PRECISE CONTRACT LANGUAGE: YET AGAIN

IVAN HOFFMAN, B.A., J.D.


        I have written extensively about the need for precision in drafting agreements.  (see Precise Contract Language, Precise Contract Language-Again, Precise Contract Language-Flashdance) I am a strong proponent of negotiation, not litigation.  I have been at the negotiation table as well as the litigation table and the former is almost always significantly less expensive and often more productive than the latter.

        The failure to have precision in agreements is often the cause of litigation.  Contracts do not destroy relationships.  Contracts are just easy targets.  The things that destroy relationships are the “I thought you said…” stuff that comes from no contracts or poorly drafted ones.  It is the uncertainty that often leads to the very things the parties wish to avoid…litigation.

        In Animal Film, LLC vs. D.E.J. Productions, Inc. et. al., the California Court of Appeals had to rule on the language in an agreement dealing with what is called “jurisdiction and venue.”  This term refers to provisions that state what body of law will govern the interpretation of the agreement and where litigation or arbitration is to take place.

        The Court stated:

Animal, a California limited liability company with its principal place of business in Los Angeles, filed a complaint on September 10, 2009, in Los Angeles County Superior Court for breach of contract, breach of the implied covenant of good faith and fair dealing, and an accounting against DEJ and First Look, both Delaware corporations whose undisputed principal places of business are in Los Angeles.

DEJ and First Look filed a motion to dismiss or stay the action on forum non conveniens grounds, arguing that the choice-of-law and forum selection provision in the production agreement requires that the action be tried in Texas, not California. That provision states in bold capital letters: “APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO AGREEMENTS MADE IN AND WHOLLY TO BE PERFORMED IN THAT JURISDICTION, AND THE PARTIES HERETO SUBMIT AND CONSENT TO THE JURISDICTION OF THE COURTS PRESENT IN THE STATE OF TEXAS IN ANY ACTION BROUGHT TO ENFORCE (OR OTHERWISE RELATING TO) THIS AGREEMENT.”

In opposition to the motion, Animal argued that the forum selection clause is permissive only, and thus does not require trying the case in Texas, and that it would be inconvenient to litigate outside California because the parties, witnesses, location for performance of the production agreement, and the accounting documents are all in Los Angeles. Animal?s counsel, Dennis Holahan, stated in a declaration that the audit of First Look was conducted in First Look?s Los Angeles office and that the auditors who would testify at trial are in Los Angeles. Holahan also stated that Animal?s principal, Rhames, lives in Los Angeles County and that Animal, which was formed in 2004 for purposes of producing the film, is a California resident. Animal argued that, because Blockbuster no longer owned DEJ and was not a party to the action, the connection to Texas was tenuous and that the forum selection clause was included because Blockbuster has its principal offices in Dallas.

Forum non conveniens is an equitable doctrine, codified in Code of Civil Procedure section 410.30, under which a trial court has discretion to stay or dismiss a transitory cause of action that it believes may be more appropriately and justly tried elsewhere. (Stangvik v. Shiley Inc. (1991) 54 Cal.3d 744, 751 (Stangvik).) The inquiry is whether “in the interest of substantial justice an action should be heard in a forum outside this state.” (Code Civ. Proc., § 410.30, subd. (a).)

In a contract dispute in which the parties? agreement contains a forum selection clause, a threshold issue in a forum non conveniens motion is whether the forum selection clause is mandatory or permissive. A mandatory clause ordinarily is “given effect without any analysis of convenience; the only question is whether enforcement of the clause would be unreasonable.” But, if “the clause merely provides for submission to jurisdiction and does not expressly mandate litigation exclusively in a particular forum, then the traditional forum non conveniens analysis applies. [Citation.]” (Intershop Communications AG v. Superior Court (2002) 104 Cal.App.4th 191, 196, citing Berg v. MTC Electronics Technologies Co. (1998) 61 Cal.App.4th 349, 358-360 (Berg).) The existence of a permissive forum selection clause is one factor considered along with the other forum non conveniens factors in applying the traditional analysis. (Berg, at p. 359.)[emphasis added]

        The underscored language from the opinion means that not only does the clause need to state what laws will apply but, if the clause is to be given effect without regard to “convenience,” then the clause must state that litigation or arbitration must occur in the jurisdiction stated.   When a clause does not so mandate, then courts review the issues regarding “convenience.

        And what this means for the parties, especially the party drafting the agreement, is that control over the outcome of this issue (i.e. where the case is to be tried) has been taken out of their hands and placed in the hands of the trier of fact.  That should never happen in a contract situation.  The whole purpose of the agreement is to try and draft it in such a way so that no trier of fact can ever interpret it otherwise than the drafter intended.

        The Court went on:

The forum selection clause in the production agreement between Animal and DEJ states that the parties submit and consent to the jurisdiction of the courts present in the state of Texas in any action brought to enforce (or otherwise relating to) this Agreement. This clause resembles forum selection clauses that courts have held to be permissive because they provide for submission to jurisdiction in a particular forum without mandating it. [emphasis added]

Conversely, the clause lacks the language of exclusivity in forum selection clauses that courts have held to be mandatory. (E.g., Cal-State Business Products & Services, Inc. v. Ricoh (1993) 12 Cal.App.4th 1666, 1672, fn. 4 [“„[A]ny appropriate state or federal district court located in the Borough of Manhattan, New York City, New York shall have exclusive jurisdiction over any case of controversy arising under or in connection with this Agreement?” (talics added)]; see also Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 494 [plaintiff agreed to bring all actions arising out of agency agreement only in Philadelphia]; Furda v. Superior Court (1984) 161 Cal.App.3d 418, 422, fn. 1 [“„Any controversy or claim arising out of or relating to this Agreement . . . shall be litigated either in a state court for Ingham County, Michigan, or in the U.S. District Court for the Western District of Michigan?” (italics added)].) Because the forum selection clause here merely provides for submission to jurisdiction in Texas and does not mandate litigation exclusively in Texas, it is permissive, not mandatory. We, therefore, apply a traditional forum non conveniens analysis, considering the forum selection clause as one factor in the balancing of the private and public interests.

        As indicated above, this means that the Court, not the parties, will determine where the matter is to be tried…just the opposite of what should have taken place within the 4 corners of the agreement.

        And as a result, after the Court reviewed the tests and standards for forum non conveniens, the Court determined that California and not Texas was the place where trial was to take place…just the opposite of what the parties apparently intended in the drafting even though the plaintiff now wanted the matter tried in California.

Conclusion

        Spend the time to include the extra few words.  Precision and thoroughness in contract drafting can be very cost effective.

Copyright © 2011 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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