M&A contractual boilerplate by state: Procedural and remedial issues in contract disputes.
While transaction agreements can vary widely from deal to deal, they usually contain similar "boilerplate" provisions that receive little attention during negotiations but significant attention in the event of a later dispute. Sophisticated parties with ties to multiple states may have some flexibility in choosing the governing law of the contract and the jurisdiction where disputes arising under the contract will be resolved. When it comes to the so-called "boilerplate," how much does the selection of one state over another matter?
This is the last of three articles (Part 1 and Part 2) that explore the manner in which boilerplate provisions may be handled differently by courts depending on whether the underlying contract is governed by California, Delaware, Illinois or New York law. This installment addresses some of the procedural and remedial issues that arise with contract disputes, including limitations on the outside date by which disputes may be brought (statute of limitations), who shall determine the dispute (jury waivers), whether attorneys' fees can be recovered, and what remedies may be imposed or agreed upon, such as specific performance, limitations on damages, and liquidated damages.
Statute of limitations
Absent modification by the parties, the statute of limitations (or deadline) to bring a claim for a breach of contract in Delaware is three years, California four years, New York six years and Illinois 10 years. Note, however, that in contracts of sale, where the Uniform Commercial Code governs, all four states employ a four year statute of limitations. Despite these deadlines provided by law, parties to M&A contracts customarily agree that claims for breaches of certain provisions of the agreement "survive" (i.e., a claim can be brought) for agreed upon time periods following the execution of the agreement that may fall short of or extend beyond the statute of limitations. For example, with respect to representations or warranties given at closing under an M&A agreement, the parties may agree that the buyer can bring a claim against the seller for breaches of certain representations for up to two years following the closing, for other representations for a period as long as "the applicable statute of limitations" and for other representations indefinitely (essentially, forever).
Case law in all four states is somewhat mixed regarding the effectiveness of contractually altering the statute of limitations. At a minimum, any deadline that is different from the statute of limitations needs to be reasonable, and the parties must clearly manifest their intent to contractually limit the statute of limitations using specific and unambiguous language. While all four states are generally comfortable with shortening the statute of limitations, California has called into question how "unambiguous" that language must be, finding language in an M&A contract that "representations survive the closing for a period of one year" not to be sufficiently explicit to shorten the four year statute of limitations. Further, New York prohibits the extension of the statute of limitations due to policy reasons; Delaware prohibits the extension for contracts involving less than $100,000, and Illinois cases have not decided whether an extension would be enforceable.
Given this uncertainty, well-advised parties to contracts should consider whether a provision that survives for the "applicable statute of limitations" provides sufficient certainty as to what the parties intended. For example, is the "applicable statute of limitations" for a breach of a representation and warranty covering environmental matters the statute of limitations for a breach of contract or the statute of limitations relating to the failure to obtain appropriate environmental permitting, the violation of a federal environmental law, or the violation of a state environmental law? And, drafters of California contracts should explicitly state that a survival period of less than or more than four years is intended to alter the statute of limitations for breach of contract.
Delaware, Illinois and New York courts have consistently enforced jury waiver provisions in contracts. California, however, does not allow parties to waive their right to a jury trial until after a lawsuit has been filed and the issues have been clearly framed. Even so, California courts have enforced alternative dispute mechanisms agreed between two sophisticated parties (such as arbitration), which essentially provides for a "back door" jury waiver.
Many parties to contracts agree that one party may specifically enforce certain of the provisions of a contract against the other party rather than being limited to simply monetary damages in the event of a breach. All four states require that there be no other adequate remedy at law, also referred to as "irreparable harm," in order to obtain equitable relief in the form of specific performance. Delaware courts will generally honor the parties' contractual stipulation of irreparable harm, while California, New York and Illinois courts have indicated that a contractual provision alone will not satisfy the burden to demonstrate the lack of another adequate remedy at law. Thus, as a threshold matter, well-advised parties agreeing to specific performance will contractually set forth that a breach would cause irreparable harm and, when possible, go further to recite the facts and circumstances demonstrating irreparable harm.
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In all four states, the default is the American rule, whereby each side bears its own attorneys fees and costs unless fee shifting is authorized by agreement of the parties or by statute. New York law typically allows parties to make their own bargain, including "loser pays" and one-way fee-shifting agreements, except that one-way fee shifting clauses will be construed bilaterally for consumer contracts. California does not limit this rule to consumer contracts, providing that any contract which purports to authorize one-way fee shifting will be construed bilaterally to provide for fee shifting in favor of the prevailing party. Delaware statutes do not mandate any certain construction for such provisions, though they do provide for bilateral fee-shifting in a few specific circumstances, such as commercial lease-purchase transactions and retail installment contracts. Delaware courts, however, have suggested that unilateral fee-shifting provisions may be unconscionable unless read bilaterally. In Illinois, courts have not addressed the issue directly, but have held that fee-shifting provisions should be enforced "according to the specific provisions of the contract," suggesting that unilateral provisions would not be modified by the courts.
Limitations on liability
Although limitations on liability are allowed in California, they are strictly construed and not enforced to exempt liability for fraud, willful injury or violations of law as a matter of public policy. New York enforces limitations of liability unless a party has engaged in misconduct amounting to gross negligence or intentional wrongdoing. Delaware allows the parties to agree to limit certain types of damage, such as consequential damages, unless the exclusion is unconscionable, unreasonable, or causes the remedy to fail of its essential purpose (which, when limiting consequential damages, is assumed in the case of consumer goods, but not in the case of commercial loss). In Illinois, limitations on liability are allowed, though are generally disfavored and are construed strictly against the parties they benefit. As such, Illinois has a long list of situations in which limitations will not be enforced, including cases involving fraud, willful and wanton negligence, or substantial disparity in the parties' bargaining power.
In California and Illinois, a liquidated damages clause is valid unless it was unreasonable under the circumstances existing when the contract was made. If the liquidated amount greatly exceeds the anticipated actual loss, then the clause may be void as a penalty. Similarly, in Delaware, liquidated damages clauses are upheld when the liquidated amount is a fair and reasonable estimate of the damages which would be caused by the breach. New York courts also prohibit enforcement of provisions which serve as penalties instead of reasonable estimates of damages, and further typically will not enforce liquidated damages clauses which are optional (e.g., "notwithstanding any other remedies, lessee may recover as liquidated damages the amount of . . .").
As these articles have shown, when it comes to contract boilerplate, what you see may not be what you get. The choice of governing law and even the boilerplate language itself can impact fundamental issues relating to the agreement the parties have reached (or, at least, the agreement they thought they had reached). In addition to the unique business points of the transaction at hand, drafters should give careful thought to the potential impact of their choice of governing law on their agreement's various boilerplate provisions, and should ask themselves which of those provisions are, or could become, the most important to their deal. By combining a fuller understanding of state-to-state differences in the treatment of boilerplate provisions with a strategic consideration of the relative value of each of those provisions, drafters can put themselves in the best possible position to enjoy the benefit of their bargain to its fullest extent.
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