Performing a Litigation Audit on Your Lease Agreements

Choice-of-Law Provisions

Choice-of-law provisions, like other boilerplate provisions, are intended to make the expectations of the contracting parties explicit. Accordingly, the parties will choose a particular state's substantive law to govern if a dispute arises. This choice depends on many considerations.

First, it is not guaranteed that a court will enforce a choice-of-law provision. Whatever state's law is chosen, counsel should be aware of the standards governing whether that choice will actually be given effect in court. Generally, a court will apply the chosen law if: 1) there is a reasonable relationship between the transaction or the parties and the state whose law was chosen to govern, or there is some other reasonable basis for the parties' choice; and 2) if applying the chosen state law would not violate a public policy of another state that has a greater interest in the outcome of the case. The choice-of-law provision must be tailored to the particular transaction and business of the contracting parties. Counsel should consider questions such as:

• What types of claims and suits are likely to arise, either by or against our company?
• Is a uniform choice of law in all of the company's contracts necessary?
• Is there a difference among the states' laws that are most likely to be involved in a future dispute? If so, how can the company take advantage of any such differences? (Some states limit the type and amount of recoverable damages, and may preclude an award of punitive damages.)
• Does the state whose law is chosen have a reasonable connection to the parties or transaction reflected in the contract?
• Can it be determined in which state the company is most likely to be sued, and if so, how can the choice-of-law provision be drafted to increase the chances a court in that state will enforce it?

Forum Selection Clauses

The contracting parties may predetermine the state in which any lawsuit between them can be brought, or where any arbitration hearing must occur. Like choice-of-law provisions, however, forum selection clauses are not always enforced by courts. Whether to insert a forum selection clause, what forum to select, and what standard will govern enforcement of the clause, are all questions that counsel should consider in drafting and reviewing agreements.

With any agreement, litigation is possible. Counsel should attempt to specify the most convenient or otherwise advantageous state in which that litigation must occur. Without any forum selection clause, the litigation will generally proceed in the state chosen by the party who sues first. With a forum selection clause, if the company is sued in a state other than the one specified, the company may move to dismiss the case. The plaintiff would then have to decide whether it is worth filing a new lawsuit that could be in a far-away state, require additional travel and expense, involve hiring new lawyers, and raise the specter of being “home-towned” in your company's favored jurisdiction.

A properly drafted forum selection clause must be communicated to the other party ' for example, by a separate, readily apparent section of the agreement. It must also be mandatory so that it requires, rather than “permits,” suits to be brought in the designated state. If these basic requirements are met, and the forum selection clause indeed applies to the parties actually involved in the lawsuit, a court will presume the clause is valid and enforce it unless the other party makes a strong showing that “enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.” M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1971). This “unreasonable and unjust” standard, unfortunately, creates uncertainty for counsel regarding whether a forum selection clause will be enforced, even if the clause is crystal-clear and was fully negotiated. Even if there was no fraud or overreaching in the actual making of the agreement, a court may exercise its discretion to refuse to enforce the clause depending on the circumstances of the particular dispute and litigants, not only at the time of the drafting of the agreement but also at the time of the dispute.

Questions counsel must consider in drafting or commenting on a forum selection clause include:

• What types of claims and suits are most likely to arise either by or against our company?
• Is the state where the company's principal place of business is located always the best forum to select?
• For the particular transaction at issue, what state is most convenient for the company's side's witnesses who will most likely be involved?
• Does the company have an existing relationship with outside counsel located in the selected forum state?
• Is there some other special circumstance that militates in favor of having disputes decided in a particular state?
• Does agreeing to a forum in a state where my company does not normally do business subject the company to general personal jurisdiction in that state when that might be undesirable?
• Is the company qualified to do business in the selected forum state so that the company would be entitled to file suit there if needed, and what are the tax consequences of qualifying the company to do business there?
• Are there reasons to provide for more than one possible forum for disputes?
• Should the forum state selected be the same as the state whose law is selected in the choice-of-law provision? (While this ordinarily would be the case, there may be special circumstances where they should be different.)
• If the adverse party has less bargaining power in the transaction, what self-serving “reasonableness language” can be added to the forum selection clause to help improve its chances of being enforced?

Venue Provisions

Venue selection is different from forum selection. While forum selection permits the contracting parties to choose the state in which disputes must be litigated, a venue provision permits the parties to select the county or court within the state where suit may or must be brought.

State courts generally will enforce the parties' selection of a particular county in which to litigate disputes. As with forum selection and choice-of-law provisions, there must be a reasonable relationship between the parties or the transaction and the venue selected. For example, if the contracting parties were located in San Diego, CA, and performance occurred entirely in that city, providing for venue in the Sacramento courts ' perhaps with the idea that one party wished to make it harder for the other party to sue ' would be deemed unreasonable and be refused enforcement.

In addition to selecting a county or counties where lawsuits must be brought, venue provisions can also involve the choice of designating the state courts in a county, the federal court located in that county, or both. Counsel should determine in advance whether the state or federal courts are a more favorable forum for anticipated disputes. Designating venue exclusively in state court may deprive a party of the right to remove the case to federal court, which is something your company may desire depending on the nature of anticipated disputes. Designating only the federal courts located in a county may avoid more lengthy state court proceedings, intimidate the opposing party or counsel, or avoid state court judges and juries who may be more sympathetic to a local adversary. However, private parties cannot create federal jurisdiction where it does not otherwise exist at law. If the federal court in a county is designated as the exclusive venue, and valid federal jurisdiction does not otherwise exist (i.e., diversity or federal question jurisdiction), the venue clause would be unenforceable and the adversary would be free to file suit in any court ' state or federal ' and in any county it chooses. Finally, the precise language chosen for designating venue can be critical. For example, in Alliance Health Group LLC v. Bridging Health Options, 2008 WL 5206911 (5th Cir. Dec. 12, 2008), the court found that a provision for venue to “occur in Harrison County, Mississippi” referred not only to the state courts of that county, but also to the federal district court located in that county. Counsel must be clear in drafting language to specify venue in state court, in federal courts located in or which encompass a particular county, or both.

Jury Trial Waiver Provisions

Counsel drafting a contract, or re-evaluating an existing form contract, must consider whether having a jury is more or less favorable for the disputes likely to arise out of the transaction. The conventional wisdom is that non-jury proceedings are preferable to defendant corporations because they pose less risk of a runaway damages verdict. However, the circumstances of a particular transaction may require counsel to reconsider this general view. For example, compensatory or punitive damages may be severely restricted in the state whose law is selected to govern the agreement. If anticipated disputes are not ones that a lawyer would take on a contingency, the prospects of an expensive jury trial may serve as a deterrent to lawsuit by the adverse party. Counsel may be aware that the adverse party is not comfortable in front of juries for a particular reason (e.g., a prior criminal record) so that the prospect of a jury would serve as a deterrent to litigation. Or, adverse counsel may be connected with the local judiciary so that a judge trial poses greater risk. Litigation involving jury trials usually lasts longer, so it may be an advantage in the particular situation for litigation to take several years to get to trial. Finally, counsel needs to be aware of whether a jury trial waiver would be enforceable under the law of the state that is selected to govern the contract.

Attorney's Fees Provisions

Virtually all attorneys are aware of the general “American Rule” that, in the absence of a contractual or statutory provision to the contrary, each party to the litigation bears its own attorney's fees regardless of who prevails. There are some exceptions to this rule. For example, Arizona law generally allows attorney's fees to be recovered by the prevailing party in “any contested action arising out of a contract.” If the law governing the transaction follows the American Rule, counsel must consider whether a prevailing party attorney's fees provision serves the client's interests for the particular transaction. Issues counsel should consider include:

• Which party is more likely to be sued for failing to perform its obligations under the agreement?
• Would the prospect of an attorney's fee award provide incentive to that party to avoid breaching the agreement?
• Would the prospect of an attorney's fee award provide one party with leverage after a dispute arises?
• Should the provision permit an attorney's fee award to only one party and, under the state law governing the agreement, would such a provision be enforceable? Indeed, in some states like California, a one-way attorney's fee provision is automatically deemed to be mutual.
• If the company's litigation history reveals that it rarely actually recovers fees in the numerous claims it brings, but it has been subject to fee awards, or leverage because of the threat of such awards, in the limited number of claims against it, is continuing to use a fee provision in standard form agreements a good idea?
• Does the magnitude of the transaction or the possible damages resulting from a breach militate in favor or against a fee provision? Are the potential damages small so that a fee provision would be a material disincentive to pursue a lawsuit? Or, are the potential damages from a breach so large that legal fees would be a drop in the bucket, so spending time and money to negotiate for or against a fee provision is not worth it?

Because a court may refuse to enforce one or more boilerplate provisions, it is important to include a severability clause in the agreement so that a court's failure or refusal to enforce one provision will not affect the validity and enforcement of the remainder of the agreement.

There are, of course, additional boilerplate provisions that require counsel's attention, including: merger of prior negotiations; non-assignability; non-waiver of future breaches, limiting amendments to those in writing; execution of the agreement in counterpart and by fax; authority to execute the agreement; liquidated damages; and arbitration and mediation.

Counsel familiar with the litigation issues raised by boilerplate provisions have a valuable negotiation tool. They can improve their client's position, or raise boilerplate-related issues solely for the purpose of trading them off for other points which are more important. The more conversant counsel is with respect to the negotiation and effect of boilerplate provisions, the better the agreement will be for the client, and the more likely it is that client will have a “leg up” should litigation arise.

Michael Eidel is a partner in the Litigation Department of Fox Rothschild LLP in Philadelphia. He concentrates his practice in commercial, employment, competition, real estate, and intellectual property matters. Eidel represents a broad range of clients, including banks, technology companies and insurance companies. He can be reached at 215-918-3568 or [email protected]. The author is grateful to Daniel Sigal, associate attorney at Fox Rothschild LLP, for his invaluable research assistance.

Standard forms and specially negotiated agreements both have “boilerplate” provisions that are largely ignored at the time of the transaction, but almost always play a significant role when a dispute arises. These provisions are usually placed in the “fine print” in form contracts, such as in “standard provisions” on the reverse side of documents that may have not been reviewed and reconsidered for years. Because such a small percentage of transactions result in litigation, there is little motivation to re-examine provisions that have worked well enough before.

Leasing counsel who specially negotiate agreements also often fail to reconsider boilerplate provisions, instead choosing the expediency of copying seemingly innocuous provisions from a prior agreement sitting in the attorney's “form file.” If leasing counsel does review the boilerplate provisions, he or she may not have the litigation background and current knowledge of case law to determine how best to revise the provisions for his or her particular transaction or company ' or how these provisions will play out in the litigation process. Yet, in the rare event litigation occurs, the previously ignored boilerplate provisions may well determine who maintains leverage throughout the case and, ultimately, who prevails.

Counsel would be well-served by engaging an experienced commercial litigator to perform a “litigation audit” of their agreements, whether they be standard form agreements or highly complex agreements in the drafting stage. This article discusses the applicable general principles and drafting considerations for some of the most frequently litigated boilerplate provisions: choice-of-law, forum selection, venue, jury trial waiver and attorney's fees.

Choice-of-Law Provisions

Choice-of-law provisions, like other boilerplate provisions, are intended to make the expectations of the contracting parties explicit. Accordingly, the parties will choose a particular state's substantive law to govern if a dispute arises. This choice depends on many considerations.

First, it is not guaranteed that a court will enforce a choice-of-law provision. Whatever state's law is chosen, counsel should be aware of the standards governing whether that choice will actually be given effect in court. Generally, a court will apply the chosen law if: 1) there is a reasonable relationship between the transaction or the parties and the state whose law was chosen to govern, or there is some other reasonable basis for the parties' choice; and 2) if applying the chosen state law would not violate a public policy of another state that has a greater interest in the outcome of the case. The choice-of-law provision must be tailored to the particular transaction and business of the contracting parties. Counsel should consider questions such as:

• What types of claims and suits are likely to arise, either by or against our company?
• Is a uniform choice of law in all of the company's contracts necessary?
• Is there a difference among the states' laws that are most likely to be involved in a future dispute? If so, how can the company take advantage of any such differences? (Some states limit the type and amount of recoverable damages, and may preclude an award of punitive damages.)
• Does the state whose law is chosen have a reasonable connection to the parties or transaction reflected in the contract?
• Can it be determined in which state the company is most likely to be sued, and if so, how can the choice-of-law provision be drafted to increase the chances a court in that state will enforce it?

Forum Selection Clauses

The contracting parties may predetermine the state in which any lawsuit between them can be brought, or where any arbitration hearing must occur. Like choice-of-law provisions, however, forum selection clauses are not always enforced by courts. Whether to insert a forum selection clause, what forum to select, and what standard will govern enforcement of the clause, are all questions that counsel should consider in drafting and reviewing agreements.

With any agreement, litigation is possible. Counsel should attempt to specify the most convenient or otherwise advantageous state in which that litigation must occur. Without any forum selection clause, the litigation will generally proceed in the state chosen by the party who sues first. With a forum selection clause, if the company is sued in a state other than the one specified, the company may move to dismiss the case. The plaintiff would then have to decide whether it is worth filing a new lawsuit that could be in a far-away state, require additional travel and expense, involve hiring new lawyers, and raise the specter of being “home-towned” in your company's favored jurisdiction.

A properly drafted forum selection clause must be communicated to the other party ' for example, by a separate, readily apparent section of the agreement. It must also be mandatory so that it requires, rather than “permits,” suits to be brought in the designated state. If these basic requirements are met, and the forum selection clause indeed applies to the parties actually involved in the lawsuit, a court will presume the clause is valid and enforce it unless the other party makes a strong showing that “enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.” M/S Bremen v. Zapata Off-Shore Co. , 407 U.S. 1, 15 (1971). This “unreasonable and unjust” standard, unfortunately, creates uncertainty for counsel regarding whether a forum selection clause will be enforced, even if the clause is crystal-clear and was fully negotiated. Even if there was no fraud or overreaching in the actual making of the agreement, a court may exercise its discretion to refuse to enforce the clause depending on the circumstances of the particular dispute and litigants, not only at the time of the drafting of the agreement but also at the time of the dispute.

Questions counsel must consider in drafting or commenting on a forum selection clause include:

• What types of claims and suits are most likely to arise either by or against our company?
• Is the state where the company's principal place of business is located always the best forum to select?
• For the particular transaction at issue, what state is most convenient for the company's side's witnesses who will most likely be involved?
• Does the company have an existing relationship with outside counsel located in the selected forum state?
• Is there some other special circumstance that militates in favor of having disputes decided in a particular state?
• Does agreeing to a forum in a state where my company does not normally do business subject the company to general personal jurisdiction in that state when that might be undesirable?
• Is the company qualified to do business in the selected forum state so that the company would be entitled to file suit there if needed, and what are the tax consequences of qualifying the company to do business there?
• Are there reasons to provide for more than one possible forum for disputes?
• Should the forum state selected be the same as the state whose law is selected in the choice-of-law provision? (While this ordinarily would be the case, there may be special circumstances where they should be different.)
• If the adverse party has less bargaining power in the transaction, what self-serving “reasonableness language” can be added to the forum selection clause to help improve its chances of being enforced?

Venue Provisions

Venue selection is different from forum selection. While forum selection permits the contracting parties to choose the state in which disputes must be litigated, a venue provision permits the parties to select the county or court within the state where suit may or must be brought.

State courts generally will enforce the parties' selection of a particular county in which to litigate disputes. As with forum selection and choice-of-law provisions, there must be a reasonable relationship between the parties or the transaction and the venue selected. For example, if the contracting parties were located in San Diego, CA, and performance occurred entirely in that city, providing for venue in the Sacramento courts ' perhaps with the idea that one party wished to make it harder for the other party to sue ' would be deemed unreasonable and be refused enforcement.

In addition to selecting a county or counties where lawsuits must be brought, venue provisions can also involve the choice of designating the state courts in a county, the federal court located in that county, or both. Counsel should determine in advance whether the state or federal courts are a more favorable forum for anticipated disputes. Designating venue exclusively in state court may deprive a party of the right to remove the case to federal court, which is something your company may desire depending on the nature of anticipated disputes. Designating only the federal courts located in a county may avoid more lengthy state court proceedings, intimidate the opposing party or counsel, or avoid state court judges and juries who may be more sympathetic to a local adversary. However, private parties cannot create federal jurisdiction where it does not otherwise exist at law. If the federal court in a county is designated as the exclusive venue, and valid federal jurisdiction does not otherwise exist (i.e., diversity or federal question jurisdiction), the venue clause would be unenforceable and the adversary would be free to file suit in any court ' state or federal ' and in any county it chooses. Finally, the precise language chosen for designating venue can be critical. For example, in Alliance Health Group LLC v. Bridging Health Options, 2008 WL 5206911 (5th Cir. Dec. 12, 2008), the court found that a provision for venue to “occur in Harrison County, Mississippi” referred not only to the state courts of that county, but also to the federal district court located in that county. Counsel must be clear in drafting language to specify venue in state court, in federal courts located in or which encompass a particular county, or both.

Jury Trial Waiver Provisions

Counsel drafting a contract, or re-evaluating an existing form contract, must consider whether having a jury is more or less favorable for the disputes likely to arise out of the transaction. The conventional wisdom is that non-jury proceedings are preferable to defendant corporations because they pose less risk of a runaway damages verdict. However, the circumstances of a particular transaction may require counsel to reconsider this general view. For example, compensatory or punitive damages may be severely restricted in the state whose law is selected to govern the agreement. If anticipated disputes are not ones that a lawyer would take on a contingency, the prospects of an expensive jury trial may serve as a deterrent to lawsuit by the adverse party. Counsel may be aware that the adverse party is not comfortable in front of juries for a particular reason (e.g., a prior criminal record) so that the prospect of a jury would serve as a deterrent to litigation. Or, adverse counsel may be connected with the local judiciary so that a judge trial poses greater risk. Litigation involving jury trials usually lasts longer, so it may be an advantage in the particular situation for litigation to take several years to get to trial. Finally, counsel needs to be aware of whether a jury trial waiver would be enforceable under the law of the state that is selected to govern the contract.

Attorney's Fees Provisions

Virtually all attorneys are aware of the general “American Rule” that, in the absence of a contractual or statutory provision to the contrary, each party to the litigation bears its own attorney's fees regardless of who prevails. There are some exceptions to this rule. For example, Arizona law generally allows attorney's fees to be recovered by the prevailing party in “any contested action arising out of a contract.” If the law governing the transaction follows the American Rule, counsel must consider whether a prevailing party attorney's fees provision serves the client's interests for the particular transaction. Issues counsel should consider include:

• Which party is more likely to be sued for failing to perform its obligations under the agreement?
• Would the prospect of an attorney's fee award provide incentive to that party to avoid breaching the agreement?
• Would the prospect of an attorney's fee award provide one party with leverage after a dispute arises?
• Should the provision permit an attorney's fee award to only one party and, under the state law governing the agreement, would such a provision be enforceable? Indeed, in some states like California, a one-way attorney's fee provision is automatically deemed to be mutual.
• If the company's litigation history reveals that it rarely actually recovers fees in the numerous claims it brings, but it has been subject to fee awards, or leverage because of the threat of such awards, in the limited number of claims against it, is continuing to use a fee provision in standard form agreements a good idea?
• Does the magnitude of the transaction or the possible damages resulting from a breach militate in favor or against a fee provision? Are the potential damages small so that a fee provision would be a material disincentive to pursue a lawsuit? Or, are the potential damages from a breach so large that legal fees would be a drop in the bucket, so spending time and money to negotiate for or against a fee provision is not worth it?

Because a court may refuse to enforce one or more boilerplate provisions, it is important to include a severability clause in the agreement so that a court's failure or refusal to enforce one provision will not affect the validity and enforcement of the remainder of the agreement.

There are, of course, additional boilerplate provisions that require counsel's attention, including: merger of prior negotiations; non-assignability; non-waiver of future breaches, limiting amendments to those in writing; execution of the agreement in counterpart and by fax; authority to execute the agreement; liquidated damages; and arbitration and mediation.

Counsel familiar with the litigation issues raised by boilerplate provisions have a valuable negotiation tool. They can improve their client's position, or raise boilerplate-related issues solely for the purpose of trading them off for other points which are more important. The more conversant counsel is with respect to the negotiation and effect of boilerplate provisions, the better the agreement will be for the client, and the more likely it is that client will have a “leg up” should litigation arise.

Michael Eidel is a partner in the Litigation Department of Fox Rothschild LLP in Philadelphia. He concentrates his practice in commercial, employment, competition, real estate, and intellectual property matters. Eidel represents a broad range of clients, including banks, technology companies and insurance companies. He can be reached at 215-918-3568 or [email protected]. The author is grateful to Daniel Sigal, associate attorney at Fox Rothschild LLP, for his invaluable research assistance.