Arbitration – not boilerplate, and not necessarily quick, easy, or inexpensive!

If you have basic familiarity with contracts, you’ve likely heard the term “boilerplate,” which is often used to mean standard language that the contract writer uses in many of its contracts or even that you may find in contracts across the board.  Of course, just because language might be “standard,” that does not mean that it is innocuous or that you can safely ignore it!

So-called boilerplate language, it it exists, is often found near the end of the contract.  Some contracts stipulate that if a dispute arises from the contract the parties agree to submit the dispute to binding arbitration.  While this clause may be brief and, coming at the end of a contract, may appear almost like an afterthought, it is important to understand that agreeing to arbitrate has very real consequences.

Arbitration clauses are most often seen by consumers in credit card agreements and service agreements with large companies (e.g., “Any dispute in connection with this Agreement shall be subject to binding arbitration in Chicago, Illinois”), but they are also sometimes poorly understood features of contracts between small businesses who somehow heard from an uncle that arbitration was easier or cheaper than going to court.

In  November 2013, a long and expensive arbitration proceeding concerning a Gwinnett County software company came to a conclusion.  The process took three (3) years and cost $3.5 million in legal fees in addition to approximately $150,000 in arbitration costs.

The victors, Kenneth Shumard and Kenneth Shumard Jr. won the right to control the use of medical billing software that is anticipated to be highly valuable.  The Shumards also won $800,000 in attorneys’ fees.  Initially, the Shumards sought a restraining order from the Gwinnett County Superior Court preventing their other partners from making certain use of the software.  Judge Ronnie Batchelor referred the dispute to arbitration, because the partnership agreement between the Shumards and their partners required that disputes go to arbitration.

As such, the Shumards did not have the option to seek judicial process, but instead, were forced to go to arbitration.

Arbitration is conducted under its own standards and is a creature of state law.  In some ways arbitration resembles court proceedings.  For example, in the above-mentioned dispute, the arbitrator received briefs on the matter and received testimony from witnesses.  The arbitrator then required post-trial briefs and issued a written decision.

In other ways, however, arbitration is an animal unto itself.  Arbitrators are not bound the same rules as judges and their decisions are often final.  Their decisions are not subject to normal appellate court review, and only subject to attack in specific instances, such as when the arbitrator is not impartial, failed to make a final determination of the issues, or manifestly disregarded the law.  Basically, arbitration is like “private court.”

A court rarely finds that an arbitrator has committed such failings, and thus, it is best to plan on any arbitration award being the final word.  Case in point, in the above-referenced dispute, the Shumards’ partners, who were unsuccessful in arbitration, went back to Gwinnett County Superior Court Judge Batchelor seeking to have the arbitration award vacated.  Judge Batchelor denied those motions and confirmed the arbitration award.

In Georgia, Chapter 9 of Title 9 of Georgia Statutes sets out the standards for arbitration (the “Georgia Arbitration Code,” O.C.G.A. § 9-9-1 et seq.).  In Georgia, the contract controls.  If a contract that requires disputes be arbitrated is enforceable, the dispute cannot be heard by the courts and must be submitted to arbitration.  The courts do have power, however, to determine whether the contract with the arbitration clause is valid, to compel arbitration, and to validate and enforce an arbitration award.

From partnership agreements and operating agreements to construction deals and a variety of other contracts, a seemingly innocuous arbitration clause can be but a brief paragraph nestled neatly in the final pages of the contract, but nonetheless has great importance.  Before entering into a contract, seek the counsel of a contract attorney to ensure you understand the implications of every section of the agreement.


UPDATE – Raysoni v. Payless Auto Deals, LLC et al.

In a previous blog, I discussed the case of Raysoni v. Payless Auto Deals, LLC et al. (see “To Carfax or not to Carfax“), a rather frustrating case in which the Georgia Court of Appeals held that the plaintiff did not have a good claim for fraud against a used car dealership even though the salesman for the dealership told Raysoni that the car he purchased was not in a wreck – which was a blatant lie and the salesman knew it.

In that case, the Court of Appeals held that despite the salesman’s lie, a claim for fraud could not be supported because Raysoni’s reliance on the lie was not justified.

In a claim for fraud, the plaintiff must show that his/her reliance on a false and injurious representation was reasonable or justifiable. The Court of Appeals found that after verbal negotiations between Raysoni and the salesman, Raysoni signed a written contract which clearly stated that the car had been in a wreck, that a buyer was not to rely on the representations of a salesperson, and that a buyer should get the car independently inspected. The contract trumped the salesman’s representations as well as the Carfax report which showed the car as being clean.

Apparently, Raysoni did not take this decision lying down, as he is now appealing to the Supreme Court of Georgia.   Oral Arguments are set for June 16, 2014.

In his appellate brief, Raysoni argued that the Court of Appeals incorrectly applied the law, based on the Georgia Supreme Court case City Dodge, Inc. v. Gardner (1974), arguing that fraud prior to the entering of the contract voids the contract, and thus the disclaimer in the contract is of no significance. Under City Dodge, the disclaimer in a contract is only one of the factors a jury will look at in deciding whether reliance was justifiable, but does not by itself preclude a finding of fraud.  Raysoni also reiterated the fact that the disclaimer was in a font size the equivalent of 5.6 Arial type (!!) buried in other text.  See if you can find the disclaimer of damage:

disclaimer text

It will be interesting to see how the Supreme Court deals with the issue of justifiable reliance.  Stay tuned for the conclusion of this case… and feel free to call a contract attorney at Briskin, Cross & Sanford if you ever have ANY doubt about what you are being asked to sign.

To Carfax or not to Carfax – fraud and justifiable reliance

A case recently came down from the Georgia Court of Appeals that should be of interest to anyone who has or plans to purchase a used car, or for that matter, anyone who enters into a contract.

So there you are, at the point of sale.  You’ve negotiated hard, asked the salesperson the tough questions, and you’ve got the answers you want to hear.  It looks like you will strike a deal.  You sit down to do the paperwork and, as the salesman tries to make small talk, you see disclaimers in the contract.

Part of your brain thinks, “this is just boilerplate legal stuff, right?” and the other part thinks, “I’m probably supposed to actually know what this means.”  All the while you’re feeling like you’d be a lot more comfortable sitting in your own office with some time to review this contract, but instead, you’ve got this salesman staring at you.  So you decide that you already hashed out all the details with the salesman and his representations have got to count for something, so you skim through the contract and sign on the dotted line.

In a similar case, Raysoni v. Payless Auto Deal, LLC, A13A0714, the plaintiff, Raysoni, purchased a 2008 Honda Odyssey from Payless Auto Deal.  Raysoni pointedly asked the salesmen if the vehicle “had anything wrong with it, such as a prior wreck or damage.”  The salesmen said “no”, assured Raysoni that the vehicle was clean and undamaged, and showed Plaintiff a Carfax report showing no accident or damage to the vehicle.

This was a lie, and the salesmen knew it was a lie, because the vehicle was purchased at auction as a frame-damaged vehicle.  Because of the damage, the vehicle required $10,000-12,000 worth of repairs, which reduced the value of Raysoni’s purchase from the $17,000 that he paid, to a mere $7,000.

Yes, despite the saleman’s blatant misrepresentations in this case, the Georgia Court of Appeals held that Raysoni could not sustain a claim for common law fraud or a claim under Georgia’s Deceptive Trade Practices Act because even though the used car salesman knowingly misrepresented a material fact, Plaintiff failed to exercise due diligence in determining the falsity of the statement.

An essential element of a claim for fraud or a claim under the Georgia Deceptive Trade Practices Act is that the plaintiff’s reliance on the defendant’s misrepresentation was justifiable, meaning that the consumer must show he or she exercised due diligence to ascertain the falsity of the representation.

As it turned out in Raysoni, even though the salesman lied during the negotiation, the contract that the Plaintiff signed after the negotiation clearly stated that: (i) the sale was “As-Is”, (ii) there was no warranty, (iii) that purchaser would pay all costs of repairs, (iv) that any representations made by salesman were not binding on the dealer, (v) that the vehicle was announced having unibody damage at auction, and (vi) that Payless strongly recommended customers have vehicles inspected before purchase.

The Court found that given the bold-faced, capitalized disclaimers in the contract, Plaintiff had blindly relied on the salesman’s representations, and therefore, his reliance was unjustifiable.  Without justifiable reliance, Raysoni’s injury was considered not to be caused by the dealer’s misrepresentations, but by his own lack of diligence.  As with many torts, causation is an essential element.  Without it, Raysoni’s claims were defeated.  The court also found that the Raysoni’s reliance on the clean Carfax report was also not justifiable in light of the conspicuous disclaimers in the contract.

As someone who has purchased a pre-owned vehicle and has used Carfax, what I find interesting about this case is the court’s discussion of “lag time.” Apparently, it is not an uncommon practice for an auctioneer or dealer to fail to report an accident for a period of time, with the effect that the car can be represented as “clean” even though it is known to be damaged.  Although this seems clearly unethical and fraudulent in itself, the court found that clear and unambiguous disclaimers in a contract nonetheless put the purchaser on notice of the damage and overcome any prior representations to the contrary, thereby defeating a claim for fraud.

The important takeaway from this case is that a clear and unambiguous contract controls, and it is therefore critical that you understand each provision in the contract.  When you are negotiating any contract and the other party says that the terms are “A,” but the contract says “B,” you should stop and require an explanation for the discrepancy.  If the terms are in fact “A” as the other party claims, then the contract should be changed to reflect that. If the other party is not willing to make the change or insists that no discrepancy exists, alarm bells should be ringing in your head.  Ultimately, the clear and unambiguous terms of a contract control, and as the above-referenced case illustrates, can even overcome even what appears to be an obvious case of fraud.

Before signing on the dotted line, make sure you understand what you are signing and that it comports with the verbal negotiations that have lead up to the signing.  If you need assistance, do not hesitate to call a contract attorney at Briskin, Cross & Sanford to help you ensure the deal you seek is the deal you receive.

Google’s terms more complex than Beowulf

I have commented before on Mark Anderson‘s common-sense observations and wry tone. Here, true to form, he notes the functional unreadability for many users of Google’s Terms and Conditions and suggests that they should be written more like Fifty Shades of Grey (well… that’s not quite what he says).

Of course, we know (possibly from guilty experience) that most readers don’t read the terms and conditions (“T&C”) or terms of service (“TOS”) before clicking the “download” or “accept” button anyway, although it is not clear whether we don’t read them because they are difficult or whether they have evolved to become difficult and obtuse because most people don’t bother to read them and therefore few sales are lost because the terms are inaccessible or unacceptably harsh.

One software vendor that offered a $1,000 reward to anyone who read the fine print in its license agreement and hid the offer in plain site in its terms of service did not receive a response claiming the prize for four months and more than three thousand downloads.  Another inserted a term providing that if a user did not register the downloaded evaluation copy of its software properly, “a leather-winged demon of the night will tear itself, shrieking blood and fury, from the endless caverns of the nether world, hurl itself into the darkness with a thirst for blood on its slavering fangs and search the very threads of time for the throbbing of your heartbeat.

For contract attorneys and IP lawyers drafting terms and conditions, end-user license agreements (“EULA”), and click-wrap agreements in general, especially those designed for use by ordinary online consumers, the most difficult part of the task is often to provide both maximum legal coverage and maximum clarity at the same time.

This should never be an excuse, of course, for not striving for that elusive blend of clarity and coverage. A clear contract will always be more enforceable, and the best business practice is rarely to “let the buyer beware” and blame the reader for not getting assistance if any of the terms he or she is invited to “click here to accept” are difficult to understand.

Of course another way to get readers to actually pay attention to the terms of service, is to have a celebrity perform a dramatic rendition of them.  Mr. Anderson has previously drawn our attention to the hilarious reading of Apple’s EULA by Richard Dryfus (click here to listen to the Dryfus reading, and be sure to click to listen to the “Effective until” segment).

If you are struggling with your own (or someone else’s) T&C, TOS, EULA or Click-Wrap Agreement–and you don’t have ready access to a celebrity like Richard Dryfus to read it for you–the contract and intellectual property attorneys at Briskin, Cross and Sanford will be more than happy to assist.

IP Draughts

beowulfIP Draughts spluttered over his porridge this morning, while reading an item in his newspaper.  According to researchers at the University of Nottingham, if you want to understand Google’s internet user agreement you need a higher level of literacy than you need to understand Beowulf, the Anglo-Saxon poem that was written about 1000 years ago.  Non-firewalled news report here.

The research team has developed some software that will rate the readability of website text. Called Literatin, it has been developed to work best with Google Chrome.  There is an amusing irony here: you have to accept the Google terms before you can use the software!  It seems that there is also a version that uses Firefox.  See here to download either version.  IP Draughts wonders whether it uses any of the same methodology as the Bla-Bla Meter, which we reported on here.

Ms Ewa Luger (@ew_luger)…

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Cut out the jargon from contracts | IP Draughts

IP Draughts is wry and cleverly written British intellectual property and business law blog published by Anderson Law, LLP in the picturesque, medieval hamlet of Shillingford, Oxfordshire. Its bloggers are not above making not-so-subtle (though sometimes well deserved) digs at the occasionally bloated and ironically old fashioned language and style of many American legal contracts.

Yesterday’s IP Draughts post (linked below) is no exception.  It captures one of those rare ounces of humor (or humour) that can be be distilled from this topic, a well that many doubtless feel is excruciatingly dry for the most part.  Okay, the little cartoons do help!

Cut out the jargon from contracts

All that being said, don’t be tempted to gloss over the notwithstandings, subject tos, and the rare, if puzzling, mutatis mutandis in your own contracts, and talk to a contract lawyer at Briskin, Cross and Sanford if there is anything in an agreement you are asked to sign that is not crystal clear to you.

As for moral turpitude (see Mr. Anderson’s post, as well as the US Customs and Immigration Service card that he discusses), that is a topic for another day as the possibilities are extensive!

For ten Dollars ($10.00) and other good and valuable consideration…

Clients for whom I am drafting or reviewing contracts frequently ask about the phrase: “NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows.”

Most people know that even the most innocent looking terms in a contract can come back to bite them if they don’t fully understand the legal implications of such terms before signing, and this is why sensible parties have an experienced business attorney review every contract, whether it is a business contract or personal contract, and whether it is for goods or for services.

The good news is that the “NOW, THEREFORE, for and in consideration” clause is not one of these landmines.  To understand why it is there, you have to know a little legal theory and a little legal history.  To be valid and binding, a contract generally requires three things: offer by one party, acceptance of the offer by another party, and something the law calls “consideration,” essentially something given in exchange for the promise and which seals the deal.  Sometimes, there are reasons that even a contract that has these elements may not be enforced, but that is a different discussion.

“Consideration” can be either “good” or “valuable” (hence the language “other good and valuable considerationto cover all bases). A “good” consideration is founded on natural duty and affection or on a strong moral obligation. A “valuable” consideration is usually founded on money or something convertible into money… except marriage, which, interestingly, is a “valuable” consideration rather than a “good” consideration, legally speaking.  Again, a topic for another day!

Coming back to “value,” if you promise to do something that you don’t have to do and don’t receive anything in exchange, the promise is like a gratuitous promise to make a gift, and it is not (under most circumstances) binding.  For example, if I say I promise to come and see you today, and then I don’t do so, you can’t sue me for breach of contract.  However, if you say to me, “here is ten dollars in consideration of your promise to come and see me today,” and I accept, you have essentially paid me something of value for my promise, and if I break my promise, you have a right to recover your damages from me (which may be $10, or may be a lot more if you were reasonably relying on me to come and see you for some important reason and you were damaged as a result of my not showing up).

There has, historically, been some debate is to whether the exchange of promises alone can be enforced.  In Georgia, the law will often enforce promises that have induced people to act or refrain from acting in reliance on that promise if that action, inaction, or reliance was reasonable.  Because this is obviously a highly subjective determination, the safest way to make your contract enforceable is to throw in a little “real” value as consideration; hence, “in consideration of ten dollars and other valuable consideration….”  This is considered the “form” of the exchange of valuable consideration, and is supposed to make you realize that you are entering into a binding contract, not just a gratuitous promise, so you should be careful that you understand and agree to the terms.   Incidentally, it could be ten dollars, it could be one dollar… one famous judge has said that it can be something as small as a “peppercorn”… which is why this is often called “peppercorn consideration.”

The bottom line: Always ask a contact attorney or business attorney to draft or review your contracts.  Even apparently simple elements of a contract can be important in understanding the promises you are making or knowing that you can enforce the promises others make to you.

$700k windfall: Russian man outwits bank with hand-written credit contract — RT Business

$700k windfall: Russian man outwits bank with hand-written credit contract — RT Business.

Dmitry Agarkov hand wrote a few key amendments to an unsolicited credit card offer and sent it back.  The credit card company accepted it without reading it and issued the credit card, accepting, Agarkov argues, the “counter offer” he made.  Fraud… or just an example of how any offer-counter-offer process should work?  If the case does not settle, the Russian court system will decide, but Tinkoff Credit Systems would probably be smarter to make a reasonable offer to Mr Agarkov and slink off to wash the egg from its corporate face.   There are certainly ways a business that offers form contracts can protect itself from unexpected amendments.  Here, however, even if the lesson is of the advisability of reading the entire contract before one signs it, the inescapable irony is that banks themselves are seldom likely to accept the “I didn’t read the fine-print and therefore should not be held to the terms of the agreement” excuse when a customer tries to play that card.

Hat Tip to RT Network.