usually] minor revision or addition proposed or made to a statute, constitution, pleading, order, or other instrument …."

Imagine a contract between two parties whom we'll call "Fred" and "Ginger." Suppose that the contract calls for Ginger to take care of Fred's lawn; Ginger's obligations include mowing the lawn each week, raking leaves in the autumn, etc.

Now suppose that on one particular day, Fred comes outside to talk to Ginger when she arrives to mow the lawn.

• If Fred says, "Hi Ginger — I don't need the lawn mowed this week." That's known as a waiver, by Fred, of Ginger's obligation for that occasion.
• Or, Fred might say, "never mind, Ginger, I don't need you to mow the lawn ever, because my teen-aged son wants to do it from now on — so let's talk about changing the contract to reduce what you have to do and also reduce what I pay you." If Ginger agrees, that's known as an amendment of the contract.

If you'll be making extensive changes to a contract — or if there have already been multiple amendments to the same contract over time — then consider doing a complete "amended and restated" agreement, with that title.

Example: As of this writing (fall 2024), the title of the Enterprise Products Partners limited-partnership agreement is, "Seventh Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P." (emphasis added).

Caution: If doing an amended-and-restated agreement, you'll want to consider whether you could be wiping out a provision that your client might later want to rely on, as happened in a Sixth Circuit case where an earlier contract contained a payment guaranty, but an amended-and-restated contract did not; presumably this was to the chagrin of the creditor that, as a result, didn't get paid.³⁰

If a document purports to be an "amendment," that fact should be immediately obvious to the reader. Otherwise, a party to a contract might (opportunistically) claim that some random document was, surprise!, an amendment to the contract.

Example: The owner of an office complex in Maryland sold the complex to a new owner.

• As is typical in such sale transactions, the complex's tenants signed an estoppel certificate.
• Later, one tenant's lease term came to an end, and the tenant began preparing to vacate the premises.
• The new owner demanded that the tenant bear the cost of making various repairs, claiming that the estoppel certificate signed by the tenant had modified the terms of the lease to require this.
• The departing tenant refused, so the new owner sued.

The trial court granted summary judgment in favor of the departing tenant, holding that the estoppel certificate had not modified the lease, and the appeals court agreed.

Lesson: This costly litigation might have been avoided by clearer terms in the lease about what it would take to amend the lease.³¹

Pro tip: In the amendment's title, consider including a series number and date — and perhaps even include a (brief) mention of the amendment's purpose — to reduce the chances of confusion and make it easier for a reader to find the amendment when skimming a list of document titles.

Example:

If making further amendments to Amendment No. 1 itself:

a.  If a contract states that amendments must be signed by all parties, then a missing signature could render the entire amendment unenforceable — even if the omission was inadvertent. This was the result in more than one court case, illustrating the R.O.O.M. principle — Root Out Opportunities for Mistakes (or Misunderstandings. (Or if you prefer: R.O.O.F.: Root Out Opportunities for F[oul]-ups.)

Example: In Expo Properties, cited above, the tenant's lease explicitly required both the tenant and the landlord to sign any proposed amendments of the lease — but the "estoppel certificate" in question had been signed by the tenant only, so the lease was not modified to be more favorable to the landlord.

Example: JPMorgan Chase lent money to a borrower. The loan agreement specifically said that both parties were required to sign any modification. The borrower claimed that the loan agreement had been modified — but the court said that the modification was ineffective because JPMorgan Chase never did countersign it.³²

b.  Sure, it's usually better if all parties sign the amendment document. But the law in the U.S. ordinarily requires the signature of just the party that's supposedly bound by the amendment.

Example: In a Seventh Circuit case, a former law-firm associate sued the firm for compensation he claimed to have been owed; a federal district court dismissed his various claims on summary judgment — but an appeals court reversed (and remanded the lawyer's breach-of-contract claims) because the law firm had signed a letter to the associate increasing his compensation over that in his employment agreement:

While the district court was apparently unsure whether [the lawyer's employment] agreement included the terms found in a June 21 letter from the firm to Hess that Hess had never signed, we see no reason not to include that material [in the agreement]. The critical signature is that of the party against whom the contract is being enforced [i.e., the law firm's signature], and that signature was present.³³

Relatedly: Under the (U.S.) Uniform Commercial Code's statute of frauds provision in UCC § 2-201, a written contract (for the sale of goods) must be signed "by the party against whom enforcement is sought …."

c.  If parties did want to require both signatures on an amendment, that could be stated in the contract using override language such as: "Any agreed amendment to this Agreement must be signed by all parties to this Agreement."

d.  For tips on drafting amendment signature blocks, see 22.4 and especially [BROKEN LINK: sig-blocks] — the format would likely be exactly the same as for the contract itself.

a.  Typically under the law in the U.S., anyone with apparent authority may sign an amendment on behalf of a party.

b.  A contract can generally negate apparent authority by clearly putting the parties on notice that only certain people have authority to agree to amendments.

Example: Such language is often seen, e.g., in car dealers' sales contracts, requiring manager- or vice-presidential signature on amendments — presumably, the purpose is to preclude buyers from claiming that a low-on-the-totem-pole sales representative had agreed to non-standard terms.

Caution: Such limitations should usually phrased in terms of a position title and not the name of a specific individual — at some unknown point in the future, that individual might no longer be available to sign amendments, because reasons. The title of the position would of course have to be customized for each contract (or each contract form).

Here's a hypothetical example from our MathWhiz-Gigunda simulation, shown with "redlining" (change the names appropriately, of course):

Save any signed amendment document in a place where it can be readily found later. (This should be a routine thing for businesses already.)

Here's why: Imagine, in a contract legal dispute, that you made a particular argument, based on the contract text. But then the other side informs you that you'd previously signed an amendment to the contract that fatally undermines your argument. Both you and your client had forgotten about the amendment — but sure enough, the other side had a signed copy ….

Sometimes a contract will be amended to resolve a disagreement between the parties. If that happens, a release might be drafted so broadly as to cause other rights to vanish.

Example: This is an issue (at this writing) in a pending federal-government contracting case, where fact issues precluded summary judgment whether a contract modification effected a release of certain other claims the contractor was asserting against the government.³⁴

Drafters of amendments should watch out for possible unwanted "side effects," in which an amendment to one provision turns out to affect one or more other provisions as well. This can be a particular problem when defined terms are used, as discussed in Kidd (stephens-bolton.com, undated).

This, incidentally, is one reason for contract drafters to follow the D.R.Y. Principle (that is, Don't Repeat Yourself, usually) to try to reduce such "dependencies" — and thus the possibility for inconsistent revisions during negotiations — between different provisions in a contract.

Applicable law might require "consideration" (see 10.7) for amendments to existing contracts. Generally speaking, this means that each side gets at least some benefit from the amendment.

Here's a business problem: Sometimes parties to a contract, in the course of their dealings will agree orally to modify the contract, or to waive a contract requirement. Of course, the parties should follow up with written documentation of the modification. But that doesn't always happen — even when the contract specifically requires such a writing.

Even when a contract clearly says that amendments must be in writing, in litigation a party might claim that the parties orally agreed to waive that writing requirement. For example, Massachusetts law allows such claims, as noted in a federal court opinion allowing a contractor's lawsuit over a purported equity grant to move forward:

A provision that an agreement may not be amended orally but only by a written instrument does not necessarily bar oral modification of the contract.

Whether an oral modification occurred can be inferred from the conduct of the parties and from the attendant circumstances of the case.

The proponent of the oral modification must present evidence of sufficient force to overcome the presumption that the integrated and complete agreement, which requires written consent to modification, expresses the intent of the parties.³⁵

This doctrine is illustrated in a century-old New York precedent — for mnemonic purposes, we'll call it the "Cardozo Rule," after its author, later a Supreme Court justice — parties are free to orally waive a contractual requirement that amendments and waivers must be in writing, subject to any possible impact of the statute of frauds (see 19.1.2):

Those who make a contract, may unmake it.

The clause which forbids a change may be changed like any other.

The prohibition of oral waiver, may itself be waived.

Every such agreement is ended by the new one which contradicts it.

What is excluded by one act, is restored by another.

You may put it out by the door, it is back through the window.

Whenever two men [sic] contract, no limitation self-imposed can destroy their power to contract again [to amend the first contract].³⁶

Delaware law likewise allows a party to assert that a written-amendment requirement was orally waived — although that party must meet a heightened evidentiary burden.

Similarly, under California law, even if a contract does contain an amendments-in-writing requirement, a party can try to claim that the requirement was orally waived. Example: In a case out of Hollywood, the parties fought over how to share the profits from the TV series Home Improvement.³⁷

And some other jurisdictions will likewise let parties at least argue that a writing requirement was orally waived. New Zealand³⁸ and Singapore³⁹ are two examples.

In New York, the Cardozo Rule has (largely) been overruled by statute; see N.Y. General Obligations Law 15-301(1), which provides that: "A written agreement … which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed[:] [i] by the party against whom enforcement of the change is sought or [ii] by his agent." (Emphasis and bracketed text added.)

In some other U.S. jurisdictions, courts will likewise uphold contractual requirements that amendments and waivers must be in writing.⁴⁰

Example: In a 2018 case, the UK's Supreme Court cited but expressly rejected the Cardozo Rule, concluding that "the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation."⁴¹

In Article 2 of the (U.S.) Uniform Commercial Code — which in general applies to transactions that are predominantly for the sale of goods — section 2-209(2) provides as follows:

(1) An agreement modifying a contract within this Article needs no consideration to be binding.

(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants [basically, regular buyers and sellers of goods of the kind] such a requirement on a form supplied by the merchant must be separately signed by the other party.

(3) The requirements of the statute of frauds section of this Article (Section 2-201) [which requires certain contracts to be in writing] must be satisfied if the contract as modified is within its provisions.

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.

(5) A party who has made a waiver affecting an executory portion [i.e., a not-yet-started portion] of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

For agreements posted to a Website (such as "terms of service"), more than one court opinion has held that changing the agreement at the Website isn't enough for a unilateral amendment.⁴⁴

A party that might send out notices of unilateral amendment should consider whether the party's email system and procedures can produce evidence that will persuade a judge or jury that a notice was actually sent to a particular customer, user, etc.

Example: In a Seventh Circuit case, the court vacated an order confirming an arbitration award against a PayPal customer who had brought a claim against the company; the court remanded for a trial about whether the customer had in fact consented to PayPal's unilateral amendment to its terms of service, which had added an arbitration requirement:

… PayPal does not have a more specific record of sending that email notice [of PayPal's unilateral amendment] to Kass or whether it was received, bounced back, or disappeared into cyberspace.

Kass denied that she had ever received or known of the 2012 amendment to the User Agreement. By sworn declaration, Kass testified that she had never seen the amended User Agreement posted to PayPal’s website, that she did not receive an email notifying her of the amendment, and that she had never seen, known of, or agreed to the 2012 User Agreement with its mandatory arbitration clause. * * * 

Whether she [Kass] was subject to mandatory arbitration under the 2012 User Agreement depends on whether Kass received an email from PayPal notifying her of that amendment. This is a question of fact that must be resolved by a trier of fact, not summarily by the court considering only the paper record.⁴⁵

What odds would you give that a local jury would side with PayPal on that point?

Example: In another case, a federal court in California ruled that Dropbox had failed to unilaterally amend its terms of service (to add an arbitration requirement). Why? Because, said the court, Dropbox had not shown, by a preponderance of the evidence, that in fact it gave notice of the amendment, where the user denied having opened or read the notice email that Dropbox sent. The court said:

There is nothing in the record to suggest that Plaintiff could not use the service until he indicated his assent, that he would have been advised of new terms and conditions while using Defendant’s services, or that Defendant ever tracked whether Plaintiff had opened its email.

Even if the email alone could be considered “reasonably conspicuous notice,” Plaintiff took no action to unambiguously manifest his assent…

Given the complete lack of evidence of notice within Defendant’s service itself, Plaintiff’s ongoing use of the service is irrelevant to determining whether he had actual or constructive notice of the post-2011 terms of service.⁴⁶

Professor Eric Goldman, an authority in this area, described the decision as "troubling" and said:

If you want to absolutely ensure that the TOS [terms of services] amendment sticks, you need users to click in assent. Good luck with that; but any lighter process is taking your chances.⁴⁷

Example: In a Georgia case, an Uber driver murdered one of his passengers. The passenger's mother sued Uber for wrongful death. In the Georgia trial court, Uber successfully moved to compel arbitration, but an appellate court reversed and remanded, holding that a triable question existed whether the deceased passenger had in fact received updated terms and conditions from Uber — and thus had implicitly assented to arbitration by continuing to use the Uber service. That's because "neither the affidavit nor the exhibits provided by Uber list the email address to the which email was sent. … There is also no record evidence that the email was delivered to Thornton."⁴⁸

For a perhaps-dated review of case law addressing what might be required to qualify as sufficient notice to consumers of unilateral amendment, see generally two 2016 ABA articles (probably paywalled, limited to ABA members).⁴⁹

A court might hold that a contract was "illusory" — and thus that the entire contract was unenforceable — if the contract says that a party has the right to change its terms unilaterally and retroactively, at least if the party doesn't give the other party sufficient advance notice and the right to opt out. Such an unenforceability ruling could have serious ripple effects, as discussed in the examples below.

–  Example: A Blockbuster customer (remember them?) sued the company for allegedly violating her privacy rights and sought class-action status. Blockbuster moved to compel individual, case-by-case arbitration, as required in the Blockbuster on-line terms of service. Harris opposed the motion — doubtless because for her lawyers, many onesie-twosie arbitration proceedings would be much less economically attractive to them than class arbitration would be. x A federal court in Texas denied Blockbuster's motion to compel arbitration, on grounds that the company's terms of service were "illusory" — because the unilateral amendment didn't include a so-called Halliburton exception — and therefore was unenforceable under the relevant state law.⁵⁰

(Now think about what else could result from a court's holding about an "illusory" contract: One or both parties might lose protection that the contract might otherwise have provided, such as for example an arbitration clause with class-action waiver; a forum-selection or governing-law clause; a limitation of liability; and so on.)

–  Example: A former employee of 24 Hour Fitness filed a lawsuit against the gym company. The company moved to compel arbitration, citing an arbitration provision in the company's employee handbook. The court affirmed a holding that 24 Hour Fitness's arbitration provision was unenforceable because the company reserved the right to change the employee handbook at will. That, in turn, meant that the handbook was "illusory" — and consequently, the arbitration provision was ineffective and the former employee's case would be tried in court instead of being heard privately by an arbitrator.⁵¹

Pro tip: Parties presumably would always be free to agree to amend the Con­tract with retroactive effect — but then of course it wouldn't be a unilateral amendment ….

–  A "going forward only" limitation might well save a unilateral-amendment clause from invalidation. Example: In a Fifth Circuit case, the court held that an employer had the right to terminate its arbitration agreement with employees, but the termination would not apply to claims that had accrued before the amendment.⁵²

–  To somewhat-similar effect, the Uber ride-sharing terms of service of April 4, 2022 (last visited May 13, 2022) states, in the penultimate paragraph of section 1, that amendments by Uber are effective after notice, which arguably implies no retroactive effect:

… Unless Uber says otherwise in its notice, the amended Terms will be effective immediately and your continued access to and use of the Services after Uber provides such notice will confirm your acceptance of the changes. If you do not agree to the amended Terms, you must stop accessing and using the Services.

(Emphasis added.)

–  Somewhat more-restrictively: In a North Carolina case, a majority of the state's supreme court held that a unilateral-amendment provision in a credit union's terms of service — which the credit union used to add an arbitration requirement — sufficiently complied with the state's implied covenant of good faith and fair dealing; the unilateral-amendment provision required advance notice and an opportunity to opt out and "the changes [to add arbitration] reasonably relate to subjects discussed and reasonably anticipated in the original agreement."⁵³

(Two dissenting judges in that case objected that, by unilaterally adding the arbitration provision, the credit union "single-handedly deprived [the credit union's customer] of her constitutional right to a jury trial on her claims and the ability to defray the burden of vindicating that right through a class action. To make matters worse, the modification’s language—drafted and adopted by CMCU alone—left [the customer] without an avenue to opt out of arbitration and the class action waiver.")⁵⁴

Unilateral amendments to terms of service can lead to bad publicity. Example: In 2023, Zoom ran into a public-relations buzzsaw when it unilaterally modified its terms of service to allow the company to train AI models on customers' information.⁵⁵

As a research aid, some other cases concerning unilateral amendments are discussed at the following footnote (which is optional reading for students).⁵⁶

Binding arbitration started out as a procedure to resolve disputes in business-to-business ("B2B") contracts. But arbitration requirements are increasingly found in business-to-consumer ("B2C") contracts — sometimes with terms that decidedly advantage the business — and many drafters of B2B contracts seem to want to avoid arbitration because it's said to offer "the worst of both worlds," with most of the expense of litigation but without wide-open discovery and little right to appeal an adverse outcome.

Example: Renaissance Hotel (1996): A California appeals court held that a "review committee" procedure in an employer's "Employee Guide" did not constitute an agreement to arbitrate, because "a third party decision maker and some degree of impartiality must exist for a dispute resolution mechanism to constitute arbitration."⁹⁸

Example: In a non-arbitration context, a Delaware chancery-court judge, on his own motion, stayed (that is, suspended) the court proceedings between a former director of a biotechnology company and the company itself. The basis for the stay was that, under the biotech company's stock-option agreement, the parties' dispute about the interpretation of the agreement must be submitted to a committee of the company's board of directors.⁹⁹

And mediation is often mistaken for arbitration — but a mediator generally has no authority at all except to try to help parties reach a settlement agreement, typically by "shuttle diplomacy."

Finally, expert determination is not arbitration, for reasons discussed at 12.25.

a.  Confidentiality in arbitration won't necessarily be automatic. That's true even though a primary reason parties opt to arbitrate their disputes in the first place is often to try to avoid having their business affairs made public in court proceedings.

b.  The agreed arbitration rules might independently require confidentiality, possibly in the arbitrator's discretion.¹⁰⁰

The arbitral law and/or the applicable substantive law might also require confidentiality, e.g., if personal health information or export-controlled information is involved. For example, apparently English arbitration law implies a duty of confidentiality in arbitration proceedings — and a failure to maintain confidentiality, where required, could result in the imposition of severe sanctions or the institution of legal proceedings against the discloser by other parties to the arbitration.¹⁰¹

c.  Caution: A court being asked to enforce an arbitration agreement might not honor even an agreed confidentiality requirement — that's because of the strong presumption of public access to court proceedings and documents filed or used in court.¹⁰²

d.  Caution: Too-strict a confidentiality requirement in an arbitration agreement might cause enforceability problems for the arbitration agreement itself — especially in employment-related cases.¹⁰³

In standard business- and consumer arbitrations, each case is decided by a privately-engaged arbitrator, not by a publicly-employed judge.

(Some arbitrators are retired judges, but they still act in a private capacity, not an official one.)

The only times an actual judge would be involved would be:

• if a party didn't want to arbitrate, in which case there might be court proceedings in which a judge decided whether or not to compel arbitration; and
• if a party refused to comply with an arbitration award, in which case the other party would likely go to court to confirm and enforce the award.

A single arbitrator will usually be required to be independent and impartial, e.g., under the AAA's Commercial Rule R-18.

[b]  Sometimes, parties agree that each party will appoint one non-neutral arbitrator and a third arbitrator will be neutral; see, e.g., AAA Rule R-18(b).

Rarely — if the parties have so agreed — a single, non-neutral arbitrator will decide the case, as happens in some professional sports collective-bargaining agreements that provide for a senior authority figure in one of the parties to serve as arbitrator; such an arbitrator arguably would not be neutral.

Example: Consider the famous "Deflategate" case, which centered on legendary (U.S.) National Football League quarterback Tom Brady: In 2016, the Second Circuit rejected Brady's objection to having NFL commissioner Roger Goodell sit as the arbitrator in Brady's challenge of his four-game suspension. The court held, in essence, that the players' union and the team owners had known full well the consequences of their arbitration agreement and that they could have bargained to do things differently.¹⁰⁴

Counterexample: The First Circuit held that, under the applicable Puerto Rican law, the arbitration provision in the World Boxing Organization's agreement with boxers was unconscionable because it gave the WBO the power to select the arbitrator. The appeals court remanded the case for consideration of a savings clause that might allow arbitration to go forward anyway with an arbitrator appointed by the district court.¹⁰⁵

Counterexample: The Seventh Circuit invalidated, as unconscionable, of an arbitration provision, in an employment agreement between a drinking establishment and an employee, because (among other infirmities), the arbitration provision gave the bar the right to choose the arbitrator. On appeal, with the bar's agreement but over the employee's objection, the appeals court directed the trial court to choose an arbitrator, as provided by the Federal Arbitration Act, and to order the parties to arbitrate. See Campbell v. Keagle Inc., 27 F.4th 584 (7th Cir. 2022) (vacating and remanding refusal to compel arbitration).

Sometimes a contract will include an agreement to arbitrate, but then when a dispute arises, one party will refuse to participate or will try to block arbitration. When that happens, the party that wants arbitration will usually go to court and seek an order compelling arbitration.

(This Clause allows one, limited exception: Under section 3, for a limited time, either party may elect to take the dispute to a small-claims court in lieu of arbitrating.)

There's a perception in some quarters that arbitrators can run amok, i.e., "go rogue." Example: Some observers believed that the arbitrators went too far in a software-copyright dispute between competitors IBM and Fujitsu — in that case, the arbitrators ultimately ordered IBM to provide its operating-system source code and other secret information to Fujitsu; and ordered Fujitsu to pay significant money to IBM for the privilege.¹⁰⁶

And worse, under U.S. law, the opportunities to appeal an adverse arbitration award could be very limited unless the agreement to arbitration limits the arbitrator's power (see the notes at 4.5.1.23 for additional discussion of that point).

Author's note: From what I've seen, most arbitrators (myself included) seem to stick to the law and the contract. Not least, that's because — wanting to be hired again and to get referrals from satisfied counsel — arbitrators can be reluctant to anger either side's counsel, which could happen if they render an award that doesn't make sense to the losing side; this is discussed in an important article by Professor Tom Stipanowich.¹⁰⁷

In U.S. litigation, parties' counsel get to take extensive "discovery" as a matter of right; typically, this takes the form of compulsory production of documents and compulsory depositions, i.e., witness interviews under oath.

But in arbitration, the applicable arbitration rules generally allow for very little such discovery, at least not without the arbitrator's approval.

(As a practical matter, though, parties' counsel very often agree to exchange discovery; this can run up the bills for arbitration to where the expense is comparable to litigation, as discussed at 4.5.4.9.)

Some companies prefer arbitration over litigation because — when properly managed — arbitration can cost less money and take less time than court proceedings.

(For arbitration-management suggestions, see my arbitration streamlining article — I sometimes serve as an arbitrator in tech-contract and IP disputes — as well as my preferred arbitration procedures.)

Moreover, for transnational arbitrations: Because of the international treaty on arbitration (the New York Convention), if a case is arbitrated in Country A, it's often easier for the winning party to get a court in Country B to enforce the arbitrator's award (e.g., by ordering seizure of the losing party's assets located in Country B) than it would be if the case had been litigated in Country A.

But: On the other hand, some parties regard arbitration as the worst of both worlds. Noted academic authority Tom Stipanowich has suggested that —

–  Arbitration has been "captured" by litigation counsel who, for reasons of their own, prefer to agree with their counterparts to run arbitration proceedings in the same expensive- and time-consuming ways as they're familiar with in court (that tracks with my own experience as an arbitrator); and

–  Arbitrators — mindful of getting future business and referrals from litigation counsel — can be reluctant to anger counsel in a case by overruling their procedural agreements, even though doing so would help to keep costs down in the case. ¹⁰⁸

Here's a hypothetical situation:

- "Alice" agrees to arbitrate a dispute with "Bob" over whether Alice owes Bob money.

• The arbitrator decides in Bob's favor and rules that Alice must pay Bob, let's say, $1,000.
• Alice refuses to comply with the arbitrator's award.

Bob can't just stroll into Alice's bank and ask a teller to hand him $1,000 from Alice's account: Bob must instead go to a court, in a jurisdiction where Alice can lawfully be sued — or has agreed she can be sued there, as in section 14 of this Clause — to "confirm" the award under the Federal Arbitration Act (in Title 9 of the U.S. Code) or, in international cases, by treaty (the New York Convention).

As explained by the Second Circuit: By law, arbitration awards "are not self-enforcing and must be given force and effect by being converted to judicial orders by courts; these orders can confirm and/or vacate the award, either in whole or in part."¹⁰⁹

When a court does confirm an arbitration award, the award acquires the same status as a judgment of the court itself; the award can therefore be enforced by the winning party, for example by getting law-enforcement officials to seize the losing party's assets to pay a monetary award.

Once Bob gets the award confirmed, he can have the resulting court judgment "executed" — that is, then Bob can get law-enforcement authorities to confiscate enough of Alice's money and other assets to satisfy the judgment.

Arbitration used to be disfavored by U.S. courts, but Congress and, repeatedly, the Supreme Court have instructed lower courts to reverse that stance, for example in Concepcion (2011):

The [Federal Arbitration Act] was enacted in 1925 in response to widespread judicial hostility to arbitration agreements. … [The Act reflects] both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract. In line with these principles, courts must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.¹¹⁰

Note: As discussed at 4.5.4.12, Congress later prohibited compulsory arbitration for some types of claim.

Many states' laws likewise strongly favor arbitration. Example: In Apache Corp. (Tex. 2021), the Texas supreme court noted: "Once a valid arbitration agreement is established, a strong presumption favoring arbitration arises and we resolve doubts as to the agreement’s scope in favor of arbitration."¹¹¹

Here are some examples of disputes in the U.S. where compulsory arbitration — mandated by contract before a dispute even arises — might be prohibited by law:

1.  Sexual-assault or -harassment claims: In March 2022, President Biden signed H.R. 4445, which amended the Federal Arbitration Act to ban enforcement of pre-dispute agreements that would compel arbitration of claims of sexual assault or sexual harassment.

2.  California employment- and consumer arbitration: In California, the statute known as A.B. 51 prohibits many employers from requiring mandatory arbitration of claims under the California Fair Employment and Housing Act and certain related statutes.

The California statute drew opposition, and a federal district court preliminarily enjoined enforcement of the statute on grounds of preemption by the Federal Arbitration Act; after an initial appeal and then reconsideration, the Ninth Circuit affirmed.¹¹²

Relatedly: California's S.B. 940 adds new section 1799.208 to the Civil Code; the new section prohibits sellers from requiring consumers to agree to arbitration outside of California, or under any other jurisdiction's substantive law, if the consumer's claim arises in California; consumers can void such requirements and recover their attorney fees for doing so.

3.  Corporate whistleblower claims: Drafters working in the financial-services arena should check the Dodd-Frank Act's prohibition of mandatory arbitration of Sarbanes-Oxley Act "whistleblower" claims; see generally the Supreme Court's decision in Murray (2024), concerning the required elements of proof.¹¹³

4.  Franken Amendment and government contracts: Government contractors and subcontractors should check the so-called Franken Amendment for its restrictions on arbitration clauses in employment agreements relating to certain government contracts. (The Franken Amendment apparently survived the GOP's takeover of Congress and the White House in the 2016 election, but it might be less relevant now in view of the 2022 enactment of HR 4445, discussed at subdivision 1 above.)

5.  Moreover, in July 2014, President Obama signed an executive order stating that in federal government contracts for more than $1 million, "contractors [must] agree that the decision to arbitrate claims arising under Title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment may only be made with the voluntary consent of employees or independent contractors after such disputes arise"; the order includes a flowdown requirement for subcontracts for more than $1 million.

(The order sets out exceptions for (i) the acquisition of commercial items or commercially available off-the-shelf items; (ii) collective bargaining agreements; and (iii) some but not all arbitration agreements that were in place before the employer placed its bid for the government contract in question.)

6.  Car dealership franchise agreements: Federal law provides that in franchise agreements between automobile manufacturers and their dealers, pre-dispute arbitration agreements are unenforceable. Interestingly, the law also states that: "Notwithstanding any other provision of law, whenever arbitration is elected to settle a dispute under a motor vehicle franchise contract, the arbitrator shall provide the parties to such contract with a written explanation of the factual and legal basis for the award." 15 U.S.C. § 1226(a)(2).

7.  Lending to military: If your client provides credit to active-duty military personnel or their eligible dependents, be sure to check the regulations that implement the Military Lending Act: Those regs essentially negate any agreement to arbitrate consumer credit disputes between lenders and such borrowers. (The regulations don't seem to distinguish between pre-dispute and post-dispute agreements to arbitrate, even though the statute itself appears to make just such a distinction.)¹¹⁴

8.  Livestock & poultry production: Federal regulations governing livestock and poultry production impose restrictions on certain contracts mandating the use of arbitration. Under these regulations, such contracts must include, on the signature page, a specifically-worded notice, in conspicuous bold-faced type, allowing the producer or grower to decline arbitration; moreover, the Secretary of Agriculture seems to have the power to review agreements to determine "whether the arbitration process provided in a production contract provides a meaningful opportunity for the poultry grower, livestock producer, or swine production contract grower to participate fully in the arbitration process."¹¹⁵

9.  Home mortgage loan claims (overruled by Congress): In the Truth in Lending regulations, Regulation Z was amended to prohibit pre-dispute arbitration clauses in mortgages secured by dwellings — but that regulation was overturned in 2017 by the GOP Congress and President Trump under the Congressional Review Act (CRA).¹¹⁶

Relatedly: In a 2024 decision, the Second Circuit, citing cases, held that if a party were forced to arbitrate a non-arbitrable claim, it could cause irreparable harm, and that would bear on whether it would be appropriate to issue a preliminary injunction against arbitration.¹¹⁷

And even if a contract itself is alleged to be void for illegality, a U.S. court will likely enforce an arbitration-delegation provision contained in the contract, as happened, for example, in a 2022 Third Circuit case.¹¹⁸

For the arbitrator to have the power to decide arbitrability disputes, the arbitration agreement itself must clearly and unmistakably delegate those specific decisions to the arbitrator, said the Supreme Court. When that happens, the arbitrator will decide the arbitrability question — and a court will likely defer to the arbitrator's decision on that point, as discussed at 4.5.1.23.¹¹⁹

On the other hand: In 2024, the Supreme Court held that, if there are two arguably-conflicting agreements — one that requires all controversies to be heard in a particular court, the other that contains an arbitration provision — then a court will determine which agreement controls on that point. This came up in a case where sweepstakes rules contained an exclusive forum-selection clause while the associated online terms of service required arbitration.¹²⁰

Many arbitration rules include a delegation provision: if an arbitration agreement adopts such rules, then the delegation agreement might follow automatically.¹²¹

But: If a party claims that it never agreed to arbitration in the first place (see this footnote), then the arbitration clause's adoption of particular arbitration rules won't be enough to delegate the arbitrability dispute.¹²²

And if the arbitration agreement itself refers only to specified disputes, and not to all disputes, then a court might find that the agreement does not "clearly and unmistakably" delegate arbitrability decisions — even when the agreed arbitration rules might suggest otherwise.¹²³

A court might hold that the delegation agreement was unconscionable; this happened in a 2024 Ninth Circuit case; as stated in the court staff's syllabus:

The panel held that the delegation clause was part of a contract of adhesion, and the Terms on Ticketmaster's website, and the manner in which Ticketmaster bound users to those Terms, evinced an extreme amount of procedural unconscionability far above and beyond a run-of-the-mill contract-of-adhesion case.

In addition, four features of New Era's arbitration Rules supported a finding of substantial substantive unconscionability of the delegation clause[.]¹²⁴

Normally, as discussed at 4.5.5.2 below, arbitration awards are largely unappealable except on very limited grounds — the theory is that, by agreeing to arbitration, the parties are getting what they bargained for, namely the arbitrator's decision, even if that decision is erroneous.

Happily, as discussed at 4.5.5.3 below: Some states do allow parties also to agree on expanded appeal rights in arbitration; this section takes advantage of that possibility by allowing reversal or vacating of an arbitrator's action on the same basis as for a non-jury trial ("bench trial") in the U.S.

In the Supreme Court's Hall Street decision (famous, at least in the arbitration world), the Court held that — when the sole authority for an arbitration proceeding is the Federal Arbitration Act — courts may not entertain a challenge to the award except on the limited, misconduct-based grounds provided in section 10 of the Act.¹²⁵

Later, in its 2013 Oxford Health Plans decision, the Court explained:

Because the parties bargained for the arbitrator's construction of their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court's view of its (de)merits.

Only if the arbitrator acts outside the scope of his contractually delegated authority — issuing an award that simply reflects his own notions of economic justice rather than drawing its essence from the contract — may a court overturn his determination.

So the sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong.¹²⁶

In W.R. Grace, though, the Court also held that a court can set aside an arbitration award that violates an explicit public policy — but the Seventh Circuit later noted in Zimmer Biomet that the public policy "must be well defined and dominant, and is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests."¹²⁷

And under California law (as summarized by a state appeals court in Brown), an arbitrator will exceed her powers — and thus have her award subject to being vacated — if the award "violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy."¹²⁸

Editorial comment: Purely from a workload-management perspective, it seems quite short-sighted for courts to prohibit enhanced appeals of arbitration awards by agreement. That's because:

• parties are always free not to agree to arbitration — which means that their disputes likely would end up in court; and
• surely, a busy trial judge would prefer to deal with a relatively simple case where some other "judge" — i.e., the arbitrator — had already done the work of managing the pre-trial work, trying the case, and writing an award, and all that the trial judge needed do was to sit as a reviewing court.

Drafters can keep in mind another possibility for enhanced appellate review: In part IV of its Hall Street decision, the Supreme Court expressly left open the possibility that enhanced review might be available under some other authority, such as state law or (in the case of court-annexed arbitrations) a court's inherent power to manage its docket.

Subsequently, the supreme courts of both California and Texas ruled that, in proceedings under the arbitration acts of their respective states, the parties were free to agree to enhanced judicial review.⁸¹

Counterexample: In 2010, the Tennessee supreme court held that an arbitration agreement's expansion of the scope of judicial review was invalid.¹²⁹

Tangentially: Some arbitration agreements take the opposite tack, stating that the arbitrator's decision will be final, binding, and not reviewable at all by a court. But U.S. courts probably won't go along with that: In 2003, the Second Circuit noted that "[s]ince federal courts are not rubber stamps, parties may not, by private agreement, relieve them of their obligation to review arbitration awards for compliance with § 10(a) [of the FAA]."¹³⁰

On slightly-different facts, however, both the Fourth and Tenth Circuits held that arbitration provision can properly waive appellate review of a trial court's confirmation of an award.¹³¹

Option 4.5.3.1's prohibition of class arbitration could be disastrous financially if a company found itself having to pay arbitration fees for hundreds or even thousands of coordinated individual arbitration claims:

–  Suppose that an arbitrator determines that class arbitration between a company and its employees (or its customers, its "independent contractors," etc.) is not allowed.

–  Later, a court might find itself compelled to accept the arbitrator's determination, however that determination comes out (see 4.5.1.23).

–  This might mean that if the arbitrator decides against class arbitration, the company could find itself on the hook for millions of dollars in individual arbitration fees. Courts tend not to sympathize with companies that use class-arbitration waivers — making it costly for employees or customers to arbitrate individually — but that then try to get out of paying the required arbitration fees. Numerous cases — involving well-known companies such as Amazon, Twitter, and Uber — are cited in the following footnote (which is optional reading for students).¹³²

Some companies include opt-out provisions in their arbitration agreements, especially in employment agremeents and customer agreements.

• Opting out of arbitration would preserve an employee's or customer's right to bring class-action litigation.
• And many people might not actually bother to opt out — this happened in a Ninth Circuit case in which a Bloomingdale's employee failed to timely opt out of arbitration when given the chance; she was held to have waived her right to litigate in court.¹³³

AT&T's October 2022 customer service agreement sets out a detailed procedure (in section 1.3.2.7) for "Administration of Coordinated Arbitrations." (The linked customer service agreement is archived at https://perma.cc/DYC6-T9WM.)

Example: Similarly, in 2023, genetic testing company 23andMe changed its terms of service to require customers to use a "mass arbitration" procedure, "after reports revealing that attackers accessed personal information of nearly 7 million people — half of the company’s user base — in an October hack."¹³⁴

The American Arbitration Association has developed supplemental rules for mass arbitration, which "were developed specifically to streamline the administration of large volume filings involving the same or related party, parties, and party representatives" with a "[t]echnology-focused approach to case management."

At this writing, it has yet to be established which if any of the above "hybrid" approaches will be accepted by courts. As noted in a law-firm Web publication:

At least one court has tentatively blessed a variant of this approach, but in so doing, noted that if the process leads to undue delay in resolution of claims, it may ultimately be deemed unconscionable.

Whether these provisions will stand up in the end is undetermined, but regardless, they represent an imperfect solution, and may do little to avoid the enormous costs of ultimately resolving large numbers of individual arbitrations.¹³⁵

So: Some parties might want to allow class arbitration, perhaps using language such as the following:

Parties agreeing to class arbitration might also want to agree to an enhanced right of appeal, as stated in Option 4.5.1.23.

Example: In 2023, citing decisions from several jurisdictions, a federal district court in Rhode Island ruled that, in the absence of an arbitration agreement, a purported waiver of state-law class action remedies was contrary to the state's public policy and so was unenforceable.¹³⁶

Counterexample: In 2024, New Jersey's supreme court, also citing other states' decisions, ruled just the opposite, namely that class-action waivers in consumer contracts were not per se contrary to public policy, but they could be unenforceable if found to be unconscionable.¹³⁷

Counterexample: In 2005, California's supreme court stated (in what appears to have been a nonbinding dictum) that "the law in California is that class action waivers in consumer contracts of adhesion are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to classwide arbitration."¹³⁸

In addition to Stolt-Nielsen, the Supreme Court has handed down other rulings about class- and collection-action arbitration, such as the following:

• Lamps Plus (U.S. 2019): "[T]he FAA similarly bars an order requiring class arbitration when an agreement is not silent, but rather 'ambiguous' about the availability of such arbitration. … Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. The doctrine of contra proferentem cannot substitute for the requisite affirmative contractual basis for concluding that the parties agreed to class arbitration."¹³⁹

• Italian Colors Restaurant (U.S. 2013): The Act preempts state law barring enforcement of a class-arbitration waiver — thus, if you agree to a contractual waiver of class arbitration, you're likely to be stuck with the waiver, even if your cost of individually arbitrating a federal statutory claim would exceed the amount you might recover if you succeed with your claim.¹⁴⁰

Online terms of service often require arbitration of disputes; courts have generally enforced such requirements.¹⁴¹

But: In 2023, a Pennsylvania appeals court held that an arbitration agreement in Uber's "browse-wrap" terms of service was not enforceable because it did not "unambiguously manifest" the user's assent to waive the constitutional right of trial by jury; see the extended discussion in the footnote at 4.5.1.19.

And online agreements seem to be especially vulnerable to unconscionability holdings in consumer-friendly jurisdictions such as California.¹⁴²

[Optional reading for students]

Generally, a party need not arbitrate disputes if it didn't agree to arbitrate; as far back as 1960, the (U.S.) Supreme Court described arbitration as "a creature of contract."¹⁴³

But: A party that didn't sign a contract containing an arbitration provision might have to arbitrate disputes arising under the contract. Example: In its 2021 Wagner decision, the Texas supreme court noted:

Federal courts have recognized that contract law and agency principles can bind a non-signatory to an arbitration agreement under the following theories: (1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable estoppel, and (6) third-party beneficiary.¹⁴⁴

Example: Similarly, in a Texas case, family members of a homeowner wanted to sue the builder of the home; the state supreme court ruled that, because the family members had accepted benefits under the construction contract, the family members could be forced to arbitrate their claims against the builder under an arbitration provision in that contract.¹⁴⁵

Example: A man's nephew bought tickets and took the man to see a "WrestleMania" show — who allegedly lost most of his hearing in one ear from pyrotechnics that were set off during the show. Affirming a WWE motion to compel the man to arbitrate his negligence claim, the Fifth Circuit said that the nephew acted as the uncle's agent for purposes of assenting to an arbitration agreement that had been presented when the nephew bought the tickets online: "An individual who permits a third party to present a ticket for admittance to an event on his behalf is bound by the terms and conditions governing the use of that ticket."¹⁴⁶ Example: To similar effect was another case brought by spectators injured at an NFL game.¹⁴⁷

Example: And in Cure & Assoc., the Fifth Circuit reversed a trial court's refusal to compel arbitration, holding that, regardless whether California or Texas law applied, equitable estoppel principles prevented the plaintiff companies from avoiding arbitration, even though those companies had not signed the contract containing the arbitration agreement.¹⁴⁸

Example: Going even further, Nevada's supreme court ruled that, in appropriate circumstances, one nonsignatory to an arbitration agreement could compel another nonsignatory to arbitrate.¹⁴⁹

Counterexample: In a 2022 "edge case," an employee of a company, who was "staffed" to Phillips 66 (a customer of the employer), sued Phillips 66 for overtime pay. The employee's employment agreement with his employer included an arbitration provision, so Phillips 66 tried to use that to compel arbitration. But the Fifth Circuit said nope: "The issue is not whether [the employee] has an arbitration agreement with anyone — it is whether he has an agreement to arbitrate with the party he is suing, Phillips 66." Which he hadn't, said the court.¹⁵⁰

Counterexample: In 2021, a federal district court in New York held that the active-voice wording of an arbitration clause — basically, that the parties must arbitrate disputes — was binding only on the parties that signed the contract, and so non-signatory parties were free to go to court, even though the dispute had arisen in connection with the contract in question.¹⁵¹

1. The Retainer may allow one or more third parties to use information in archive copies in the same way(s) as the Retainer, but only with the restrictions stated in this Option.(14.3)
2. The third party's use must be solely for the Retainer's benefit. (Incidental third-party benefit is permissible, for example if the Retainer pays the third party for services that are permitted under this Clause.)
3. The Retainer must enter into a written agreement with each such third party; that agreement must impose use- and disclosure restrictions on the third party that are substantially identical to those that apply to the Retainer under the Con­tract.

Whenever the Owner reasonably asks, the Retainer will provide the Owner with a complete and accurate list of all persons who have had access to archive copies maintained by or for the Retainer. ⚠¹⁵⁹

The Retainer will maintain all archive copies itself (i.e., with the Retainer's own employees), without using an outside archive custodian. ⚠¹⁶⁰

The Retainer will use an outside archive custodian, ⚠¹⁶¹ approved in advance by the Owner, for all archive copies — with such approval: ✅not to be unreasonably withheld, conditioned, or delayed. ❌to be granted or withheld in the Owner's sole discretion.

Drafters who use the term AS IS will often capitalize it, in case the law requires such terms to be "conspicuous" (a topic discussed in more detail at 10.8).

The disclaimer of implied conditions and terms of quality is a nod to the law of England, Wales, and Northern Ireland. Example: In KG Bominflot (EWHC 2009, at ¶¶ 45-49), in the England and Wales High Court, an oil seller learned — presumably to its dismay — that its contractual disclaimer of (only) implied warranties was not enough to shield it from liability under implied conditions; the court said, "If the failure to use the word "condition" renders [the contract's disclaimer] of little or no effect, so be it. The sellers agreed to the wording of [the disclaimer] … and must live with the consequences."¹⁶⁷

(Pro tip: Don't call it "UK law"; see 13.3.7.12.)

Example: At the start of the COVID-19 pandemic, Amazon stopped providing its "Rapid Delivery" service to Amazon Prime subscribers without telling them — while continuing to collect full price. A Prime subscriber brought a putative federal class action lawsuit against Amazon. The district court, though dismissed the case, and the Eleventh Circuit affirmed, because Amazon's terms of service had stated that services would be provided "AS IS" and "AS AVAILABLE."¹⁶⁸

Background: To promote economic efficiency, the general rule is that — with some exceptions in special cases, discussed in the additional notes beginning at 5.3.3.2 below — contracts are assignable without consent. When a contract is assigned:

• the assignor delegates, to the assignee, responsibility for the assignor's obligations;
• the assignor remains liable to the other party for any breach by the assignee; and
• the assignee is entitled to the assignor's rights under the contract.

This general rule is reflected in, e.g., section 2-210 of the Uniform Commercial Code (which applies to the sale of goods only but is sometimes used by courts as guidance for other situations).(5.3.3.17)

The assignability of contracts is a key feature of "futures" trading in commodities, stocks, currencies, interest rates, and the like. For example, in the case of natural gas, a U.S. Department of Energy Website explains that, "The natural gas futures market is a marketplace where standardized contracts for the future delivery of set natural gas volumes are traded."¹⁸⁸

Similarly, companies and individuals buy (or sell) standardized "call" and "put" option contracts for stocks, commodities, and the like, to reduce the risk of price volatility.¹⁸⁹

The first exception to the general rule of free assignability is that intellectual-property licenses are not assignable by the licensee without the consent of the owner of the intellectual property in question.¹⁹⁰

(The licensor is presumably free to assign if it wishes.)

A tangential point: Some license agreements prohibit assignment of the license but allow the licensee to sublicense to third parties. That could result in litigation over whether a given transaction by the licensee was a prohibited assignment, or instead was a permitted sublicense. Example: In a 2014 decision, Florida's supreme court declined to impose a bright-line rule on this point, noting that the name given to the transaction ("assignment" or "sublicense") would not be determinative.¹⁹¹

Another exception to the rule of free assignability is that a party may not assign a contract if the assigning party's performance is considered special or unique.

Caution: For any given contract, the question whether a particular party's performance would fall into this "special or unique performance" category would probably present factual issues that would have to go to trial, as opposed to being adjudicated more quickly and less expensively on the pleadings or on summary judgment. As a probably-absurd hypothetical example:

• Suppose that Houston's own Megan Thee Stallion, a Grammy-winning rapper, entered into a contract to sing at a rap festival.
• Now suppose that Megan wanted to assign her contract to, say, Ted Nugent (who is … not a rapper) without first getting an OK from the festival organizers: If that were to end up in a lawsuit, it would almost certainly result in summary judgment that Megan could not assign the contract.
• It might be a different story question if Megan wanted to assign her contract, without consent, to one of her fellow rappers Cardi B and/or Nicki Minaj — that might well have to go to trial.

Author's note: For federal (U.S.) contracts, the following is an edited version of an excerpt (with extensive citations omitted) from a decision by the Civilian Board of Contract Appeals in ATS Trans LLC (2022).¹⁹² No copyright is claimed in the decision text, which is a work of officers or employees of the U.S. Government under 17 U.S.C. § 105.

The Assignment of Contracts Act, 41 U.S.C. § 6305, and the Assignment of Claims Act, 31 U.S.C. § 3727, together make up the “Anti-Assignment Acts.” These Acts generally prohibit the assignment of a government contract or claim.

The Acts serve two primary purposes – first, to prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government; and second, to enable the United States to deal exclusively with the original claimant instead of several parties.

Any attempt to transfer a contract in violation of the Assignment of Contracts Act annuls the contract. A valid transfer subject to that statute requires government approval to be binding against the Government. The Government can recognize an assignment expressly via novation or implicitly by ratification or waiver.

Assignments occurring by the “operation of law” (i.e., corporate restructurings, mergers, and name changes “where in essence the contract continues with the same entity, but in a different form”) are exempt from the Act’s application. … Courts have applied the exception to statutory mergers, concluding that such assignments do not present the danger that the statute was designed to obviate.

Example: A New York statute provides that, whenever a company enters into a contract with a state agency, the company cannot assign the contract without the agency's consent; if the contractor fails to obtain the consent, the agency "shall revoke and annul such contract," and the contractor forfeits all payments except that needed to pay its employees.¹⁹³

The non-assignability of state contracts can give the state agency considerable leverage — and in New York, state agencies apparently can be quite unabashed about wielding that leverage, as seen in one noteworthy episode involving the Port of New York and New Jersey and a Dubai company (5.3.3.6).

A party might want to do a major transaction such as a merger or asset sale. Such a transaction might well entail assigning one or more associated contracts — but the assigning party might first have to get a counterparty's consent for the contract assignment. That could, in effect, give the counterparty a veto over the assigning party's ability to do the transaction — and if the counterparty were to stall (perhaps in the hope of "extracting" financial- or business concessions), the opportunity for the transaction might disappear as the other party to the transaction grew tired of waiting.

Consequently, a prospective assigning party will want to seriously consider negotiating for Option 5.3.2.2 (asset dispositions) and/or Option 5.3.2.1 (mergers), for reasons discussed in the comments there.

Example: In one high-profile, politically-sensitive case involving a Dubai company, the Port of New York and New Jersey insisted on being paid a $10 million consent fee — plus a commitment to invest another $40 million in improvements to terminal operations — in return for the Port's consent to an assignment of a lease, as reported in the New York Times.

Example: Cisco Sys. (S.D.N.Y. 2021): Tech giant Cisco Systems spun off its video services division, selling the division to a private equity firm; the spun-off division was rebranded as Synamedia. As part of the transaction, Cisco sold certain assets to Synamedia, which also assumed certain liabilities. (This is not an uncommon approach.) • But there was a problem: One of the assets to be acquired by Synamedia was a 25-year lease in Hampshire, England — and that lease required the landlord's consent to an assignment. The landlord refused to consent to the assignment — which led to Synamedia's moving out and to litigation between Cisco and Synamedia (ultimately settled) over who was responsible for paying the rent.¹⁹⁴

Example: Restaurant chain Ruby Tuesday ("Ruby") was the tenant in a lease of a mansion that Ruby used for corporate retreats. Encountering financial difficulties, Ruby wanted to sell the lease to a real-estate developer, BNA Associates. But to assign the lease, Ruby needed the consent of one of Ruby's creditors, Goldman Sachs, because of a provision in their credit agreement. Goldman refused its consent; Ruby lost the deal and ended up in bankruptcy — and Goldman ended up with the lease that the developer had wanted to buy from Ruby.¹⁹⁵

The real-estate developer sued Goldman for intentional interference with business relations. Affirming dismissal of the case, however, the Sixth Circuit was equally dismissive: "Goldman was perhaps playing hardball. Any rational actor would likely have done the same, were it in their perceived best interest."

See the commentary at 5.3.2.1 for more on whether a merger might constitute an assignment requiring consent.

In the U.S., a change of control of a licensee corporation, through a transfer of the corporation's stock, is not an "assignment" of the license and thus doesn't require licensor consent (assuming that the licensee remained a separately functioning corporation).¹⁹⁶

Caution: An assignment-consent provision could specifically provide that a change of control does indeed requires consent — but that would likely be objected to by any party with any sort of bargaining power.

Caution: If a contract requires a party's consent for "direct or indirect" assignment by another party, then consent might be required for a sale of stock of the other party resulting in a change of control intended to circumvent a consent requirement.¹⁹⁷

Example: In 2022, semiconductor designer Arm announced that it had sued its licensee Nuvia after Nuvia's acquisition by Qualcomm. Arm claimed that "Qualcomm attempted to transfer Nuvia licenses without Arm’s consent, which is a standard restriction under Arm’s license agreements"; see also the complaint at paragraphs 28 and 36. At this writing (early summer 2024), the lawsuit seems still to be ongoing.

Background: Sometimes a party to a contract will change its organizational form, for example:

• by changing from a limited-liability company ("LLC") to a corporation, or vice versa; or

• by reincorporating in a different state, e.g., "moving" from Delaware to Texas, as Elon Musk's companies SpaceX and Tesla did in 2024.

If that contract required the party to obtain consent to an "assignment," would the party breach that consent obligation if it didn't obtain consent to its change of organizational form?

The significance of this issue can be seen by a 2024 New York case:

• The plaintiff was a corporation when it entered into the contract in suit with the defendant, but later the plaintiff changed its corporate form by merging with an LLC.
• Importantly, the contract included an assignment-consent requirement: "This Agreement and the rights granted hereunder may not be assigned by either Party, whether by operation of law, merger, change of ownership or otherwise, without the prior written consent of the other Party, and any unauthorized assignment shall be void ab initio."(Bold-faced emphasis added; ab initio means, roughly, "from the start.")
• The plaintiff sued the defendant for breach of the contract; the defendant moved to dismiss for lack of standing, on grounds that the defendant had entered into the contract with the corporation, not the LLC.

The court denied the defendant's motion, holding that "the plaintiff raised a question of fact as to whether the merger constituted an assignment that violated the nonassignment provision of the contract."¹⁹⁸

See also the commentary at 5.3.2.1 for more on whether a merger might constitute an assignment requiring consent.

Even the burden and delay attendant to obtaining consents to assignment could pose a problem for an assigning party.

Example: In a 2014 Florida case, an assigning party wanted to sell a line of business but had to seek consent from some 25 different counterparties.¹⁹⁹

Example: In 2015, General Electric announced that it was selling more than $30 billion of commercial loans to Wells Fargo, completing the sale in early 2016. In the worst case, the relevant GE company might have had to assign thousands of loan-related agreements to a Wells Fargo company — and that might have required checking each of those agreements to be sure it didn’t have a provision requiring GE to get the borrower’s or guarantor’s consent before assigning the agreement.

A reviewing party, asked to consent to an assignment of a contract, might be willing to "play chicken" with the assigning party by (metaphorically) folding its arms and saying, in effect: We think we ARE being reasonable in withholding our consent unless you pay us big bucks. If you don't agree, then sue us — and watch your deal evaporate before your eyes while you wait months or years for the court proceedings to end.

(Presumably the reviewing party would never be so incautious as to actually say something like the previous paragraph, because it would look really bad to a judge or jury if it were to be quoted — or misquoted — in court.)

An assigning party concerned about this possibility could ask for Option 5.3.2.11 to impose a deadline for refusing consent.

Concerning Option 5.3.2.4: In some jurisidictions, the law might require that consent to assignment of the agreement must not be unreasonably withheld.

Example: Section 1995.260 of the California Civil Code provides that: "If a restriction on transfer of the tenant's interest in a lease requires the landlord's consent for transfer but provides no standard for giving or withholding consent, the restriction on transfer shall be construed to include an implied standard that the landlord's consent may not be unreasonably withheld. … "

Example: Nevada Atlantic (Cal. App. 2008; unpublished):²⁰⁰ Apropos of that statutory provision, a California appeals court held that a contract provision allowing the landlord to withhold consent "for any reason or no reason" was not to be construed as including an unreasonably-withheld standard, saying that "the parties' express agreement to a ‘sole discretion' standard is permitted under legal standards existing before and after enactment of section 1995.260, as long as the provision is freely negotiated and not illegal."

Example: Pacific First Bank (Ore. 1994):²⁰¹ A lease prohibited the tenant from assigning the agreement, including by operation of law, without the landlord's consent. The lease also stated that the landlord would not unreasonably withhold its consent to an assignment of the lease to a subtenant that met certain qualifications. Notably, though, the lease did not include a similar, no-unreasonable-withholding statement for other assignments.

Oregon's supreme court held that ordinarily, the state's law would have required the landlord to act in good faith in deciding whether or not to consent to an assignment. But, the court said, the parties had implicitly agreed otherwise — therefore, the landlord did not have such a duty of good faith.

Example: In MDS (Canada) (11th Cir. 2013), the court upheld a trial court's finding that the owner of a patent, which had exclusively licensed the patent to another party, had not acted unreasonably under the circumstances when it refused consent to an assignment by the licensee to a party that wanted to acquire the licensee's relevant product line.

(This holding provides a useful illustration of how appeals courts have limited ability to "second-guess" a trial court's findings of fact.)

Example: In Dick Broadcasting Co. (Tenn. 2013),²⁰² Tennessee's supreme court held that:

where the parties have contracted to allow assignment of an agreement with the consent of the non-assigning party,

and the agreement is silent regarding the anticipated standard of conduct in withholding consent,

[then] an implied covenant of good faith and fair dealing applies and requires the nonassigning party to act[:]

• with good faith
• and in a commercially reasonable manner

in deciding whether to consent to the assignment.

Example: In Shoney's (Ala. 2009),²⁰³ Alabama's supreme court alluded to a similar possibility; The contract in suit specifically gave the Shoney's restauraunt chain the right, in its sole discretion, to consent to any proposed assignment or sublease of a ground lease by a real-estate developer that had acquired the ground lease from Shoney's. The supreme court held that this express language overrode a rule that had been laid down in prior case law, namely that a refusal to consent is to be judged by a reasonableness standard under an implied covenant of good faith.

Counterexample: In Barrow-Shaver Resources (Tex. 2019),²⁰⁴ the Texas supreme court declined to read a reasonableness requirement into an assignment-consent provision. Caution for Texas lawyers and law students: Barrow-Shaver fits in with Texas's non-recognition of a general implied covenant of good faith and fair dealing.²⁰⁵

And again: The reviewer might be willing to "play chicken" with the proposer, as discussed at 5.3.3.11.

For additional discussion of consent standards, see 10.4.

In reviewing a request for consent to assignment, a reviewing party should give due consideration to any evidence that the assigning party provides concening the apparent qualifications of the proposed assignee.

But a prospective reviewing party might want to spell out, in the contract, a list of specific safe-harbor factors that could justify withholding consent. For example, in the context of a real-estate lease, Medianik (2020) notes that "[a] more aggressive landlord will expressly condition its consent [to a tenant's assignment of a lease] on the presence or absence of certain circumstances, such as: (1) the tenant not being in default under the lease …."²⁰⁶

Toward that end, see 10.4 concerning factors that a Reviewing Party may take into account, and those that a Reviewing Party must take into account, in deciding whether to grant consent.

An assigning party might want to assign a contract only "in part" — this would be to support a not-uncommon business practice in which:

• A company (the "seller") is licensed to use certain software in its business;
• The seller sells an unincorporated division of its business, or a site such as a refinery or a factory;
• In connection with the sale, some of the seller's people will change employers, so that after the sale closes, those people will continue in their old jobs, but they'll now be working for the buyer;
• Both the seller and the buyer want those people to be able to keep using the software in question — but that might be tricky if the buyer isn't already licensed to use the software.
• Moreover, the seller wants to continue using the software in the rest of its business, as before.

For that reason, Option 5.3.2.2 is set up to allow the seller to assign the software license "in part."

To be sure: If the software licensor (i.e., the company that makes and licenses the software) had enough bargaining power, then the licensor might demand that the buyer buy its own license to use the software; that could be a nice, incremental chunk of sales revenue for the licensor.

But that might well be short-sighted, because the buyer and seller of the business might ask, "Hey, the seller already paid for the license; why should the buyer have to re-buy it?"

Example: In a 2009 Cincom case, a software customer (i.e., the licensee) did a corporate reorganization by, in relevant part, a series of mergers. As a result of the mergers, the named licensee technically became part of a different corporation that was owned by the same parent company — but nothing else had changed. The software vendor demanded that the customer re-buy the license; when the customer refused, the vendor took the customer to court — and won.²⁰⁷

Editorial comment: The Cincom plaintiff might have been extremely short-sighted. Look at it from a sales perspective: When a vendor treats a customer that way, what are the odds that the vendor will ever be able to sell anything again to that customer — let alone convince the customer to be a reference for the vendor's future sales efforts? Talk about pennywise and pound-foolish ….

In contrast, a smart software licensor will want to agree even to just a partial assignment of the software license. Why? Because the people in the seller's spun-off division — who're now working for the buyer — could serve as unofficial ambassadors for the software licensor, encouraging their new employer to acquire more licenses to use the software elsewhere in the new employer's organization.

When a contractor enters into an agreement with an owner (for example, a construction contract to build a building), the owner's lender might ask the contractor to sign an agreement that includes — possibly among other burdens — the contractor's obligation to assign the contract to the lender in certain circumstances. For example, Taylor (2021) points out:

While the content of these agreements differs from lender to lender, here’s what they normally contain:

a.  A contractor consent to a potential assignment of the prime contract to the lender in the event the owner defaults;

b.  The circumstances under which the contractor will or will not get paid for past and future work;

c.  A waiver of lien rights for work in place; and

d.  Obligation on the contractor to seek prior written permission directly from the lender, during the project, and prior to any possible default by the owner, for any change in the plans, the schedule, and even any change orders.²⁰⁸

Relevant to Option 5.3.2.9: Consider this hypothetical situation:

• Two parties, "Fred," a supplier, and "Ginger," a customer, sign a contract. (This intentionally evokes Fred Astaire and Ginger Rogers — and also usefully has an alphabetical sequence.)
• Fred later assigns the contract to a third party, "Harry." (Another alphabetical progression.)
• But Ginger isn't totally comfortable that Harry will be able to deliver on Fred's obligations under the contract.

Now, to be sure: If Harry did fail to perform Fred's obligations, then Ginger could sue both Harry and Fred for breach of the contract.

But that might be cold comfort to Ginger, who presumably doesn't want to have to deal with a breach at all: What Ginger wants is for the job to get done — properly and on time, whether by Harry or Fred — not least because if the job doesn't get done right, it might cause major problems for Ginger's business.

Moreover, in deciding to do business with Fred, Ginger might well have done some homework ("due diligence") about Fred's reliability. She might object to having to deal instead with Harry, about whom she might know little or nothing.

Oh, sure: An assignment-consent requirement would be one way for Ginger to address that concern: Ginger could insist on including a provision in the contract, saying that Fred simply isn't allowed to assign the contract to Harry without Ginger's consent.

But: An alternative to a consent requirement might be for Ginger to request "reasonable assurance" from Harry that Harry will actually be able to deliver.

So this Option could be a useful tool for Ginger to test whether Harry is likely to present more of a business risk than Ginger is comfortable with.

In the specific context of sales of goods, UCC § 2-210 states:

(1) A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract.

No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.

(2) Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance.

A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreement otherwise.

(3) Unless the circumstances indicate the contrary a prohibition of assignment of "the contract" is to be construed as barring only the delegation to the assignee of the assignor's performance. …

(4) An assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of rights[,]

and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor[,]

and its acceptance by the assignee constitutes a promise by him to perform those duties.

This promise is enforceable by either the assignor or the other party to the original contract.

(Emphasis and extra paragraphing added.)

An attorney-fee award can dwarf the rest of a judgment; when a contract contains a prevailing-party attorney fees clause, the losing party could find itself on the hook for attorney fees that far exceed the amount originally in controversy.

Example: In a hotly-contested 2021 Tennesee case, a home builder was found to have breached a contract with a homeowner; the builder was ordered to pay damages of $6,800 — plus more than $200,000 in attorney fees under the contract's prevailing-party attorney fee clause.²¹⁶

Caution: Some parties — for example, a large, wealthy, litigious company that's contracting with a much-smaller one — might be adamant that each party will always pay its own attorney fees; that's because the large, wealthy company wants to be able to use the cost of litigation as a way of subtly pressuring the smaller one to settle on favorable terms. To that end, parties that wanted to contractually impose the American Rule could use language such as in Option 5.4.2.1.

By statute, Congress and various state legislatures have allowed or even required awards of attorney fees to specified classes of prevailing parties, thus overriding the "American Rule" that normally controls (see section 5.4.2.1).

Example: U.S. antitrust law requires "a reasonable attorney's fee" to be awarded to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws …." 15 U.S.C. § 15(a). This statute was applied in a 2016 case, in which a federal district court in California awarded more than $40 million in attorney fees to a group of current and former student athletes — the athletes had sued the NCAA over a then-existing rule that prohibited student athletes from being paid for use of their names and likenesses in advertising and video games.²¹⁷

Example: Under Cal. Civ. Code § 1021.9, a "specialized" California statute (as in, benefiting a particular class of politically-important special interests):

In any action to recover damages to personal or real property resulting from trespassing on lands either under cultivation or intended or used for the raising of livestock, the prevailing plaintiff shall be entitled to reasonable attorney’s fees in addition to other costs, and in addition to any liability for damages imposed by law.

As explained by a California appeals court: "The statute is intended to ensure that farmers are able to protect their land from trespassers through civil litigation."²¹⁸

A 2009 report by the Congressional Research Service lists a number of federal statutes of this nature.

Concerning Option 5.4.2.3:

Motion practice can be a major, usually-unrecoverable expense in a lawsuit or arbitration. ("Motion practice" refers to motions filed with the court or arbitrator to compel discovery, for preliminary injunctions, for summary judgment, etc.)

Much of the expense of motion practice comes from a seeming article of faith among litigation counsel, along the lines of the saying attributed to Walter Gretzky, father of hockey legend Wayne Gretzky: You miss 100% of the shots you don’t take.

For litigation counsel, Gretzky père's dictum could be paraphrased as: You’ll be denied on 100% of the motions (and oppositions) that you don’t file. The problem, of course, is that in situations like this, when a party's litigation counsel "takes the shot," it inflicts burden, expense, and delay on the other party and the court — too often, to no real purpose.

Oh, sure: The rules of procedure typically "require" lawyers and parties to play nice. And a judge could impose sanctions for bad behavior.

But in reality, judges seldom impose sanctions. And realistically, a lawyer's concern about being sanctioned will often be far outweighed by the lawyer's fear of losing the case — and/or the fear that an angry client might think that the lawyer isn't doing enough to smite the client's adversary.

So, by contractually providing for awards of attorney fees in motion practice, drafters can help encourage the parties and their lawyers to be reasonable in the positions they take along the way.

In some contracts, attorney-fee clauses allow, not a prevailing party per se, but a "non-breaching party" that successfully sues for breach, to recover fees. This variation is somewhat like the "Texas Rule"; something like it was seen — but not relied on by the court — in an Eleventh Circuit case.²¹⁹

Caution: If drafting a provision like this, consider referring to the breach-of-contract plaintiff, not as the non-breaching party, but instead as, say, the "contract claimant." That's because in a Northern District [of California] case, the contract in suit included a termination-for-breach provision that referred to the right of the non-breaching party to terminate. That wording, said the court, meant that the party that had purported to terminate the contract did not have the power to do so — because that party was itself in breach, of a different contract provision. On that reasoning, a breach-of-contract plaintiff could lose its claim for attorney fees because the plaintiff was itself in breach of some contract provision.²²⁰

Some contracts contain unilateral attorneys' fee clauses; for example, a real-estate lease might state that the landlord can recover its attorney fees if it has to sue the tenant, while remaining silent as to whether the tenant can ever recover its attorney fees. Such unilateral clauses might well be given effect by courts.²²¹

(In a lease, the American Rule, plus such a fee-shifting provision, would normally mean that the tenant could not recover, even if it were the prevailing party in a suit brought by the landlord — unless a statute provided otherwise, as in the California Rule discussed at 5.4.3.6.)

California Civil Code § 1717 provides, in essence, that any one-way attorney fees provision (as is sometimes seen in consumer-facing contract forms) is to be treated as a prevailing-party provision; moreover, attorney fees under that section cannot be waived.²²²

Much the same is true in Oregon.²²³

New York has a similar rule for consumer contracts.²²⁴

Under Alaska R. Civ. P. 82, a prevailing party is entitled to recover its attorney fees, with the amount of the fee being a percentage of the judgment (on a sliding scale with different brackets for different outcomes, and subject to possible adjustment by the trial judge).

Delaware law allows awards of attorney fees in certain shareholder lawsuits even when the shareholder might not qualify as a prevailing party "where: (1) the suit was meritorious when filed; (2) the defendants took an action that produced a corporate benefit before the plaintiffs obtained a judicial resolution; and (3) the suit and the corporate benefit were causally related."²²⁵

A North Carolina statute states that a promissory note and various other forms of indebteness can require payment of attorney fees as a percentage of the "outstanding balance" (a defined term), with a ceiling (or "haircut") of 15% of the outstanding balance.²²⁶

Compare: • 42 U.S.C. § 1988 (civil rights statute), which uses "a reasonable attorney's fee"; with • 28 U.S.C. § 1927, which provides for awards of excess "attorneys' fees" against attorneys who "multiplies the proceedings in any case unreasonably and vexatiously …."

In this book we use the simpler attorney fees, as to which noted lexicographer Bryan Garner observes: "Although inelegant, attorney fees is becoming more common — presumably to avoid making a decision on the apostrophe altogether."²²⁷

It's possible that Garner's view could be catching on: As one data point, the (U.S.) Defend Trade Secrets Act, enacted in 2016, uses "attorney fees" in a provision that requires employers to advise their employees (and individual contractors and consultants) of the individuals' whistleblower rights, as discussed at 10.2.5.2.²²⁸

For a lighthearted review of "authorities" about the apostrophe, see a 2023 opinion from the Southern District of Texas.²²⁹

Auditable records could include, for example, documentation of the Rec­ord­keep­er's sales, where the Rec­ord­keep­er is, say:

• a store in a commercial building, reporting its sales to a landlord for purposes of calculating agreed percentage-rent payments to the landlord; or
• a licensee under a patent, reporting its sales to the owner of the patent, for purposes of calculating agreed running-royalty payments to the patent owner for use of the patented invention.

A sample right-to-audit clause, published by the Association of Certified Fraud Examiners (undated, no longer online but archived at https://perma.cc/HP6G-LEAA) sets out a long "laundry list" of specific types of documents that a party might want to require a contractor to maintain:

Such records shall include, but not be limited to, accounting records, written policies and procedures; subcontract files (including proposals of successful and unsuccessful bidders, bid recaps, etc.); all paid vouchers including those for out-of-pocket expenses; other reimbursement supported by invoices; ledgers; cancelled checks; deposit slips; bank statements; journals; original estimates; estimating work sheets; contract amendments and change order files; backcharge logs and supporting documentation; insurance documents; payroll documents; timesheets; memoranda; and correspondence.

Big Four? Except as discussed below, any Big Four accounting firm would typically be considered a reasonable choice for auditors — but they don't come cheap.

Contingent-fee auditors — objectionable? Some recordkeepers would quickly object to an auditor working on a contingent-fee basis. That's because contingent-fee auditors might be tempted to err on the side of "finding" errors. (That could be especially problematic if the auditors' findings were agreed to be binding, and in any case disputes about the auditors' findings likely would be expensive and time-consuming for all concerned.)

Danger of in-house auditors? Often, employees of the Auditing Party and its affiliates might not be considered reasonable auditors — but the Rec­ord­keep­er should consider agreeing anyway, to help keep costs down, because the Auditing Party might not want to bear the expense of having an outside auditor do the job, and instead might prefer to send in one of its own employees to "look at the books."

Use the Rec­ord­keep­er's own auditor? Contracts consultant John Tracy once suggested, in a LinkedIn discussion thread (membership required), that an auditing party should consider engaging the outside CPA firm that regularly audits the recordkeeping party's books. John says that this should reduce the cost of the audit and assuage the recordkeeping party's concerns about audit confidentiality; he also says that "the independent CPA will act independently rather than risk the loss of their [sic] license and accreditation and get sued for malpractice."

Talk to each other! This is one of those areas where communication can help.

Here are just a couple of examples of how audit rights either did pay off or might have paid off, as reported in a 2022 Wall Street Journal article:

Publishing company Gannett Co. provided inaccurate information to advertisers for nine months, misrepresenting where billions of ads were placed, according to researchers who provided their findings exclusively to The Wall Street Journal. …

* * * 

In another example observed by a Wall Street Journal reporter, Capital One and American Red Cross bought ads that seemed as though they would appear on the Sarasota Herald-Tribune website, based on the information provided in the real-time auction. In fact, the ads ran on the website of Ruidoso News, a biweekly newspaper in New Mexico.

An American Red Cross spokeswoman said the organization was unaware of the issue.

Capital One didn’t respond to a request for comment.

(Extra paragraphing added.)

In a 2003 article, fraud examiner Craig Green lists a number of things that such folks often look for, including, for example:

• fictitious "shell entities" that submit faked invoices for payment;
• cheating on shipments of goods, e.g., by shorting goods or sending the wrong ones;
• cheating on service performance, e.g., by performing unnecessary services or by invoicing for services not performed;
• billing at higher-than-agreed prices;
• kickbacks and other forms of corruption;
• and others.²⁶²

For another overview of issues generally addressed in audit clauses, see a 2020 FTI article that suggests, among other things:

• letting the auditor check completeness, "the right to verify that information excluded is correctly excluded, ie the completeness check"; and
• "[r]eporting processes and the customer’s right to comment on audit findings."

Depending on the circumstances, parties might agree that some or all of the following should be checked in connection with a background check:

1.  Driving-record check: A check of records of accidents; driver's-license status; driver's-license suspensions or revocations; traffic violations; and driving-related criminal charges (e.g., DUI).

2.  Education verification: Confirmation of dates of attendance, fields of study, and degrees earned. Education checks are sometimes used because résumé padding is not an uncommon occurrence. Example: The chief spokesman of Walmart resigned after the retail giant learned that he had falsely claimed to have graduated from college, when in fact he had not finished his course work; ditto the former dean of admissions at MIT.

3.  Employment verification: A check of of start- and stop dates and titles of employment for the past seven years or the past two to five employers, whichever results in more employers being checked.

4.  Liens: A check of records of tax- and other liens; civil judgments; and bankruptcy filings (to provide a better indication of any past financial difficulties of the checked individual).

5.  Personal reference check: Telephone- or in-person interviews with at least three personal references, seeking information about the following characteristics of the individual:

• ethics;
• work ethic;
• reliability;
• ability to work with others (including, for example and where relevant, peers, subordinates, superiors, customers, and suppliers);
• strengths;
• areas with room for improvement;
• personality.

6.  Professional license verification: Verification that an individual who claims to have a professional license (e.g., doctor, lawyer, engineer, etc.):

• does in fact have such a license; and
• is in good standing with the relevant licensing body — because it's not impossible that someone claiming to be a doctor, lawyer, CPA, etc., might not be in good standing.

7.  Residence address verification: A check of dates of residence addresses for the past seven years (to reduce the risk of the checked individual's seeking to evade a criminal-records check by omitting a residence address).

Apropos of Option 6.2.3.1:

a.  Caution: Credit checks, if not done correctly, can get a checking party in trouble under the [U.S.] Fair Credit Reporting Act ("FCRA"). Noncompliance with background-check consent requirements has hit some well-known companies with sizable settlement payouts.²⁸³

One particular procedural requirement comes up regularly in class-action lawsuits: Section 1681b(b)(2)(A) of the FCRA, which states that, with certain very-limited exceptions:

… a person may not procure a consumer report, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless—

(i) a clear and conspicuous disclosure has been made in writing to the consumer

at any time before the report is procured or caused to be procured,

in a document that consists solely of the disclosure,

that a consumer report may be obtained for employment purposes; and

(ii) the consumer has authorized in writing … the procurement of the report by that person.

Hat tip: Remson (2014).

b.  Caution: Willful violation of the FCRA disclosure requirement entitles the consumer to recover "statutory damages ranging from $100 to $1,000 per violation, punitive damages, and attorney fees."²⁸⁴

c.  Caution: If an FCRA consent form contains anything other than the mandated disclosure — even in a footnote — the requester is in danger of being labeled a willful violator, with consequences as stated just above. Example: In a 2022 decision, a California appeals court reversed a summary judgment in favor of Barnes & Noble, on grounds that a reasonable jury could find that the company acted willfully by asking a job applicant to sign a consent form provided by a background-checking company, because the consent form included a footnote with a disclaimer of warranties and advice to employers to seek their own legal advice.²⁸⁵

a.  Criminal-history records checks in basic form seem to be available from any number of Web sites at low cost, including from government agencies such as the FBI and/or the Texas Department of Public Safety.

b.  A criminal-history check would typically include a nationwide check of records of arrests, convictions, incarcerations, and sex-offender status.

c.  Drafters could consider whether to ask a subject to submit fingerprints to confirm the subject's identity (and guard against imposters).

d.  Caution: The U.S. Equal Employment Opportunity Commission (EEOC) has filed lawsuits against employers who allegedly "violated Title VII of the Civil Rights Act by implementing and utilizing a criminal background policy that resulted in employees being fired and others being screened out for employment …." EEOC Press Release (2013).

The EEOC has also taken the position that a blanket prohibition against using personnel with criminal records could be alleged to have a disproportionate impact on racial- or ethnic minorities and thus to be illegal in the United States; see EEOC Enforcement Guidance (2012).

f.  Caution: In addition, some states — and even cities — might likewise restrict an employer's ability to rely on criminal background information in making employment-related decisions.

Drafters should pay particular attention to the law in California, New York, Massachusetts, Illinois, and Pennsylvania (not necessarily an exhaustive list). This is because in recent years the practice of automatically disqualifying people with criminal convictions has come under fire from government regulators and the plaintiff's bar as being potentially discriminatory (the so-called "ban the box" movement).²⁸⁶

See Option 6.2.3.3.

a.  Caution: Companies should be cognizant of disability laws such as the Americans with Disabilities Act, which might affect a company's ability to deny employment because of medically-prescribed drug use.

b.  Depending on the duties to be assigned, even the use of legal drugs might be a cause for concern — for example, an individual taking certain prescription medications might be unsuited to drive a bus or other commercial vehicle. (This is still-another area where language might need to be fine-tuned to fit the parties' needs.)

c.  For obvious reasons, if a background check indicates that a person might have a drug-misuse problem, then tighter restrictions would appropriate, when it comes to using the person for critical activities, than for other restricted activities.

d.  Pro tip: Companies might consider the possible effect on employee morale of asking them to take a drug test – and about what they might have to do if a valued employee were to bust the test. (As the saying goes: Be careful about asking a question if you're not prepared to deal with the answer.)

It might be prudent to obtain a checked individual's consent to a background check even if the law doesn't require consent: If the individual were to learn of an unconsented background check, the individual's displeasure might go viral on social media, especially given today's heightened sensitivity to privacy concerns.

It's been suggested that background checks on people who have lived in California might not provide employers with much real-world benefit, that that the time and money might be better spent on searching applicants' social media. In part, that's due to recent changes in California law, Senate Bill 731, which have resulted in automatic sealing of certain felony-conviction records and in limits on what employers can do with conviction information.²⁸⁷

In some deals, a party's prospect of not getting paid can be a non-trivial risk:

Example: During the economic downturn accompanying the COVID-19 pandemic, the prominent retail chain Paper Source loaded up on inventory from its small-business suppliers, ordering unusually-large quantities of merchandise — and then, in effect, tore up the bills by filing for bankruptcy protection. As reported by the Washington Post, "Paper Source ordered more from The Card Bureau in a 60-day period than it had in all of 2020." Shortly afterwards, Paper Source filed for bankruptcy protection — the legal effect of which was to allow Paper Source (mostly) to stiff its suppliers, likely paying them something like pennies on the dollar.²⁹⁶

Example: In the Seventh Circuit's Northbound Group case, the plaintiff company's assets were acquired by a newly-created subsidiary of the party that the plaintiff company had anticipated would be the buyer; that subsidiary turned out to be judgment-proof, but the acquisition agreement evidently didn't provide any kind of backup payment source (6.4) such as a guaranty ([BROKEN LINK: guar-proto]) of the subsidiary's payment obligations.²⁹⁷ (This illustrates the importance of making sure the contract names the correct party or parties, as discussed at discussion at 3.6.2.6.)

Example: Over the years, various enterprises associated with Donald Trump have reportedly "stiffed" a large number of creditors.²⁹⁸

Here's a common use for backup-payment arrangements:

• A landowner enters into a "prime contract" with a general contractor (or "prime") to get a building built.
• The prime contract contemplates that the general contractor will hire, coordinate, and pay, various specialist subcontractors ("subs") to do various specific things such as demolish the existing building ("demo work"); pour a foundation for the new building; erect the building's frame and roof; install electrical wiring; install plumbing; and so on.

[TO DO: Diagram showing payments by customer to contractor to subcontractor?]

The general contractor's obligation to pay its subs is important to the owner: If the general contractor were to fail to pay a sub, the law would likely allow the sub:

• to demand payment from the owner — which likely has already paid the general contractor — and/or
• to place a lien²⁹⁹ on the owner's property, thus placing a "cloud" on the owner's title and complicating the owner's life.

For that reason, in negotiating the prime contract with the general contractor, the owner might well require the general contractor to obtain "payment security" to make sure that the subs got paid.

(The prime contract likely would also require the owner to obtain financing from a bank or other lender, so that the general contractor would have assurance that it would be paid.)

In deciding whether a particular backup-payment arrangement was acceptable, the Biller could reasonably take into account, for example, the following (without limitation):

• the financial condition of the individual or organization agreeing to serve as the backup payer (i.e., the Bank);
• whether the Bank was in a jurisdiction that would be convenient to the Biller for purposes of enforcing the Biller's right to payment (e.g., U.S. banks only, federally-chartered U.S. banks only, etc.);
• the extent to which the arrangement covered:
  • pro-rata payments required under orders for goods as shipped and/or for services as performed; and
  • payment of any cancellation- or termination charges under such orders; and
• whether the Bank would reimburse the Biller for any Biller refund of a Payer payment in proceedings under bankruptcy- or comparable laws, for example in settlement of a claim for refund of a "preference" payment (see [BROKEN LINK: guar-pmt]).³⁰⁰

Here are a few possible backup sources of funding:

1.  A supplier could ask for a deposit --- possibly into "escrow," to be held by a third party until stated conditions are met. See Clause 11.10 (deposits) and its commentary; see also Escrow (Investopedia.com).

2.  A supplier could ask its customer to provide a standby letter of credit ("SLOC") — in return for a fee, a bank agrees to pay the amount due if necessary; in effect, a SLOC is a prearranged line of credit for Biller with Payer's bank, with Payer being responsible for repaying the bank. (See generally [BROKEN LINK: ltr-crdt-cmt] for a court's explanation of letters of credit.)

3.  A supplier could ask its customer for a guaranty from a third party — concerning which, see Clause [BROKEN LINK: guar-proto].

4.  The supplier could ask to take a security interest in real estate or other property (tangible or intangible), referred to as "collateral" — see Clause [BROKEN LINK: sec-int-top].

5.  A customer hiring a contractor could ask the contractor to buy a payment bond from an insurance carrier, typically referred to as a "surety." Then, if the contractor fails to pay its subcontractors, then the surety is responsible for paying any unpaid suppliers and subcontractors. See generally Payment bond (IRMI.com).

• The surety will usually try to recoup its payment(s) from its insured, that is, from the nonpaying contractor.
• A customer deaing with a prime contractor will often negotiate to require the prime contractor to obtain a payment bond. The intent is to keep the prime contractor's unpaid subcontractors and suppliers from filing a mechanic's lien or materialman's lien (nowadays often referred to as a "supplier's lien") on the customer's project. See generally Mechanic's lien (Wikipedia.org).
• Under the federal Miller Act,³⁰¹ a prime contractor working on a government project must furnish a bond; if the prime contractor fails to pay subcontractors, laborers, and/or suppliers for "labor" or "materials," then those payees can sue the bond provider (typically an insurance carrier).

6.  A customer hiring a contractor could ask the contractor to buy a performance bond, a.k.a. a contract bond, to have a backup pot of money available:

• to fund a party's performance of its contractual obligations;
• to guarantee availability of materials needed for the work (this is known as a supply bond); and/or
• to hire a replacement contractor to finish work that the original contractor either failed to do or failed to do correctly.³⁰²

Performance bonds might be required of companies under government contracts, such as certain oil and gas leases granted by the U.S. Government.³⁰³

Caution: Performance bonds might well set forth prerequisites for a contractor to be paid by the surety; failure to comply with those prerequisites might result in nonpayment, as happened, for example, in a 2021 federal-court case in Massachusetts.³⁰⁴

7.  Relatedly: A prime contractor could purchase subcontractor default insurance (SDI) that would allow the prime contractor (but not the end-customer) to make a claim against the policy in case of a default by a subcontractor, as suggested in a 2021 article.³⁰⁵

The Con­tract could include language such as the following (perhaps by incorporating it by reference):

The consequences of a material breach of contract can be significant; moreover, courts will generally defer to a contract's explicit statement that a particular type of breach would be "material," as discussed in more detail at 17.2.

For that reason, the Biller might want the Payer to stipulate that the Payer's breach of its backup-payment obligations would indeed be material — thus giving the Biller a bit more leverage over the Payer in case of difficulties.

One possible alternative to engaging a Bank would be for the Payer to provide the Biller with a deposit (concerning which, see Clause 11.10).

In 1990, a Texas appeals court explained: "Contracting parties ordinarily use best efforts language when they are uncertain about what can be achieved, given their limited resources."³²¹ And perhaps most of the time things will work out OK, so the parties will often decide that a best-efforts obligation is an acceptable business risk, and so can help get the contract to signature sooner.

Parties that agree to include a best-efforts obligation in a contract can get into costly disputes about whether particular actions satisfied the obligation. That's because:

•  With the benefit of plenty of time and 20-20 hindsight, litigation counsel — coached by a motivated expert witness — will second-guess the choices that the obligated party made.

•  Then it might be up to randomly-selected jurors to decide the best-efforts question — and because jurors often aren't familiar with the relevant business environment, they might end up deciding, in part, on the basis of which witnesses they liked best.

Best-efforts obligations are especially common when one party grants another party exclusive rights, for example exclusive distribution rights or an exclusive license under a patent, trademark, or copyright.

To many business people, it might seem self-evident that when a contract uses the term best efforts, it calls for "something more" than mere reasonable efforts — otherwise, why bother even saying best efforts? That is to say:

• Reasonable efforts will cover a range of possibilities;
• best efforts refers to somewhere near the top of that range.

By analogy: On major U.S. highways, the speed-limit signs often include both maximum and minimum speeds of (say) 70 mph and 45 mph:

• Let's stipulate that those two speeds establish the upper- and lower bounds of reasonableness.
• Now, suppose hypothetically that a trucking company agreed that its driver would use her "best efforts" to drive a shipment of goods from Point A to Point B on such a highway.
• In good weather with light traffic, driving at 55 mph — that is, 10 mph above the minimum speed but 15 mph below the maximum speed — might qualify as reasonable efforts, but likely not as best efforts.

Or to use a sports analogy: Best efforts means bring your "A" game, not your "C" game, even though C is a passing grade in (U.S.) schools, and arguably is equivalent to reasonable efforts.

So-called comparables could be used in measuring compliance with a best-efforts obligation could be whether the obligated party had done what it had done in other, similar transactions; this can be seen in a Seventh Circuit by Judge Posner:

The term "best efforts" is a familiar one in contract parlance, and its meaning is especially plain in a case such as this where the promisor has similar contracts with other promisees. In such a case "best efforts" means the efforts the promisor has employed in those parallel contracts where the adequacy of his efforts have not been questioned. If Olympia worked as hard for Racine as it did for its other, but noncomplaining, customers, then it was using its best efforts within the meaning of the contract.³²²

Asking for best efforts can make business sense:

•  Sure, there's some legal uncertainty associated with a best-efforts commitment.

•  But from a business perspective it can make good sense to ask the other side for such a commitment anyway: a party that makes a best-efforts commitment — to the extent that it later thinks about that commitment at all — will at least be aware that it might well have to make more than just routine, day-to-day, "reasonable" efforts. That alone might be worthwhile to the party asking for the commitment.

On the other hand: Agreeing to make best efforts could lead to trouble: If you commit to a best-efforts obligation, and the other side later accuses you of breaching that obligation, and you can't settle the dispute, then you're likely to have to try the case instead of being able to get rid of it on summary judgment. That's because:

•  As noted above: If a problem arises, then no matter what you did or didn't do, the other side's lawyers and expert witness(es), with 20-20 hindsight, will argue that there were X number of things that you supposedly could have done to achieve the agreed goal but didn't, and so you necessarily failed to use "best" efforts, Q.E.D.

•  It might be difficult or impossible to get summary judgment that you didn't breach the best-efforts obligation, in which case you're likely to have to go to the trouble and expense of a full trial or arbitration hearing. The judge or arbitrator could well say that the question involves disputed issues of material fact — those issues would have to be resolved by witness testimony and cross-examination about such things as industry practices; the then-existing conditions; etc. According to the rules of procedure in many jurisdictions, that will require a trial and will not be able to be done in a summary proceeding. Your motion for summary judgment would then likely be denied.

•  The tribunal, after hearing the evidence, could find that in fact you did not use your best efforts. If that were to happen, you'd likely have a very hard time convincing an appeals court to overturn that finding.

See also: • Clause 21.6.2 (reasonable efforts); • Clause 9.15 (commercially-reasonable efforts); •  Thau (2021), a student law-review note offering what seems to be a pretty-thorough review of "efforts" case law.³²⁴

In a 2008 blog posting, Ken Adams seemed to insist that best efforts is in essence a synonym for reasonable efforts, and that therefore drafters should abjure the former term in favor of the latter.³²⁵ To be sure, Ken does have at least some support in the case law for his position. But that arguably amounts to lawyers telling clients, for no good reason: No, you can't do your deal the way you want, because I say so. That seems to seriously overstep the service role of a lawyer or other drafter.

Whether a court will honor a blue-pencil request might well vary with the jurisdiction.

Example: In BDO Seidman (N.Y. 1999), New York's highest court allowed the state's courts to engage in blue-penciling of restrictive covenants in noncompetition covenants, but only if:

• the employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct,
• but has in good faith sought to protect a legitimate business interest,
• consistent with reasonable standards of fair dealing ….³²⁸

In some other jurisdictions, courts will refuse to engage in blue-penciling of a contract even if contract specifically authorizes it, saying in effect, You people should have drafted the contract correctly; don't expect us to fix your mistake.³²⁹

Consider this hypothetical situation: You're a small vendor trying to make a sale to a giant conglomerate:

• As usual, the giant conglomerate insists on using its own purchase-order form (concerning which, see 6.7).
• And that PO form allows the giant conglomerate to seek a preliminary injunction against you in various circumstances — as well as proclaiming that you, the vendor, waive the bond requirement.

From the congomerate's perspective, your bond waiver would save their legal department a bit of trouble in rustling up a bond, should the conglomerate ever decided to seek a preliminary injunction against you for (allegedly) breaching the the contract.

So should you, the vendor, agree to the waiver? Ideally, no, for the reasons discussed below — although it might be an acceptable business risk.

Not every recipient of personal health information ("PHI") will be a "business associate," which means that a business-associate agreement won't be required for every disclosure of protected health information: In its January 2013 comments in the Federal Register concerning this part of the rule, the Department of HHS had this to say:

Disclosures by a business associate pursuant to § 164.504(e)(4) and its business associate contract for its own management and administration or legal responsibilities do not create a business associate relationship with the recipient of the protected health information because such disclosures are made outside of the entity’s role as a business associate.

However, for such disclosures that are not required by law, the Rule requires that the business associate obtain reasonable assurances from the person to whom the information is disclosed that[:]

• it [the information] it will be held confidentially and used or further disclosed only as required by law or for the purposes for which it was disclosed to the person[;] and
• the person [i.e., the recipient of the information] notifies the business associate of any instances of which it is aware that the confidentiality of the information has been breached.³⁴³

Concerning section 8.1.1.4: So-called "de-identified" protected health information can be commercially valuable, but its use might be subject to legal restrictions.³⁴⁴ Seeing a need, some vendors have produced specialized "clean room" software that anonymizes consumer data.³⁴⁵

Under HHS regulations, a business associate may use aggregated protected health information only in limited circumstances. The HHS definition of data aggregation provides as follows:

Data aggregation means, with respect to protected health information created or received by a business associate in its capacity as the business associate of a covered entity,

• the combining of such protected health information by the business associate with the protected health information received by the business associate
• in its capacity as a business associate of another covered entity,
• to permit data analyses that relate to the health care operations of the respective covered entities.³⁴⁶

As pointed out by a healthcare lawyer: "Per the regulations and commentary, the 'data aggregation' exception would not apply unless (1) the data aggregation is for the covered entity’s healthcare operations, not the business associate’s own purposes; and (2) the BAA expressly authorizes the business associate to perform the data aggregation services."³⁴⁷

Under 45 CFR § 164.528, a covered entity must account to individuals for PHI disclosures; if you're a business associate, those obligations are largely "flowed down" to you. (For more on flowdown requirements see [BROKEN LINK: flowdown-cmt].)

Moreover, if you're a business associate:

• you also must comply with certain requirements of Subpart E of 45 CFR Part 164 that apply to the covered entity;³⁴⁸
• you're required to ensure — in accordance with 45 CFR §§ 164.502(e)(1)(ii) and 164.308(b)(2), as applicable — that any subcontractors that create, receive, maintain, or transmit protected health information on your behalf have agreed to the same restrictions, conditions, and requirements that apply to you with respect to such information;
• under 45 CFR § 164.410, if you become aware of uses or disclosures of PHI that aren't provided for by the parties' contract, then you're required to report it to the covered entity. This includes, for example:
  • breaches of unsecured PHI;
  • any security incident of which you become aware;
  • any demand by a governmental entity for disclosure of PHI.

(See also section 10.2.1.28 in Clause 10.2, which addresses how subpoenas, etc., for confidential information are to be handled.)

Locating, extracting, and returning PHI could be a major, costly burden and so should be planned for accordingly.

When you're a business associate, termination or expiration of your business-associate agreement won't end your obligations under the agreement to safeguard PHI that was:

• received from the covered entity, or
• created, maintained, or received by the business associate on behalf of the covered entity.

For regulatory requirements for electronic PHI, see Subpart C of 45 CFR Part 164.

If you're a business associate and you suffer a data breach ("get hacked"), you could find yourself in the cross-hairs of the federal government. Example: In 2023, the Department of Health and Human Services ("HHS") announced a settlement with MedEvolve, Inc., a business associate that provides software services to covered health care entities, after a MedEvolve server was found to have exposed protected health information of more than 230,00 individuals on the internet. According to the HHS press release:

The potential HIPAA violations in this case include[:]

• the lack of an analysis to determine risks and vulnerabilities to electronic protected health information across the organization, and
• the failure to enter into a business associate agreement with a subcontractor.

MedEvolve paid HHS $350,000 and agreed to implement a corrective action plan — and it also agreed to being monitored by HHS for two years and to provide annual- and incident-based reports. ³⁴⁹

When you're a business associate, you're required to make your internal practices and its books records available for compliance inspections by the Secretary of the U.S. Department of Health and Human Services.

(You could try negotiating to conduct the inspection in accordance with Clause 15.14, inspections, and Clause 5.6, audits.)

The U.S. Department of Health and Human Services maintains: • a frequently-asked questions site (FAQ); • an unofficial compilation of "all the HIPAA regulatory standards in one document" • a "HIPAA for Professionals" page of links.

The U.S. Center for Medicare and Medicaid Services has a booklet, HIPAA Basics for Providers: Privacy, Security, & Breach Notification Rules.

Healthcare attorney Kim Stanger has a 2023 piece, Business Associate Agreements: Requirements and Suggestions

For convenience, here are links to some key definitions: • Breach; • "business associate" at 45 CFR § 160.103; • "covered entity" at 45 CFR § 160.103; • Data aggregation; • Designated record set; • Disclosure; • Health care operations; •  "HIPAA Rules" refers to the Privacy, Security, Breach Notification, and Enforcement Rules at 45 CFR Part 160 and Part 164.; • Individual; • Minimum necessary (also here); • Notice of privacy practices; • Protected health information; • Required by law; • Security incident; • Subcontractor; • Unsecured protected health information; • Use