Common Draft: Pretty-Fair Contract Terms
(unfinished draft)

A.  The Payer wouldn't have to immediately pay amount(s) that the Payer could show were not properly subject to being accelerated.

B.  Acceleration wouldn't affect the parties' other rights, remedies, and obligations under the Con­tract (unless the Con­tract said otherwise, of course). Here some examples of other rights and remedies that wouldn't be affected by an acceleration of payment obligations under this Clause:

• any remaining right that the Payer might have to cure the payment failure in question;
• the Biller's other available remedies for a payment failure — such as, for example, suing the Payer for the unpaid amount(s) and/or foreclosing on security interests in collateral (if any);
• any defenses (if any) that could otherwise be asserted to try to block enforcement of the payment obligation; that will be true whether the defense could be raised by the Payer or by some other party (e.g., a guarantor).

Billers: Consider the following 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. The court explained:

Noteholders should be free to accurately inform borrowers of their default, the steps required for a cure and the practical consequences if the borrower fails to act, without running the risk of being deemed to have taken the drastic step of accelerating the loan [and starting the clock running on the statute of limitations].

Even in the event of a continuing default, default notices provide an opportunity for pre-acceleration negotiation---giving both parties the breathing room to discuss loan modification or otherwise devise a plan to help the borrower achieve payment currency, without diminishing the noteholder's time to commence an action to foreclose on the real property, which should be a last resort.

Freedom Mtge. Corp. v. Engel, 37 N.Y.3d 1, 28, 146 N.Y.S.3d 542, 169 N.E.3d 912 (2021) (emphasis added).

(But the lender "lost" anyway, because it had to litigate the matter.)

5.  While we're discussing 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. See Moore v. Wells Fargo Bank, N.A., 685 S.W.3d 843 (Tex. 2024); see also U.S. Bank Trust N.A. v. Walden, 124 F.4th 314, 324-25 & n.5 (5th Cir. 2024) (citing § 16.038 in partially reversing and remanding summary judgment, granted in favor of bank that had purchased home loan and initiated foreclosure proceedings, because bank's notice to homeowners had unequivocally rescinded and abandoned acceleration).

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:

The Bank has the right to immediately cease or reduce the credit line issued to the Borrower, or shorten the loan period, or deem all principal and interest due, if one of the following occurs in relation to the debts owed by the Borrower to the Bank:

(1)     When the Borrower fails to repay the debt or to amortize principal in accordance with its agreements, or refuse to honor or make payments when due for any of its debts to the Bank or to any financial institution;

(2)     When applying for settlement under the bankruptcy law, voluntary or involuntary bankruptcy, voluntary or involuntary restructuring of the company or being refused by the Taiwan clearing house, closing of business or liquidating debts;

(3)     When failing to provide guarantee as originally agreed;

(4)     Upon the death of the Borrower and the heir disclaims inheritance;

(5)     When a criminal sentence is issued and the majority of assets have been confiscated;

(6)     When the Borrower, the Guarantor, the representative of the Borrower or the Guarantor, actual beneficiary, or those exercising control over the Borrower or the Guarantor is found to be subject to economic sanctions, or be deemed or investigated terrorist or organization by foreign governmental or international anti-money laundering organization, or is found to be on the list of sanctions announced by the Ministry of Justice of the Republic of China;

(7)     When the Borrower fails to pay for the interest of any debt owed to the Bank or any financial institution;

(8)     When any collateral are sealed or lost or reduced in value, or due to the deteriorated financial status of the issuing company of the collateral, situations involving insufficient security, poor credit of the Guarantor or termination of guarantee, and failure to replace the collateral or failure of the Guarantor to repay part of principal after being requested by the Bank to do so;

(9)     In relation to the debt owed by the Borrower, when the actual use of funds differs from the purpose approved by the Bank or the business, credit, assets have adverse changes that may detrimentally affect the credit claim of the Bank;

(10)     When subject to compulsory execution, provisional attachment, provisional injunction or other preservation, exposing the Bank to the risk of not being able to be repaid;

(11)     When the Borrower is found to be dishonest or withholding information or conducting other acts not in good faith in its statements of facts or in its provision of documents during its correspondence with the Bank;

(12)     When the Borrower or the Guarantor do not cooperate with the inspection, refuse to provide information related to the actual beneficiary of the Borrower or the Guarantor or the person exercising control, or refuse to cooperate in explaining the actual nature and purpose of the transaction or the source of funds;

(13)     When the Borrower fails to comply with the commitment to maintain certain standards of financial status during the loan period, or other covenants or undertakings stated in the transaction documents with the Bank.

For situations stipulated in the clauses (1)–(6) above, the Bank does not need to give prior notice or provide a grace period for remedying the situation; for situations stipulated in clauses (7)–(13) above, the Bank shall give notice or provide a grace period for remedying the situation.

(Emphasis added.)

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."

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.

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 7.33.4.4 and its commentary); and
• Raising the issue with the customer might "poke the bear" (see 30.12), 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.

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 2.6 (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 the customer doesn't do so. (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 18.1 for a court's explanation of how SLOCs work.)

3.  A supplier could ask its customer for a guaranty from a third party — concerning which, see Clause 2.10.

4.  The supplier could ask to take a security interest in real estate or other property (tangible or intangible), referred to as "collateral" — but that could be burdensome for all concerned, as discussed at Clause 24.1.

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, 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). See United States ex rel. Dickson v. Fidelity & Deposit Co. of Md., 67 F.4th 182, 184 (Fed. Cir. 2023): The court affirmed a trial court's judgment that a project manager's work within the statutory limitation period was not "labor" and therefore could not be collected from a surety.

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. See generally, e.g., Performance bond (Investopedia.com); James Clark and Daniel Miktus, Comply or Else: Additional Obligees Must Comply with Conditions Precedent in Performance Bonds (JDSupra.com 2023); Christopher Herron, Steve Todd, and Kenny Young, Exposure Analysis: The Performance Bond Cost to Complete (JDSupra.com 2022); Supply Bond (NFP.com, undated).

Performance bonds might be required of companies under government contracts, such as certain oil and gas leases granted by the U.S. Government. See 30 C.F.R. § 556.900, cited in Taylor Energy Co. v. United States, 975 F.3d 1303, 1307 (Fed. Cir. 2020), where the court affirmed dismissal of Taylor Energy's complaint, on grounds that it failed to state a legally-cognizable claim.

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. See Arch Ins. Co. v. Graphic Builders, LLC, 519 F. Supp. 3d 54 (D. Mass. 2021), where the court granted summary judgment that a general contractor was not entitled to collect on subcontractor's performance bond; the decision was affirmed at 36 F.4th 12 (1st Cir. 2022).

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. See Andrew Gibson, Surety Bonds vs. Subcontractor Default Insurance (JDSupra.com 2021).

One easy alternative to engaging a Bank would be for the Payer to provide the Biller with a deposit (concerning which, see Clause 2.6).

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.¹

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 (see 2.4), such as a guaranty (see 2.10) of the subsidiary's payment obligations. Northbound Group, Inc. v. Norvax, Inc., 795 F.3d 647, 650 (7th Cir. 2015) (cleaned up), affirming 5 F. Supp. 3d 956, 972-74 (N.D. Ill. 2013).

(This illustrates the importance of making sure the contract names the correct party or parties, as discussed at discussion at 7.2.4.)

Example: Over the years, various enterprises associated with Donald Trump have reportedly "stiffed" a large number of creditors. See, e.g., Igor Derysh, “Trump never pays his bills”: Truth Social reportedly stiffs contractor amid financial “disarray” (Salon.com Aug. 26, 2022); Charlie Gasparino and Eleanor Terrett, Trump's social media app facing financial fallout (FoxBusiness.com Aug. 25, 2022); Alexandra Berzon, Donald Trump’s Business Plan Left a Trail of Unpaid Bills (WSJ.com Jun. 9, 2016).

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 lien on the owner's property, thus placing a "cloud" on the owner's title and complicating the owner's life. See generally Mechanic's lien (Wikipedia.org); Mechanic's Lien Definition (Investopedia.com).

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.)

As explained in a FAQ page of the Bureau of Labor Statistics (see question 15):

Various indexes have been devised to measure different aspects of inflation. Inflation has been defined as a process of continuously rising prices or, equivalently, of a continuously falling value of money.

• The CPI measures inflation as experienced by consumers in their day-to-day living expenses;
• the Producer Price Index (PPI) measures inflation at earlier stages of the production process;
• the International Price Program (IPP) measures inflation for imports and exports;
• the Employment Cost Index (ECI) measus inflation in the labor market; and
• the Gross Domestic Product (GDP) Deflator measures inflation experienced by both consumers themselves as well as governments and other institutions providing goods and services to consumers.

There are also specialized measures, such as measures of interest rates.

(Extra paragraphing and bullets added.)

There are also other inflation adjustment indexes such as, for example:

• CPI-W, Consumer Price Index for Urban Wage Earners and Clerical Workers;
• Regional CPIs;
• other specialty CPIs for, e.g., airline fares; college tuition; household energy; medical care; motor fuel; used cars and trucks; and others.

Deposits are commonplace in business:

– A supplier of goods or services might want at least some assurance that it will in fact be timely paid; a deposit, paid up front (or on an agreed schedule) provides some such assurance.

– A contractor might want a customer to put up at least some of the necessary working capital, for example to buy materials needed to manufacture contracted-for goods.

– Apartment renters are no doubt familiar with security deposits required by landlords.

– Real-estate purchase contracts often require the buyer to deposit part of the purchase price "into escrow" (concerning which, see generally [BROKEN LINK: escrow-cmt]) as "earnest money"; in certain circumstances, the earnest money might be forfeited if the buyer doesn't close the purchase.

If a lawyer accepts deposits from clients to cover the lawyer's fees and/or expenses, the law — or legal-ethics rules — might require the lawyer to keep the deposits in an "IOLTA account" with very-restrictive rules about what can be done with the deposited funds. (IOLTA stands for Interest On Lawyer Trust Accounts.)

Generally, a deposit into an IOLTA account does earn interest — but the interest is aggregated and given to charity, not individually to the client that paid the advance deposit. The theory is that any one client's deposit is likely to earn too little in interest to justify the cost of managing it. See generally, e.g., IOLTA Overview (AmericanBar.org, undated).

Trivia: The term "IOLTA account" is redundant, of course. It's the same as, for example, "ATM machine" or "PIN number" or "please RSVP" or "the hoi polloi."

Advance agreement about "borderline" expenses can help to avoid later disputes.

But: Drafters for Billers should watch out for mandatory language such as that in a clause I once reviewed, in a customer's purchase-order fine print:

–  The clause in question required any supplier seeking reimbursement to "flag" any even-arguably borderline expenses.

–  Presumably, that requirement was to help avoid unpleasant surprises in reimbursement requests.

–  But a party incurring expenses probably wouldn't want to agree to a mandatory expense-flagging requirement — because a stingy reimbursing party could try to use a supposed flagging failure as an excuse to withhold reimbursement.

If a Payer wanted to insist on preapproval rights, it could ask for language such as the following:

Note that under the above language, a Biller would not be breaching the Con­tract if it didn't get preapproval: Instead, the Biller simply might not get paid — which likely would be plenty of motivation for the Biller to get preapproval.

Suppose that a Biller submits a request for reimbursement that doesn't comply with this Clause, and Payer's accounts-payable people process the request and pay the reimbursement. In that situation, Payer should be able to recover the payment, or to take an "offset" (see Clause 2.14.5) against the next payment due, without having Biller object that Payer supposedly waived the noncompliance.

A Payer drafter could use language along the following lines to be explicit about this:

An "absolute" guaranty would likely waive the Guarantor's defenses to the Debt — that's why some drafters for creditors like for want guaranty language to start out, "[GuarantorName] absolutely and unconditionally guarantees …." The word absolutely could preclude the guarantor from contesting the validity of the underlying payment obligation (see section 2.10.15).

A guaranty should be clear about just whose obligations are being guaranteed, because a creditor's aggressive position on this issue could lead to litigation. For an especially-aggressive case of a creditor suing on a guaranty to try to cover an unrelated debt, see a 2013 Fifth Circuit case. See McLane Foodservice, Inc. v. Table Rock Restaurants, LLC, 736 F.3d 375 (5th Cir. 2013).

A standard-form contract might include guaranty language that the parties might not have specifically discussed but that could be enforceable against an individual who signs on behalf of a corporation or LLC. Example: This happened in a Florida case where:

• A corporation, 688 Skate Park, was the tenant in a lease.
• The signature block correctly listed 688 Skate Park as the party agreeing to the lease.
• The lease was signed on behalf of 688 Skate Park by one Jay Turner "as its President."
• Unfortunately for Mr. Turner, though, the lease form also included a statement that "the individual executing this Lease on behalf of said corporation, limited liability company or limited partnership, guarantees the obligations of Tenant hereunder."

The result: A Florida appellate court held that Mr. Turner could be personally liable on the lease. See Coleman v. 688 Skate Park, Inc., 40 So.3d 867 (Fla. App. 2010) (reversing district court's dismissal of landlord's suit against guarantor; emphasis added).

Example: Similarly, in a Mississippi supreme court case, a company president signed a commercial lease in his representative capacity — but the lease also contained language stating that the company personally and unconditionally guaranteed the company's financial obligations. This, said the supreme court (citing cases), had the effect of binding the company president to the lease's arbitration clause. See R.K. Metals, LLC v. E & E Co., No. 023-CA-00620-SCT, slip op. (Miss. Mar. 6, 2025) (affirming summary judgment).

In legal writing, especially in financial contexts, guaranty (as a noun; plural: guaranties) is a document that a party signs to guarantee (as a verb) payment of another party's debt. See Guarantee, Black's Law Dictionary 849, 850 (11th ed. 2019).

See generally the following:

–  Stephen L. Sepinuck, Suggestions for Drafting Guaranties, archived at https://perma.cc/QVY7-YNPH (discussing various waivers of defenses).

–  Joshua Stein and Elaine Wang, Revisiting The 24 Defenses Of The Guarantor — 24 Years Later, archived at https://perma.cc/DQ8H-NL3Q.

–  Christine Anchia Crousillat and Herman Lipkis, Types of Guarantees in Commercial Leases.

Students: Just skim this appendix.

Example: The Fifth Circuit peremptorily dismissed a guarantor's attempt to assert equitable defenses, because the guarantor "clearly waived any right to interpose defenses that belonged to [the debtor]." N. Am. Svgs. Bk. v. Nelson, 103 F.4th 1088, 1095 (5th Cir. 2024) (affirming summary judgment in favor of lender).

Example: The CEO of a bankrupt company got nowhere in arguing that he shouldn't be liable on his personal guaranty of nearly $42 million that the /company owed to a bank. The CEO asserted that the debt had been fraudulently incurred, without the CEO-guarantor's knowledge, by the since-deceased president of the company (a different individual). New York's highest court rejected the CEO's argument, holding that his allegations did not overcome the waiver of defenses and "absolute and unconditional" liability provision in the guaranty. See Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 25 N.Y.3d 485, 36 N.E.3d 80, 15 N.Y.S.3d 277 (2015) (affirming reversal of summary judgment in favor of guarantors).

Counterexample: The federal bankruptcy court in the Southern District of New York held that liquidated-damages provisions in aircraft leases were unenforceable penalties and thus — as a matter of public policy — could not be enforced against the leases' guarantors any more than they could be enforced against the original debtors. See Moayedi v. Interstate 35/Chisam Road, LP, 438 S.W.3d 1, 3 (Tex. 2014).

Counterexample? The Seventh Circuit affirmed summary judgment that a guarantor's waiver of defenses did not waive the guarantor's right to assert the statute of limitations as a defense, because the statute affected only the legal enforceability of the guaranty without negating the underlying obligation. See Hovde v. ISLA Develpment LLC, 51 F.4th 771, 777 (7th Cir. 2022) (affirming dismissal of creditors' claim against guarantor on statute-of-limitations grounds).

To speed up negotiation, a drafter representing a Biller might not want to include an interest provision in the Con­tract, because:

–  Even without a contract provision, the law might allow the charging of interest on past-due amounts. For example, section 302.002 of the Texas Finance Code states in part: "If a creditor has not agreed with an obligor to charge the obligor any interest, the creditor may charge and receive from the obligor legal interest at the rate of six percent a year on the principal amount of the credit extended beginning on the 30th day after the date on which the amount is due. …"

–  Some customers have been known to announce, imperiously: We don't pay interest, period, and if you want our business, that's the way it is. And so even bringing up the subject of interest might "poke the bear," i.e., cause the Payer to insist that the Con­tract prohibit the Biller from charging interest — and such a prohibition would likely override the law's allowance of interest charges.

So: For a Biller, this could be one of those times when silence (about interest charges) might be the better choice during negotiation of the Con­tract.

Importuning language ("charging the illegal interest was just a mistake!") can work in some jurisdictions such as Texas, which allow parties to reduce the chances of usury problems by agreeing in advance to take certain actions in case of unlawful interest charges. See generally Spence (SDLLaw.com 2020) (with extensive citations to Texas case law).

But such importunings might well have little or no effect in jurisdictions such as New York, which apparently brushes off usury-savings clauses entirely (although the state's usury laws contain significant exceptions). American E Group LLC v. Livewire Ergogenics Inc., No. 1:18-cv-3969, slip op. at 1 (S.D.N.Y. Jan. 28, 2020); see also id. at part III.C at 12 & n.13 (extensive citations of N.Y. case law).

For a detailed review of the history of New York's usury law, see the Adar Bays opinion by the state's highest court, which held that if interest charged on a loan to a corporate borrower is determined to be criminally usurious, then the contract is void ab initio (Latin for "from the outset"). See Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 325, 179 N.E.3d 612 157 N.Y.S.3d 800, 2021 NY Slip Op 05616 (2021) (on certification from 2d Cir.), subsequent proceeding, Adar Bays, LLC v. GeneSYS ID, Inc., 28 F.4th 379 (2d Cir. 2022) (vacating and remanding summary judgment order).

Likewise, Rhode Island's supreme court acknowledged that the state's usury statute was "draconian" and "strong medicine," because the legislature had put the risk of charging too high an interest rate onto the lender in "an inflexible, hardline approach to usury that is tantamount to strict liability …." The court affirmed a trial-court ruling that a commercial loan agreement for more than $400,000 was void as usurious. LaBonte v. New England Dev't R.I., LLC, 93 A.3d 537, 544 (R.I. 2014).

Michigan: The state's supreme court held :

[I]n determining whether a loan agreement imposes interest that exceeds the legal rate, a usury savings clause is ineffective if the loan agreement otherwise requires a borrower to pay an illegal interest rate. This is so even if some of the interest is labeled something else, such as a "fee" or "charge."

Enforcing a usury savings clause in this circumstance would undermine Michigan's usury laws because it would nullify the statutory remedies for usury, thereby relieving lenders of the obligation to ensure their loans have a legal interest rate.

In short, a lender cannot avoid the consequences of contracting for a usurious interest rate simply by including a savings clause in the contract.

Soaring Pine Capital Real Estate & Debt Fund II, LLC v. Park Str. Grp. Realty Svcs., LLC, 511 Mich. 89, 999 N.W.2d 8, 11 (2023) (reversing and remanding court of appeals' affirmance of summary judgment; cleaned up, extra paragraphing added).

Relatedly, a New York intermediate appellate court observed that "where a loan agreement is usurious on its face, usurious intent will be implied and usury will be found as a matter of law." Roopchand v. Mohammed, 154 A.D.3d 986, 988-89, 62 N.Y.S.3d 514, 2017 NY Slip Op 07476 (N.Y. App. Div. 2017) (affirming summary judgment dismissing suit to collect on promissory note) (cleaned up).

Likewise, the District of Columbia Court of Appeals (which is not the federal D.C. Circuit) observed:

It would run contrary to our usury statute to permit creditors to avoid its sting via savings clauses purporting to cap the loan’s interest rate to the maximum allowed by law. The animating force of usury statutes is to relieve the borrower of the necessity for expertise and vigilance regarding the legality of rates he must pay, putting that onus instead on the lender to set the rate in clear terms that are within the bounds of the law.

A usury savings clause will not save a usurious transaction when a note is usurious on its face, that is, when the savings clause is directly contrary to the explicit terms of the contract, or when there is no evidence of the lender attempting to effectuate the savings clause.

That is why many jurisdictions have ruled that usury savings clauses, like the one Sloan relies upon here, can never operate to rescue an otherwise facially usurious rate.

In short, it is contrary to public policy to enforce a usury savings clause if the interest provided in the loan agreement is otherwise facially usurious at the time of contracting.

Sloan v. Allen 323 A.3d 439, 444 (D.C. App. 2024) (cleaned up, formatting edited).

Not all charges for past-due amounts will be deemed "interest" under applicable law; here are a few examples of charges that were held not to constitute usurious interest under Texas law:

• A bank's service fee for a bounced check (an "NSF charge"); See First Bk. v. Tony's Tortilla Factory, Inc., 877 S.W.2d 285, 285 (Tex. 1994).
• A cable-TV provider's administrative fee, charged for late bill payment. See Garcia v. Texas Cable Partners, L.P., 114 S.W.3d 561 (Tex. App.—Corpus Christi 2003) (affirming summary judgment in favor of cable company) (citing cases); see also, e.g., Gomez v. Niemann & Heyer, L.L.P., No. 1:16-CV-119-RP (W.D. Tex. Oct. 7, 2016) (denying motion to dismiss claims against debt-collector law firm; citing Garcia) (see also earlier order explaining background).

A federal trial court in California held that a usury-savings clause operated only in the event of default in payment on promissory note and did not "unconditionally operate to limit the interest rate [on the note] to the maximum non-usurious rate." Consequently, the court denied the lenders' motion for summary judgment.

In re Village Concepts, Inc., slip op. at part V.H (E.D. Cal. Mar. 17, 2015) (cleaned up).

Under New York law, "a stock conversion option that permits a lender, in its sole discretion, to convert any outstanding balance to shares of stock at a fixed discount should be treated as interest for the purpose of determining whether the transaction violates N.Y. Penal Law § 190.40, the criminal usury law"; and "if the interest charged on a loan is determined to be criminally usurious under N.Y. Penal Law § 190.40, [then] the contract is void ab initio …." Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 324 (2021), on certification from Second Circuit in 962 F.3d 86 (2d Cir. 2020), subsequent proceeding, Adar Bays, LLC v. GeneSYS ID, Inc., 28 F.4th 379 (2d Cir. 2022) (vacating and remanding summary judgment order).

By statute in Texas (and other jurisdictions), clearly offering a lower price for cash payment, as well as a higher credit- or time-based price, does not count as interest if the purchaser knowingly chose the higher price. See Spence, supra, at 27 (with extensive citations, including Tex. Fin. Code § 301.002(4)).

Invoices typically aren't required in "strategic" transactions such as real-estate sales and mergers and acquisitions — instead, the other party simply won't go ahead with the deal (e.g., sign the real-estate deed or the merger closing documents) until the agreed payment is received. (Sometimes an agreed payment will be received by an escrow agent, not by you.)

And: In an employment contract, it'd be nonsensical to require the employee to provide the employer with an invoice for each paycheck.

For that matter: In the United States, the Fair Labor Standards Act might well make it illegal for an employer even to require an employee to turn in a timesheet as a prerequisite to getting paid. See, e.g., Can we hold an employee’s paycheck because he or she didn’t turn in a timesheet? (SHRM.org, undated).

But invoices are increasingly required even in contracts such as intellectual-property license agreements: The payer would be the licensee of the IP in question, and for example submits a report of its licensed sales to the IP owner or other licensor — possibly with a proposed computation of royalties (or other amounts) due; the IP owner then sends an invoice to the licensee.

Biller: Many (and even most) payers will require someone knowledgeable to approve payment of each invoice. But in a trusted business relationship, you shouldn't even be sending an invoice in the first place unless you have reason to think that in fact you're entitled to payment.

Repeated invoice problems shouldn't necessarily give rise to the payer accusing you of breach of contract or misrepresentation — but it could happen ….

To speed up payment, it might be worth the biller's time to check whether the payer prefers any particular method of invoicing. For example, the payer might use a particular electronic invoicing system and might prefer — or even insist — that its suppliers submit invoices that way.

If the Con­tract specifies that one or more particular payment methods may — or must — be used, then it'd be a good practice for each invoice to include a suitable reminder of that fact.

A.  The timing of invoice issuance can affect the parties' respective cash flows:

It's fairly typical for suppliers to send invoices only after they finish their performance under the Con­tract, for example, upon delivery of ordered goods or completion of services performance — and it's also very typical for customers to prefer (even insist) on this.

BUT: In construction- and other services agreements, the service provider will often want to get some money up front (to pay for materials, etc.) and be paid as soon as possible after particular phases of the work are completed, as opposed to waiting to be paid until the work is 100% complete.

B.  In the latter case, the Con­tract will typically state when interim invoices are to be sent, e.g.:

• every month (as is typically the case with law firms' invoices) or every fiscal quarter, and/or
• when specified performance targets are reached, e.g., when the foundation has been poured for a building under construction.

A payer might have a legitimate reason for imposing a deadline for invoice submission. For example, you might be concerned about having to "restate" financial results for the relevant fiscal period, because such a "restatement" could be necessary if a late invoice were to materially alter the customer's already-reported results.

And for a public company, a restatement of reported financial results is a Very Bad Thing — a restatement can lead to a sharp drop in the company's stock price, resulting from diminished investor confidence in the company's accounting practices. This happened to one company, Calgon Carbon, because the company's general counsel didn't timely forward outside law-firm invoices to the company's accounting department.² (See generally Investopedia, Restatement.)

To impose a strict deadline for invoice submission, a drafter could consider the following optional language:

Caution: In some jurisdictions, a court might regard such a waiver provision as being a forfeiture — and as the Texas supreme court explained, generally under U.S. law, "[f]orfeitures are not favored … contracts are construed to avoid them." Fischer v. CTMI, LLC, 479 S.W.3d 231, 239 (Tex. 2016) (citations omitted).

Payer: It's probably not a good idea to lock down the invoicing method in the Con­tract: That would mean that a change to that procedure could require an amendment to the Con­tract. That'd likely be a pain.

Sure, as a practical matter, if you paid an "improperly" submitted invoice, that'd likely be a waiver of the submission requirement in the Con­tract. But why set that up as a potential dispute?

And keep in mind that, in a B2B context, the biller will usually be motivated to go along with any (reasonable) request that you make about invoice submission request — because the biller will (probably) care more about getting paid quickly than about insisting on using any particular method for submitting invoices.

Payer: You'll want to act promptly if an invoice doesn't contain enough "substantive details" to allow for appropriate review. A Delaware trial court held that a payer had waited too long:

Nor is the Court persuaded that Trimble's obligation to timely dispute the invoices was nullified by the invoices' lack of substantive details.

The Court accepts that Trimble may have been disadvantaged by being contractually required to dispute invoices with forty-five days when the invoices didn't provide many specifics to dispute.

But litigation is not an arena in which to bargain for new terms. Trimble's concern would have been better raised when the [contract] was negotiated in early 2020.

Barring that, Trimble could have brought it up in response to any one of the dozens of invoices that Trimble approved and paid.

Trimble didn't do so. Instead, Trimble waited until it had reason to evade Section 5.1 to bemoan this supposed inequity.

Outbox Sys., Inc. v. Trimble, Inc., No. N21C-11-123, slip op. at part IV.A.1 (Del. Super. Ct. Apr. 30, 2024) (decision after trial) (cleaned up, extra paragraphing added).

A set of Walmart invoicing requirements states as follows:

Invoices submitted to Walmart must have the following information:

• Supplier Name / Address (as registered with Walmart)
• Walmart Supplier Number (as provided on your Welcome email)
• Invoice Number (must be unique, numeric and a maximum of 15 characters)
• Invoice Date
• Invoice amount
• Invoice amount
• PO being invoiced (one per Invoice / Credit Memo) – Invoices without a PO number will be rejected
• Invoice amount
• Walmart Business Contact (Your main point of contact for day-to-day work)
• Invoice amount
• Walmart Department Name
• Detail of service / goods provided
• Remittance Information
• Contract Number

Here's a set of Honeywell invoicing requirements — extra paragraphing has been added to break up the "spaghetti clause" (see 30.3).

13.  Invoicing and Payment

After each shipment made or service provided, Supplier will submit an invoice listing a description of the Goods provided and, as applicable, part numbers, quantity, unit of measure, hours, and the unit and total prices.

This invoice must match the corresponding Purchase Order pricing, quantities, and terms,

and must be sent to the invoice address listed on the Purchase Order.

All applicable taxes and other Government charges including, but not limited to, sales, use, or excise taxes; value added tax, customs duties, fees and all incidental charges including but not limited to royalties, selling commissions, nonrecurring engineering, or other incidental charges must be separately itemized and identified on the invoice.

The invoice must also include the following information in English, or in the destination country’s official language if required:

(a) name and address of Supplier and the Honeywell entity purchasing the Goods;

(b) name of shipper (if different from Supplier);

(c) Honeywell’s Purchase Order number(s);

(d) country of export;

(e) detailed description of the Goods;

(f) Harmonized Tariff Schedule number;

(g) country of origin (manufacture) of the Goods, or if multiple countries of origin, the country of origin of each part shipped;

(h) weights of the Goods shipped;

(i) currency in which the sale was made;

(j) payment terms;

(k) shipment terms used; and

(l) all rebates or discounts.

The invoice will be accompanied (if applicable) by a signed bill of lading or express receipt evidencing shipment.

Payment of an invoice does not constitute acceptance of the Goods

and is subject to appropriate adjustment should Supplier fail to meet the requirements of the Purchase Order.

Payment terms are net 120 days from receipt of a Honeywell-approved invoice unless otherwise stated on the face of the Purchase Order or other written agreement executed by both parties.

Invoices will not be approved unless they accurately reference conforming Goods received by Honeywell or services satisfactorily performed for Honeywell.

Payment will be scheduled for the first payment cycle following the net terms for the Purchase Order.

In some jurisdictions, a pay-if-paid clause could mean that the Sub cannot seek payment from a backup payer, or "surety," such as a payment bond, if there is one. See BMD Contractors, Inc. v. Fid. & Dep. Co., 679 F.3d 643, 649 (7th Cir. 2012) (affirming summary judgment in favor of issuer of payment bond). See generally, e.g., Robert Cox, Pay-if-Paid Clauses: A Surety's Defense for Payment Bond Claims? (JDSupra.com 2019).

If the Sub is going to agree to pay-if-paid terms with the Prime, then the Sub should consider asking the Prime to commit to maintaining "payment security" (see Clause 2.4) for all amounts to be paid by the Prime — including, without limitation, amounts to be paid under any (accepted) purchase orders issued by the Prime under the Con­tract. (This represents what might be one of the most common "use cases" for payment security.)

The Sub might want the payment security to take the form of:

• an irrevocable, unconditional letter of credit (see the notes at 18.1), or
• a bank guarantee (see Clause 2.10), or
• a payment bond,

in any of these cases, on terms that are reasonably acceptable to (and perhaps approved in advance by) the Sub.

Here's a partial list, based solely on what I've encountered in my reading; be sure to check for the jurisdiction of interest.

Various states restrict or prohibit pay-if-paid clauses, e.g., California, Illinois, Massachusetts, North Carolina, South Carolina, Virginia, and Wisconsin. See Dismas Locaria and Caleb McCallum, Even Federal Contractors and Subcontractors Should Pay Heed to State Law on Conditional Payment Clauses (JDSupra.com 2022).

Nevada's supreme court has noted that "pay-if-paid provisions, while not void per se, are unenforceable if they run contrary to the rights and requirements established under NRS 624.624-.630" (state-law statutory provisions governing payment of subcontractors, etc.) and thus are to be examined on a case-by-case basis. See Helix Elec. of Nevada, LLC v. APCO Constr., Inc., 138 Nev. Adv. Op. 13, 506 P.3d 1046, 1048 (Nev. 2022) (affirming district court; pay-if-paid provision was unenforceable).

New York appears to entirely ban pay-if-paid clauses. See West-Fair Elect. Contractors v. Aetna Cas. & Surety Co., 87 N.Y.2d 148, 158, 661 N.E.2d 967 638 N.Y.S.2d 394 (1995) (on certification from Second Circuit).

Ohio, on the other hand, has the opposite rule, allowing even pay-if-paid provisions. See Transtar Electric, Inc. v. A.E.M. Electric Serv. Corp., 2014 Ohio 3095, 140 Ohio St. 3d 193. The state supreme court's decision has been criticized for not addressing public-policy considerations. See Scott Wolfe, Jr., Ohio Supreme Court Gets Pay If Paid Decision Wrong, Hurts Subcontractors (ZLien.com 2014).

Texas, by statute, has regulated "contingent payment" clauses for certain construction subcontracts. See Tex. Bus. & Comm. Code § 56.001 et seq., especially § 56.054.

Virginia's SB-550 bans pay-if-paid and pay-when-paid provisions in certain construction subcontracts, as well as imposing seven- or 45-day payment deadlines in many cases. See generally James Harvey, Virginia’s New Construction Payment Terms (Part 1) and (Part 2) (JDSupra.com 2022).

Good morning — I'm calling to follow up on my emails, plural, about your past-due invoices; can you please tell me what the holdup is?

          –Most suppliers, to at least some of their customers at some point, probably.

Payment disagreements aren't uncommon:

• Billers can make mistakes (or overbill).
• Payers can misunderstand invoices.
• Payers can intentionally stiff their vendors, perhaps citing "reasons" that might or might not be valid.

When a Payer doesn't pay the entire amount — or even any amount — of a Biller invoice, the shortfall could occur, for example: • because the Payer believes that the Biller has incorrectly billed the Payer; or • because the Payer takes an offset, that is, reduces the amount paid by an amount supposedly owed by the Biller.

For payments by check, the Con­tract could require the check to be drawn on, for example:

• a U.S. bank; or
• a specifically-identified bank; or
• any bank to which the Biller does not reasonably object in writing.

When an ordinary check is written, the money stays in the Payer's account until the check is "presented" to the Payer's bank for payment. This means that the check might not clear if the Payer were to file for bankruptcy protection, because the bank is likely to freeze the Payer's account. See generally Check (Investopedia.com).

(These days, check clearance is almost always done electronically if the Biller uses a different bank than the Payer.)

Payment by automated clearing house ("ACH") is an electronic debit transaction in lieu of a check. See generally Automated Clearing House (ACH) (Investopedia.com).

Caution: As with payment by check, (2.14.10.4), if the Payer files for U.S. bankruptcy protection before the check clears, then the check might never clear.

Caution: It's a bad idea to include, in the Con­tract itself, Biller's bank-account information for ACH transaction:

– Suppose that the Con­tract were to be disclosed to others (such as in a due-diligence effort) or to become publicly available — such as the Payer's having to file the contract with the SEC as a "material agreement" but failing to ask for confidential treatment of the bank-account information.

– It's not unknown for one party to expose another party's confidential information to the public by filing the information with the SEC. Example: This happened, for example, in a 2012 Delaware supreme court case.⁴

– In such a situation, the Biller's bank-account information could end up available to an unknown number of others.

A better way to do this is to say, in the Con­tract, that the Biller will separately provide wire-transfer information. (This should be done by secure means.)

A certified check is written by the Payer and drawn on the Payer's bank account, but the bank guarantees to the Biller that the bank has put a hold on Payer's account for the amount of the check. This means that the check shouldn't bounce if it can legally be paid. See Certified check (Investopedia.com).

Caution: With a certified check, the money stays in the Payer's account until the check clears; this means that the same bankruptcy issues exist as for regular checks (2.14.10.4).

Caution: Certified checks can be counterfeited, in which case the bank might not have to pay, and if the Biller cashes the check, the Biller might have to refund the money (that's probably in the bank's standard customer agreement that the Biller had to sign to open an account with the bank).

A cashier's check is written by the bank itself using funds in the Bank's own account, not the Payer's account: When writing that check, the bank transfers the stated amount of money from the Payer's account to the bank's own account. See Cashier's check (Investopedia.com).

(Note the difference between this and a certified check, discussed above.)

The Con­tract might specify what bank, or what type of bank, is to be used for a cashier's check.

Caution: Cashier's checks can be counterfeited, meaning that the Biller might be on the hook to refund the payment, as noted above.

Payment by wire transfer would give the Biller "immediately-available funds" that the Biller could immediately withdraw and spend if desired. See generally Wire transfer and Available funds (each at Investopedia.com).

Caution: As with ACH payments (see 2.14.10.5), don't include bank-account information in the contract itself.

It's pretty well established that when the Payer makes a payment under the Con­tract, that in itself doesn't limit any rights that the Payer might have concerning the subject of the payment — such as, for example, warranty rights against the Biller.

Example: Suppose that the Payer hasn't yet paid the Biller's invoice, and that the Payer and the Biller are having a dispute about something relating to the invoice, perhaps about the quality of the Biller's deliveries. The Payer could fear that paying the invoice might be interpreted as acceding to the Biller's position or otherwise prejudicing the Payer's rights. But that shouldn't be the case unless the Payer had clearly agreed otherwise.

In some jurisdictions, there might be a statutory deadline for the Payer to object to a Biller invoice, under what are known as "prompt payment acts."⁵

In some jurisdictions, if someone pays an incorrect invoice without protest, it might not be possible to recover the overpayment. See James D. Abrams and Erica L. Cook, Voluntary Payment Doctrine: A Useful Affirmative Defense or Instrument of Evil? (AmericanBar.org.2016), archived at https://perma.cc/5HY2-9YD2./

Payment disputes are a quintessential example of how last-offer arbitration (a.k.a. "final offer" or "pendulum") can be used to promote settlement, as discussed at Clause 6.4.

From the other side of the coin: Question: What if you're a supplier and a customer sends you a partial payment that's marked "Payment in Full"? Answer: If you cash the check, you might very well be stuck — possibly losing out on a very-large amount due. See, e.g., Scott Wolfe, Jr., Are Checks with “Payment in Full” in Memo Line Legally Binding? … (Levelset.com 2019 & 2021); Sara Lipowitz, 'Paid in Full' Check Memo (Lawyers.com 2020).

Example: The insurance carrier United HealthCare of Texas found itself stuck with a $24,000 settlement of United's $2 million overpayment claim against a physicians' group:

• United asserted that the physicians' group had been overpaid by some $2 million.
• As a settlement offer, the physicians' group sent — to United's lockbox contractor, Wells Fargo — a check for $24,000, marked "Full and final payment" of the dispute. The physicians' group also sent copies of the settlement proposal to multiple United addressees, including United's in-house counsel.
• As United's lockbox contractor, Wells Fargo automatically cashed the settlement check.

A Texas court held that United had ample notice that:

• the check was part of a settlement proposal, and
• had United exercised due diligence, it would have had ample time to stop its lockbox contractor, Wells Fargo, from cashing the check.

Therefore, said the court, United was bound by the settlement offer — and thus recovered only $24,000 of what United claimed had been United's $2 million overpayment to the physicians' group. See United Healthcare of Texas, Inc. v. Low-T Physicians Service, P.L.L.C., 660 S.W.3d 545 (Tex. App–2023) (affirming declaratory judgment).

It'd be fairly typical for the Biller to apply payments under a contract to the Payer's then-unpaid payment obligations — in the order of date incurred — as follows:

– First: The money paid would be used to pay off any accrued but unpaid interest;

– Then: Any money left over would be applied to reduce the unpaid principal balance. See generally David Cook, The Interest Tail Wags the Profit Dog, Business Law News, Issue No. 3, 2014 (State Bar of California Business Law Section; available on-line to Section members).

Order-of-payment language is often seen in promissory notes and other loan documents, and sometimes in contract language allowing interest to be charged for past-due payments (concerning which, see 2.11).

See Clause 2.2 and its commentary concerning demands for payment "up front" even if the Con­tract provides other payment terms.

In theory, being an IP infringer, due to late payment, could have serious financial consequences:

• Suppose that a customer were late in paying the price of a patented- or copyrighted product purchased from a vendor.
• The vendor could try to claim that the customer's unpaid use of the product constituted infringement of the vendor's intellectual-property rights — and that the customer therefore owed the vendor a portion of the customer's profits as indirect damages for the infringement, not merely as damages for breach of contract.

Your author is not aware of any cases specifically on point. But some well-known companies have been hit with such profits-as-indirect-damages awards.⁶

Pro tip: If the Biller didn't want to wait so long for its money, it could consider factoring its accounts receivable, namely selling its invoice(s) to a third-party "factor" — but at a discount from face value. See generally 14.1.

(A strong-arming customer's purchase order form might purport to prohibit the Biller from factoring the customer's invoices.)

Relatedly, see the discussion of "pledges," to a creditor by a debtor, of the debtor's right to be paid under a contract, at 8.4.

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. See GT Issa Constr., LLC v. Blalock, No. E2020-00853-COA-R3-CV, slip op. (Tenn. App. Nov. 23, 2021) (affirming judgment on jury verdict).

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 3.1.5.

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 3.1.5).

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. See O'Bannon v. NCAA, No. 09-3329 (N.D. Cal. Mar. 31, 2016), aff'd, 739 F. App'x 890, No. 16-15803 (9th Cir. Jun. 29, 2018) (unpublished). The district court had reduced the original fee award of nearly $46 million, granted by a magistrate judge; see 114 F. Supp. 3d 819 (N.D. Cal. 2015) (magistrate judge award). See also, e.g., Dan Whateley and Ashley Rodriguez, How NIL deals and brand sponsorships are helping college athletes make money (2024).

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." Kelly v. House, 47 Cal. App.5th 384, 390 (Cal. App. 2020) (reversing denial of statutory attorney fees).

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

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. See, e.g., Allied Indus. Scrap, Inc., v. OmniSource Corp., 776 F.3d 452 (6th Cir. 2015), discussing Wilborn v. Bank One Corp., 906 N.E.2d 396 (Ohio 2009). In the Wilborn case cited by the Sixth Circuit, the state's supreme court had affirmed dismissal of a lawsuit by borrowers against lenders; the court rejected the borrowers' claim that a unilateral attorneys' fee clause, in a residential mortgage loan agreement form, should be held void as contrary to public policy.

(In a lease, the American Rule,3.1.5 combined with 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 3.1.11.4.)

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. Much the same is true in Oregon, and New York has a similar rule for consumer contracts. See, e.g., Elation Sys. Inc. v. Fenn Bridge LLC, 71 Cal. App. 5th 958, slip op. at 23-25 (Cal. App. Nov. 22, 2021) (unpublished portion of opinion that vacated and remanded award of attorney fees to prevailing defendants); Or. Rev. Stat. § 20.096; NY Gen. Obl. Law § 5-327(2).

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." Anderson v. Magellan Health, Inc., 298 A.3d 734, 739-40 (Del. Ch. 2023) (awarding $75,000 in attorney fees to shareholder's counsel but not the $1.1 million requested).

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. See N.C. Gen. Stat. § 6-21.2, discussed in Colorado Bankers Life Ins. Co. v. Academy Financial Assets, LLC, 60 F.4th 148, 152-56 (4th Cir. 2023) (district court did not err in following plain language of statute and imposing a 15% fee award of just over $6 million without requiring evidence of attorney’s actual billings or usual rates).

Applying North Carolina law, the Fourth Circuit explained some facts of life to customers that negotiate services contracts containing consequential-damages exclusions. This took place in a case where:

• While doing an $8,400 job, a fumigation company had improperly applied a dangerous pesticide to a peanut dome owned by the plaintiff — this led to "fire, an explosion, loss of approximately 20,000,000 pounds of peanuts, loss of business, and various cleanup costs"; the plaintiff's total losses amounted to some $19 million.
• The peanut company (and its insurer) filed suit against the fumigation company, but the trial court granted summary judgment in favor of the fumigation company because the company's contract excluded consequential damages.

The appeals court affirmed, explaining:

[Customers] faced with consequential damages limitations in contracts have two ways to protect themselves.

First, they may purchase outside insurance to cover the consequential [sic] risks of a contractual breach [by the supplier],

and second, they may attempt to bargain for greater protection against breach from their contractual partner.

Severn [the plaintiff] apparently did take the former precaution — it has recovered over $19 million in insurance proceeds from a company whose own business involves the contractual allocation of risk.

But it did not take the latter one, and there is no inequity in our declining to rewrite its contractual bargain now.

Severn Peanut Co. v. Industrial Fumigant Co., 807 F.3d 88, 92 (4th Cir. 2015) (affirming summary judgment in favor of service provider that had caused millions of dollars to its customer's facility) (formatting altered).

Consequential damages can be grossly disproportionate to the value of the underlying contract. Example: In 2024, the notorious Crowdstrike outage — caused by an error in an update to CrowdStrike's cybersecurity software — caused millions of computer systems around the world to crash, with estimated economic damage of some USD $10 billion, including cancellation of thousands of scheduled airline flights. Reportedly, CrowdStrike's license agreement limited customers' remedies to a refund of fees paid, but many big customers, such as Delta Airlines, weren't accepting that, and notified CrowdStrike that it should prepare for litigation.

Students: Just skim the rest of this section's examples.

Example: Noted practitioner-commentator Glenn West has observed:

In 1984, an Atlantic City casino entered into a contract with a construction manager respecting the casino’s renovation. The construction manager was to be paid a $600,000 fee for its construction management services. In breach of the agreement, completion of construction was delayed by several months. As a result, the casino was unable to open on time and lost profits, ultimately determined by an arbitration panel to be in the amount of [$14.5 million]. There was no consequential damages waiver in the contract at issue in this case.

Glenn D. West, Consequential Damages Redux: An Updated Study of the Ubiquitous and Problematic "Excluded Losses" Provision in Private Company Acquisition Agreements, 70 Bus. Lawyer 971, 984 (Weil.com 2015) (formatting altered, footnote omitted).

Example: In Australia, an opthmalmologist, a Dr. Kitchen, wrongfully terminated his service agreement with an eye clinic. The service agreement didn't include an exclusion of consequential damages. The Supreme Court of Queensland held him held liable for the clinic's lost profits and other amounts, in the total sum of more than AUD $10 million. See Vision Eye Institute Ltd v Kitchen, [2015] QSC 66, discussed in Jodie Burger and Viva Paxton, Australia: A stitch in time saves nine: How excluding consequential loss could save you millions (Mondaq.com 2015).

Example: In Ohio, a contractor agreed to gut and remodel a building for use as a neighborhood bar. The contractor didn’t do so by the agreed completion date — causing the customer, a would-be bar owner, to miss the November-December holiday season. The court agreed with the bar owner that the contractor’s conduct had been "reckless" — causing the breach to fall within a carve-out from the contract’s exclusion of consequential damages. As a result, the court affirmed an award of the bar owner’s lost profits. See Bakhshi v. Baarlaer, 2021 Ohio 13, No. 28767, slip op. ¶¶ 68-69 (Ohio App. 2021).

Example: From a corporate press release: A Taiwan company, TSMC, manufactures computer chips. It recently learned that "a batch of photoresist [a light-sensitive material used in 'etching' circuits onto chips] from a chemical supplier contained a specific component which [sic] was abnormally treated, creating a foreign polymer in the photoresist." BOTTOM LINE: "This incident is expected to reduce Q1 revenue by about US$550 million …."

Example: Here's a dated but famous example from 1999: A botched software implementation at Hershey caused it to be unable to deliver some $100 million of Hershey's Kisses for Halloween — the biggest candy "season" of the year. See, e.g., Thomas Wailgum, 10 Famous ERP Disasters, Dustups and Disappointments (ComputerWorld.com 2009).

Now imagine that you were the supplier that provided the software to Hershey, or that provided the photoresist to the chip manufacturer: How would you like to have to litigate which damages were "direct" and which were "consequential"?

Students: Read the IBM example below, then just skim the rest of this section.

Discerning the difference between excluded consequential damages and recoverable "general" damages can sometimes be difficult; courts are often forced to parse sometimes-needlessly complex contract language and lawyer arguments to determine which is which.

Classifying particular types of damages as consequential or "direct" — a poor choice of names, IMHO — might be a very subjective exercise. Example: Consider an Indiana appellate court's 2018 decision in the long-running Indiana v. IBM litigation — in a second trial (on remand) over a failed computer-system acquisition, the trial judge held that:

–  IBM had to pay for a replacement computer system that the state acquired after IBM was fired, known as the "Hybrid" system — even though the Hybrid system was an upgrade from the system that IBM had agreed to build; and

–  The additional cost of the upgrade, said the trial judge, was properly classified as direct [sic] damages resulting from IBM's breach — and thus was subject to an agreed cap of $125 million — and not as consequential damages, which would have been subject to a much-lower cap of $3 million.

The trial judge's decision was affirmed on appeal. See IBM v. Indiana, 112 N.E.3d 1088, 1100-01 (Ind. App. 2018), summarily aff'd, 138 N.E.3d 255 (Ind. 2019).

But: Dissenting on the upgrade-as-direct-damages issue, a state supreme court judge argued unsuccessfully that:

[I]t was not IBM's breach but the State's decision to switch to the different, more expensive Hybrid system that caused the State to incur these additional expenses. The State's additional, Hybrid-related costs are at most consequential damages, not direct damages.

138 N.E.3d 255 at 261 (Slaughter, J., dissenting in part, concurring in part)

Students: You can just skim the rest of this section.

Example: In a (debatable) 2020 ruling from the Internet age, the New Hampshire supreme court affirmed a trial-court holding that a customer's cost of recreating lost data, necessitated by its outsourcer's alleged mistakes that caused the loss of the data, were "consequential" damages and therefore not recoverable because of an exclusion clause in the contract. See Mentis Sciences, Inc., v. Pittsburgh Networks, LLC, 243 A.3d 1223 (N.H. 2020).

(Less debatably, the court came out the same way on the customer's claim for damages for its inability to bid on certain government contracts due to the unavailability of the lost data.)

Some experienced practictioners (including your servant) believe that a more-sensible approach will sometimes be:

• not to bother with an exclusion of consequential damages, because of the proof difficulties summarized above; and
• instead, to agree to a damages cap (see 3.12), so as to cut the Gordian knot — or to be like Indiana Jones in the streets of Cairo:

Courts will sometimes hold that exclusions of consequential damages are "unconscionable." Indeed, UCC § 2-719(3) specifically says:

Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.

Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable

but limitation of damages where the loss is commercial is not.

(Extra paragraphing added.)

Example: Procura (2019): This lawsuit involved a failed project to install computer software. A federal district court in Minnesota refused to give effect (at least initially) to a consequential-damages exclusion that benefited the vendor, because the court deemed the exclusion to be unconscionable. See Prairie River Home Care, Inc. v. Procura, LLC, No. 17-5121 (D. Minn. Jul. 10, 2019) (denying motion to dismiss claim for consequential damages).

This Clause essentially follows the rule in the landmark 1854 English case of Hadley v. Baxendale (the "corn mill crankshaft case"). Hadley has been much remarked on over the decades; the opinion and its progeny are still relied on in American courts and likely studied by most if not all American law students. In Hadley:

–  A corn mill in Gloucester utilized a steam engine to clean and grind corn.

–  The steam engine's crankshaft broke.

–  The mill owners were informed that to have a new crankshaft made, they would have to ship the broken shaft to a manufacturer in Greenwich so that the new one could be made to the same dimensions, using the broken one as a pattern.

–  The mill owners shipped off the broken crankshaft, but the carrier was five days late in delivering the broken crankshaft to the manufacturer.

The corn mill's owners sued the carrier for, among other things:

• the profits that the corn mill would have earned during the mill's extra "down time" caused by the carrier's delay in shipping the broken crankshaft; and
• the wages that the corn mill's owners had to pay their idle employees during that extra down time.

In an opinion by Sir Edward Hall Alderson, Baron of the Exchequer (i.e., a judge of an English commercial court), the Hadley court reasoned as follows:

Now we think the proper rule is such as the present is this:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising[:]

• naturally, i.e., according to the usual course of things, from such breach of contract itself, or
• such as may reasonably be supposed to have been[:]
  • in the contemplation of both parties,
  • at the time they made the contract,
  • as the probable result of the breach of it.

Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, [then] the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.

But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, [then] he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.

For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants. …

See Hadley v. Baxendale, [1854] EWHC Exch J70 (formatting lightly edited for readability).

Some American courts have tried reformulating the Hadley rule, as discussed at 3.2.9.10, but this Clause sticks to the traditional Hadley formulation.

On the subject of consequential damages, the Restatement (Second) of Contracts uses types of foreseeability to differentiate between general damages and consequential damages.

First are general damages, which, to be recoverable, must have been foreseeable to others generally:

Loss that results from a breach in the ordinary course of events is foreseeable as the probable result of the breach.

Such loss is sometimes said to be the "natural" result of the breach, in the sense that its occurrence accords with the common experience of ordinary persons. …

The damages recoverable for such loss that results in the ordinary course of events are sometimes called "general" damages.

Restatement (Second) of Contracts § 351, "Unforeseeability And Related Limitations On Damages," comment b (citations omitted, emphasis and extra paragraphing added).

Next, are so-called consequential damages, namely uncommon or out-of-the-ordinary damages that nevertheless, at the time the parties entered into the contract, were foreseeable by the breaching party due to special circumstances and thus would be recoverable unless excluded:

If loss results other than in the ordinary course of events, there can be no recovery for it unless it was foreseeable by the party in breach because of special circumstances that he had reason to know when he made the contract. …

The damages recoverable for loss that results other than in the ordinary course of events* are sometimes called "special" or "consequential" damages.

These terms are often misleading, however, and it is not necessary to distinguish between "general" and "special" or "consequential" damages for the purpose of the rule stated in this Section.

Id. (ditto).

Study suggestion: Hand-copy the flow chart below, because research has shown that handwritten notes help with both comprehension and retention.

Some American courts have tried different ways of defining consequential damages, but it's not clear that these redefinitions are helpful.

Example: In AcryliCon USA (2021), the Eleventh Circuit remarked that "[t]he key distinction between direct damages and consequential damages is that the former compensate for the value of the promised performance, while the latter compensate for additional losses incurred as a result of the breach." AcryliCon USA, LLC v. Silikal GmbH, 985 F.3d 1350, 1369 (11th Cir. 2021) (summarizing Georgia law; emphasis added).

Example: In a similar vein, in Severn Peanut (2013), the Fourth Circuit ventured that "[c]onsequential or special damages for breach of contract …. are distinguished from general damages, which are based on the value of the performance itself, not on the value of some consequence that performance may produce." Severn Peanut Co. v. Industrial Fumigant Co., 807 F.3d 88, 90-91 (4th Cir. 2015) (cleaned up, emphasis added). Accord: Mentis Sciences, Inc., v. PIttsburgh Networks, LLC, 243 A.3d 1223, 1228 (N.H. 2020).

This distinction seems unhelpful, though: Arguably, "the value of the performance itself" is the value of the consequences to be produced — no more and no less. As Harvard Business School professor Theodore Levitt famously put it:

People don't want to buy a quarter-inch drill. They want a quarter-inch hole!

Quoted in Clayton M. Christensen, Scott Cook and Taddy Hall, What Customers Want from Your Products (HBS.edu 2006).

Similar thoughts had been expressed previously, e.g., "When you buy a razor, you buy a smooth chin—but you could wear a beard." Quoted in No One Wants a Drill. What They Want Is the Hole (QuoteInvestigator.com 2019).

Perhaps the focus of the value of the performance would be more useful if it were phrased as the market value of the performance itself, i.e., the value that others, not in the plaintiff's particular circumstances, would theoretically pay for the performance.

Example: The Supreme Court of Texas espoused a variation on the Hadley approach in a 1997 decision, where the court held that:

Direct damages are the necessary and usual result of the defendant's wrongful act; they flow naturally and necessarily from the wrong. …

Consequential damages, on the other hand, result naturally, but not necessarily.

El Paso Marketing, L.P. v. Wolf Hollow I, L.P., 383 S.W.3d 138, 144 (Tex. 2012) (cleaned up, formatting altered), quoting Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997).

For cases decided under Texas law, the court's Arthur Andersen test thus replaces Hadley's "usual course of things" with "necessary and usual."

It's unclear, though, how helpful the Texas court's reformulation would be to trial counsel hoping to prove (or refute) a case, or to a jury seeking to distinguish recoverable from unrecoverable damages.

Your author wishes (but I'm not holding my breath) that the legal community could agree to rename "consequential damages" as something like "atypical damages" — both are clunky, but at least the latter one conveys the essence of the concept: While unforeseeable damages are never recoverable, it's possible for damages to be foreseeable in one of two different ways:

• because, in the ordinary course without any special circumstances, reasonable people would have foreseen the damages possibility; and/or
• because, at the time that the parties entered into the contract, the defendant had some other reason to foresee such damages; as the Texas supreme court held: "When one party has given notice of the consequences of breach at the time of contracting, no further inquiry into the foreseeability of those consequences is required"; Signature Indus'l Servs., LLC v. Int'l Paper Co., 638 S.W.3d 179, 192 n.8 (Tex. 2022).
• finally, if neither of the above conditions is shown to be true, then the damages simply aren't recoverable, period. See id. at 184 (reversing court of appeals and rendering judgment against plaintiff because "legally insufficient evidence supported the award of consequential damages").

It's not a good idea to say that the parties agree to have suits heard in the courts "of" the specified forum location. That's because a U.S. court might find that such language precluded the defendant from removing the suit from state court — the courts "of" the forum state — to federal court.

Example: This happened, for example, in Dynamic CRM Recruiting (2022), in which the Fifth Circuit affirmed a federal district court's remand of a removed case to state court in Houston — even though diversity of citizenship existed — because the contract's forum-selection clause required suits to be "brought before the district courts of Harris County, Texas[.]" Dynamic CRM Recruiting Solutions, L.L.C. v. UMA Educ., Inc., 31 F.4th 914 (5th Cir. 2022), esp. at 922 nn.27-32 (citing numerous cases). See also, e.g., Smart Comms. Collier Inc. v. Pope Cty. Sheriff’s Office, 5 F.4th 895 (8th Cir. 2021) (affirming dismissal of federal-court lawsuit because forum-selection clause required litigation in Arkansas state courts) (citing cases); Grand View PV Solar Two, LLC v. Helix Electric, Inc., 847 F.3d 255, 258 (5th Cir. 2017) (affirming remand to state court after removal); Doe 1 v. AOL, LLC, 552 F.3d 1077, 1081-82 (9th Cir. 2009) (per curiam).

Example: CH2M Hill (2019): The contract in question required litigation to be in Linn County, Oregon. When one party sued the other party, the defendant removed the case to federal court. But: As it happens, there's no federal courthouse located in that county — consequently, said the Ninth Circuit, the federal trial court correctly remanded the case to state court. See City of Albany v. CH2M Hill, Inc., 924 F.3d 1306, 1307, 1308 (9th Cir. 2019) (affirming remand to state court).

Drafting lesson: If you want your client (and the other side, of course) to be able to remove to federal court, be sure that your forum-selection clause refers to "the state- and federal courts having jurisdiction in" the specified place, versus "in" the specified place.

Example: Hin-Pro (2015): In this English case: See Hin-Pro International Logistics Limited v Compania Sud Americana De Vapores S.A. [2015] EWCA Civ 401 ¶¶ 4, 61-78 (emphasis added). (Hat tip: English lawyer Mark Anderson, who in his write-up makes additional observations about the case.).

• A Hong Kong freight forwarder used its standard bill-of-lading form in accepting cargo for shipment from China to Venezuela.
• The form provided in part that "[t]his Bill of Lading and any claim or dispute arising hereunder shall be subject to English law and the jurisdiction of the English High Court of Justice in London."

The UK Court of Appeal, after reviewing case law concerning similar language, held that the bill of lading's wording conferred exclusive jurisdiction on the English courts.

Asking for — or insisting on – a forum-selection clause might fall into the category of "be careful what you wish for," because the courts in the forum state might decide matters differently than what you expected. A Massachusetts company learned a painful lesson in that regard in Taylor v. Eastern Connection Operating, Inc., discussed at 3.7.4.

An exclusive-forum clause might be tactically disadvantageous — consider this not-so-hypothetical example:

• You're helping to negotiate a contract between "Ginger" and "Fred."
• Your draft contract is a tough one; among other things, it contains an exclusive-jurisdiction forum clause that requires all litigation to be conducted in Ginger's home-court jurisdiction.
• At some point after signing the contract, Ginger wants to seek a temporary restraining order or preliminary injunction against Fred. (That might be, for example, because Fred appeared to be violating a confidentiality clause requiring him to keep Ginger's information secret.)

In that situation, Ginger might well be better off tactically by suing Fred in Fred's own home jurisdiction, because:

• In kicking off the lawsuit, it's likely that Ginger will be able to complete the necessary service of process on Fred more quickly in Fred's own "home court" than in Ginger's jurisdiction.
• If Ginger must go to court to compel Fred to produce documents or witnesses, Fred would probably have a harder time resisting an order from a judge in Fred's own home jurisdiction.
• Even if Ginger were successful in getting a court to issue an injunction affecting Fred, the injunction likely wouldn't take effect until it had been formally served on Fred, and that service of process might well be quicker and easier in Fred's home jurisdiction.
• If Fred violated the injunction, Ginger probably would be able to haul him back more quickly into court for contempt proceedings in his own home jurisdiction.
• BUT: By insisting on an exclusive-jurisdiction forum selection clause, Ginger might have precluded suing Fred in Fred's home jurisdiction.

LESSON: Ginger should think twice before insisting that Fred agree to exclusive jurisdiction in Ginger's home court.

Some states' arbitration laws provide that agreement to arbitrate in the state constitutes consent to jurisdiction in the co1urts of the state to enter judgment on the arbitration award — this is the case in California, for example, under Cal. Code of Civ. P. § 1293.

And such a statute might purport to confer exclusive jurisdiction in the courts of that state, as seen in Connecticut and Nevada. See Conn. Gen. Stat. § 52-407zz(b); Nev. Rev. Stat. § 38.244

An explicit exclusive forum-selection provision in a contract might be held to trump an arbitration provision, such as Clause 8.1, in a prior- or "background" agreement, such as the arbitration provision in the rules of the Financial Industry Regulatory Authority ("FINRA"), a self-regulatory organization. At this writing there is a split in the circuits on that point:

• The Second and Ninth Circuits have held that an exclusive forum-selection clause does trump the arbitration provision in the FINRA rules. (But as discussed below, a later Ninth Circuit case implicitly called that holding into question.) See Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, 764 F.3d 210 (2d. Cir. 2014), in which the appeals court affirmed a trial court's grant of Goldman's motion to enjoin FINRA arbitration, on grounds that the forum-selection clauses in the parties' agreements superseded the arbitration provision (hat tip: Michael Oberman); see also Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 736 (9th Cir. 2014), where the appeals court reversed a denial of preliminary injunction and final judgment on the same grounds. Accord: The Resource Group Int'l Ltd. v. Chishti, No. 23-286, slip op. (2d Cir. Jan. 22, 2024) (vacating and remanding denial of motion to enjoin arbitration); Suski v. Coinbase, Inc., 55 F.4th 1227 (9th Cir. 2022) (affirming denial of motion to compel arbitration) (exclusive forum-selection clause in later-accepted "official rules" superseded delegation clause in arbitration agreement contained in previous user agreement).

• In a similar vein was a 2015 decision by Hawai'i's supreme court, in a case where a condominium purchase agreement stated that venue for litigation would be in a specified court in Hawai'i, but the purchase agreement incorporated a condominium declaration, which contained an arbitration clause. The court ruled that this inconsistency meant that the arbitration clause was unenforceable. (The court also held that the arbitration clause was unconscionable because it prohibited discovery and punitive damages.) See Narayan v. Ritz Carlton Dev. Co., 100 Haw. 343, 400 P.3d 544 (2015).

• But in contrast, the Fourth Circuit held that an exclusive forum-selection clause did not trump the arbitration clause in the FINRA rules, on grounds that the forum-selection clause referred to litigation, not arbitration, and "we believe that it would never cross a reader's mind that the [forum-selection] clause provides that the right to FINRA arbitration was being superseded or waived." UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319, 329-30 (4th Cir. 2013); see also UBS Sec. LLC v. Allina Health Sys., No. 12–2090, 2013 WL 500373 (D. Minn. Feb. 11, 2013) (following Carilion Clinic). /

• Likewise, in Mohamed (2016), the Ninth Circuit held that, in Uber's user agreement, the exclusive-forum provision was not incompatible with an arbitration provision, because the forum-selection provision was intended "to identify the venue for any other claims that were not covered in the arbitration agreement." Mohamed v. Uber Techs., Inc., 848 F.3d 1201, 1209 (9th Cir. 2016) (reversing, in part, denial of motion to compel arbitration).

Example: In Nippon Shinyaku (2022), a Federal Circuit decision: See Nippon Shinyaku Co. v. Sarepta Therapeutics, Inc., 25 F.4th 998 (Fed. Cir. 2022) (reversing and remanding denial of preliminary injunction).

• A confidentiality agreement between the parties — we'll call them A and B — contained a forum-selection provision that expressly required any action challenging the validity of A's patents to be filed in federal court in Delaware.

• Notwithstanding this requirement, B filed administrative challenges to the patents (known as "petitions for inter partes review," or IPRs) in the U.S. Patent and Trademark Office (USPTO).

The Federal Circuit held that the forum-selection provision should have been given effect, and that the trial court should have enjoined B from pursuing the IPRs.

(This was the opposite result from that in the 2021 Kannuu v. Samsung case discussed at 3.6.9.17.)

Some companies’ boilerplate terms include territory-specific choices of forum (and law). Example: Here’s a territory-specific forum provision from Carson Wagonlit Travel (now CWT):

18.1  This Agreement shall be exclusively governed by the exclusive laws of [sic] and all disputes relating to this Agreement shall be resolved exclusively in[:]

(i) England and Wales and governed by English law if the Seller’s registered office is located in the Europe, Middle East, Africa (EMEA) region;

(ii) Singapore if the Seller’s registered office is located in Asia Pacific (APAC) region; or

(iii) the State of New York, USA if the Seller’s registered office is located the Americas region.

Archived at https://perma.cc/6RJK-57EM (emphasis and extra paragraphing added).

If a contract specifies Massachusetts as the forum state for litigating disputes, the defendant might find that its bank account and other assets have been "attached" even before trial if the plaintiff can show a likelihood of success on the merits. See Shep Davidson, When an Out-of-State Company Can Be Sued in Massachusetts and Why You Should Care (2013).

Example: In a 2023 Texas supreme court decision, a Texas-based law firm and one of its partners were sued for malpractice by a former corporate client for allegedly failing to seek some $1 million in damages in a motion for default judgment in a previous lawsuit against a former employee of the client. Based on the facts recited in the supreme court's opinion, it seems entirely possible that that the law firm made a particular tactical decision in litigation — quite possibly with the then-client's approval — but apparently the firm did not protect itself by documenting the same, for example in an email to the client. See USA Lending Group, Inc. v. Winstead PC, 669 S.W.3d 195 (Tex. 2023) (reversing dismissal for failure to state a claim).

If the law firm had emailed the client to document that the firm had made such a tactical decision — especially if the email also documented that the firm had consulted the client in advance about the decision — then the firm's prospects in a malpractice lawsuit would have been enhanced considerably.

Example: Wright (2016): An English sports executive signed an employment agreement with an Indian company to serve as the company's CEO. Long story short, the employment agreement didn't include a forum-selection provision to specify England, vice India, as the venue for any litigation. Things went badly, and the executive sued the Indian company, in India, for breach of his employment contract. But the Indian court proceedings took so long that the Indian company became insolvent, and in the end, the executive got nothing, apart from bills for some £1 million in legal fees from his counsel — so he successfully sued his law firm for malpractice for failing to advise including a forum-selection clause in the draft contract because of the notorious slowness of Indian courts. See Wright v. Lewis Silkin LLP, [2016] EWCA Civ 1308 ¶¶ 17-18, 39, 46

A rookie mistake is to refer to "the courts of the United Kingdom," or "the courts of Great Britain," because the UK has three separate legal systems: England and Wales; Scotland; and Northern Ireland; and, since devolution, Wales, as explained in (separate) articles by English practitioners. See Tom Bolam, Country Clarity in Contract Law (Fladgate.com 2021); Greenwoods Legal LLP, Choice of law and jurisdiction: "England and Wales" and Brexit (Greenwoods.co.uk 2018).

And at the (very-useful) lawyers-only forum redline.net, British attorney David Hill writes:

To make things really complicated, although the jurisdictions [in the UK] are distinct, the court system is more 'united' so for your court jurisdiction clause (which should always be paired with the choice of law clause) the correct form is 'the courts of England and Wales' (or Scotland, or Norther[n] Ireland)!

See also the commentary at 3.7.10 concerning governing-law clauses when parties agree that the laws of one of the UK's separate countries or provinces (England, Wales, Scotland, Northern Ireland) are to apply.

As explained in a 2019 post by Seattle-based lawyer Dan Harris, anyone drafting a contract with a Chinese counterparty should consider:

• whether the contract meets the language- and governing-law requirements of Chinese law to make the contract enforceable by a Chinese court; and
• if not, whether the counterparty has sufficient reachable assets in a more-friendly jurisdiction (because Chinese courts purportedly won't enforce foreign judgments or arbitration awards).¹⁴

Some contracts require any litigation against a given party to be brought in that party's home jurisdiction — so in a contract between "Fred" who lives in France and "Ginger" who lives in Georgia:

• if Fred wanted to sue Ginger, he'd have to file the lawsuit in Georgia;
• conversely, if Ginger wanted to sue Fred, she'd have to file in France.

Here's an example of such a clause "in the wild":

EXCLUSIVE FORUM SELECTION: Any action arising out of or relating to this Agreement, or any transaction or relationship resulting from it, is to be initially brought, and subsequently maintained, exclusively in the courts having jurisdiction in the following respective cities: (i) [CITY], England if [CUSTOMER NAME] and/or any of its personnel are defendants in the action as originally brought; and (ii) Houston, Harris County, Texas if [SUPPLIER] and/or any of its personnel are defendants in the action as originally brought.

If contracting parties don't specify a forum for their disputes, they could be letting themselves in for a fact-intensive court dispute over whether a lawsuit would be proper in a particular state chosen in the heat of a dispute. As a rule, this would mean that the parties could count on having to pay lawyers for depositions, document production, brief-writing, and oral argument, both in the trial court and when the losing party appealed. That's because the existence of "personal jurisdiction" often lies in the eye of the beholder — i.e., a court — unless the parties have previously agreed between themselves on that score. Example: This can be seen in Vayu, Inc. (2023), in New York's highest court; the facts of that case aren't important here, other than that extensive litigation was required to address the forum question.¹⁵

Suppose that you're drafting a contract and are thinking about where contract-related disputes might be litigated: • If you don't include a forum-selection clause in a draft contract (and thereby "roll the dice" about the forum for future lawsuits), then it's at least possible that The Other Side might not even raise the issue. • On the other hand: If you do propose a forum clause — and The Other Side has more bargaining power — then The Other Side might insist on "flipping" the provision to mandate its own preferred forum. When that happens, possibly the best you can hope for is for The Other Side to agree simply to drop the forum clause entirely.

That happened in one contract negotiation for a routine commercial deal: • One party "Alpha" was using a contract patched together by business people. Alpha sent the contract to a prospective customer that had significantly-more bargaining power. • Alpha's contract form included a forum-selection provision requiring all litigation to take place exclusively in Alpha's home city. • The customer's lawyer saw the forum-selection clause, and said it needed to be reversed, so that the exclusive forum would be the customer's home city. That wouldn't have been good for Alpha, because litigating in the other city would have been costly and inconvenient.

Fortunately, the customer's lawyer went along with the suggestion by Alpha's lawyer to just drop the forum-selection clause entirely. The other lawyer evidently didn't realize that on the facts, this could have turned out to be a win for Alpha, because: • Without a forum-selection stipulation, the customer likely would not have been able to sue Alpha in the customer's home city at all, because the courts in that city would almost certainly not have had personal jurisdiction over Alpha. (Of course, that wouldn't have stopped the customer from filing suit anyway, which would have meant that Alpha would have to spend money to get the case dismissed or transferred.) • In contrast, Alpha would have been able to sue the customer in Alpha's home city, because the customer had significant operations in that city. The customer's lawyer apparently didn't tumble to the fact that he was making a potentially-big concession.

Drafters should be careful about specifying an exclusive forum for proceedings "relating to" the parties' agreement, as opposed to the narrower "arising out of" the agreement as used in this Clause.

Example: In Kannuu Pty Ltd. (2021), the Federal Circuit's decision involved a general, exclusive forum-selection provision, which had caused the parties to have to litigate whether Samsung could challenge the validity of a patent in an administrative proceeding in the U.S. Patent and Trademark Office, known as an "inter partes review" or "IPR" instead of in the agreed exclusive-forum court. Spoiler: Both the trial- and appeals courts said "yes."¹⁶

But: An even-broader forum selection provision led to the opposite result, as discussed at 3.6.9.8.

Example: Consider the following (hypothetical) possibility:

• Provider, a company headquartered in Providence (Rhode Island), licenses its software to Customer, in Cumberland (Maryland). (The city names here were chosen for matching initials.)
• As with many drafter-favoring contracts, Provider's standard software license agreement requires that any litigation "arising out of or relating to" the agreement must be brought in Providence, Provider's home city.
• One day, though, Customer rolls out its own software product that performs some of the functions of Provider's software — and Customer's new software bears a trademark that's confusingly similar to Provider's own trademark.

In that situation:

• If Provider wanted to sue Customer for trademark infringement, then Provider might well want to bring the lawsuit in Cumberland because of the better availability of relevant witnesses and documents.
• But: Provider might not be able to sue Customer in Cumberland — as Provider would prefer to do in these particular circumstances — because the license agreement required all disputes relating to the license agreement to be brought in Provider's home city of Providence.

In one contract that I reviewed for a client, a forum-selection clause stated that "disputes are to be resolved in [a particular court]." This is almost a canonical example of a false imperative; Rebecca Tradewell, an attorney for the Wisconsin Legislative Reference Bureau, explains that a better way to word such a provision is to state it in terms of a positive obligation: "Any dispute arising out of … must be brought and maintained in [the court in question]." See Becky Tradewell, Food Shall Be Pure: Using "shall" carefully for clearer laws (NSDL.org 2013).

For extensive discussion and research notes, see Okoli (2024).¹⁷

In many American states, a statute specifies the location where a lawsuit must be brought; typically, this will be either the county where the plaintiff resides or the county where the defendant resides.

But if a contract's forum-selection clause specifies a county that does not meet the statutory requirement, then a court might refuse to enforce the forum selection. Example: This happened in a North Caroline case; the court, though, did note that "a forum selection clause which favored a court in another State was enforceable …." A&D Envt'l Serv., Inc. v. Miller, 770 S.E.2d 755, 756 (N.C. App. 2015) (affirming denial of defendant's motion to enforce forum-selection clause) (emphasis in original, citation and internal quotation marks omitted).

Another example: Under a California statute (Cal. Code Civ. Pro. § 116.225), "[a]n agreement entered into or renewed on or after January 1, 2003, establishing a forum outside of California for an action arising from an offer or provision of goods, services, property, or extensions of credit primarily for personal, family, or household purposes that is otherwise within the jurisdiction of a small claims court of this state is contrary to public policy and is void and unenforceable." (Hat tip: Sean Hogle at the lawyer forum redline.net.) For more about California's extensive legislative treatment of forum-selection clauses, see John F. Coyle, Forum Selection Clauses in California (TLBlog.com 2025).

Courts will sometimes refuse to honor a contract's forum-selection clause if the clause offends a strong public policy of the forum location. Here are a few real-world examples.

Example: A California appeals court denied mandamus to compel dismissal of a shareholder lawsuit, where:

• the defendants' motion to dismiss was based on a forum-selection clause designating Delaware's Chancery Court, but
• the plaintiffs would not have had the right to a jury trial there:

The defendants sought dismissal of the case based on mandatory forum selection clauses in EpicentRx’s certificate of incorporation and bylaws, which designated the Delaware Court of Chancery as the exclusive forum to resolve shareholder disputes like the present case.

The trial court declined to enforce the forum selection clauses after finding that litigants do not have a right to a civil jury trial in the Delaware Court of Chancery and, therefore, enforcement of the clauses would deprive EpiRx of its inviolate right to a jury trial in violation of California public policy.

We agree with the trial court that enforcement of the forum selection clauses in EpicentRx’s corporate documents would operate as an implied waiver of EpiRx’s right to a jury trial—a constitutionally-protected right that cannot be waived by contract prior to the commencement of a dispute.

Thus, we conclude the trial court properly declined to enforce the forum selection clauses at issue, and we deny the defendants’ request for writ relief.

EpicentRX, Inc. v. Sup. Ct. of San Diego Cty, 95 Cal. App. 5th 890, 895 (2023) (formatting lightly edited).

Example: A group of users of the America OnLine ("AOL") service sued AOL in California and sought class-action status.

• The AOL user agreement required all disputes to be litigated in Virginia.
• Citing the forum-selection clause, a federal district court in California dismissed the case but said it could be re-filed in Virginia state courts, as required by the user agreement.
• The federal appeals court disagreed, holding that California had a strong public policy favoring class-action relief — and noting that the requested relief was not available in Virginia state courts.
• Therefore, said the appeals court, "the forum selection clause in the instant member agreement is unenforceable as to California resident plaintiffs bringing class action claims under California consumer law." Doe 1 v. AOL, LLC, 552 F.3d 1077, 1084 (9th Cir. 2009).

Example: Relatedly, California Labor Code § 925 "prohibits an employer from requiring an employee who resides and works in California to agree to a provision requiring the employee to adjudicate outside California a claim arising in California." Zhang v. Superior Court (Zhang v. Dentons US LLP), 85 Cal. App. 5th 167, 171 (2022) (denying mandamus).

Counterexample: In AutoNation, the Texas supreme court's decision produced a very different outcome:

• AutoNation, a Florida-based car dealer, filed suit, in Florida, against a former employee who lived in Texas and had worked for the car dealer there.
• The former employee's employment agreement contained a choice-of-law clause calling for Florida law to apply, together with a forum-selection clause requiring any litigation to take place in Florida.
• Before learning of the Florida action, the former employee sued the car dealer in Texas, seeking a declaratory judgment that the non-competition covenant of the employment agreement was unenforceable under prior Texas supreme court precedent.
• Granting a writ of mandamus, the Texas supreme court ruled that while it was not questioning the validity of its prior precedent, it would still enforce the "freely negotiated" [sic] forum-selection clause to allow first-filed suit in Florida to proceed. In re AutoNation, Inc., 228 S.W.3d 663 (Tex. 2007).

QUESTION: On the AutoNation facts, what are the odds that the Florida court would have applied Texas law, given that the contract included a Florida choice-of-law clause?

Example: Franchise investment law: In a Sixth Circuit case, the contract in suit was between a Michigan countertop fabricator and a Minnesota manufacturer of stone slabs used to make countertops. The contract's forum-selection provision required all lawsuits to be brought in a Minnesota state court. The Michigan company filed suit in a federal district court in Michigan. The trial court granted the Minnesota company's motion to dismiss, citing the contract's forum-selection clause, but the appeals court reversed, on grounds that Michigan Franchise Investment Law invalidated the clause. See Lakeside Surfaces, Inc. v. Cambria Company, LLC, 16 F.4th 209 (6th Cir. 2021) (reversing and remanding dismissal of Michigan-filed lawsuit).

Example: Usury law: A California appeals court held that the state's usury laws, while complicated, represented a fundamental public policy of the state that trumped a loan agreement's forum-selection provision. See G Companies Management, LLC v. LREP Arizona LLC, 88 Cal. App. 5th 342 (2023) (reversing order enforcing forum-selection clause). For additional discussion and case citations, see generally Paulo B. McKeeby, Solving the Multi-State Non-Compete Puzzle Through Choice of Law and Venue (2012). (For more on usury law, see 2.11.6.2.)

Example: In Atlantic Marine (2013), the (U.S.) Supreme Court explained that in the United States, federal courts will routinely enforce forum-selection clauses "unless extraordinary circumstances unrelated to the case clearly disfavor a transfer."¹⁸

Example: In Rivera (2009), the First Circuit noted:

… a forum selection clause should be enforced unless the resisting party can show[:]

[i] that enforcement would be unreasonable and unjust, or

[ii] that the clause was invalid for such reasons as fraud or overreaching or

[iii] that enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.¹⁹

Example: Likewise, state courts in the U.S. generally honor forum-selection provisions; for example, in Paul Business Systems (1990), Virginia's supreme court explained that a forum-selection provision would be enforced "unless the party challenging enforcement establishes that such provisions are unfair or unreasonable, or are affected by fraud or unequal bargaining power."²⁰

Example: As explained by the Fifth Circuit in Franlink, Inc. (2022): Under the "closely-related" doctrine, non-signatories to the contract might be bound by — and conversely, might be able to enforce — a forum-selection clause "where, under the circumstances, the non–signatories enjoyed a sufficiently close nexus to the dispute or to another signatory such that it was foreseeable that they would be bound."²¹

Counterexample: In Rieder (2020), the Texas supreme court held that a company's CEO was not personally bound by a contract's forum-selection provision just because the CEO had signed the contract on behalf of the company.²²

Example: In T3 Enterprises (2019), a contract expressly required arbitration in Dallas, but the Idaho supreme court held that the contract's choice of Texas law required arbitration in Idaho.²³

Example: And later, in Off-Spec Solutions (2021), the Idaho court held that a contract's choice of California law required arbitration in Idaho — this, even though the contract expressly required arbitration to be in California:

We hold that California law requires an examination of the public policy of the forum in which suit is brought, and that the forum selection clauses at issue violate the strong public policy of the State of Idaho. We affirm the district court’s ruling that claims arising from the parties’ purchase agreement and LLC agreement must be arbitrated in Idaho.²⁴

Editorial comment: It'd be one thing if the Idaho court had tossed out the contracts' respective choice-of-law provisions as well as the choice-of-forum provisions, on grounds that otherwise, the parties' bargained-for results would have violated Idaho public policy as expressed in Idaho's choice-of-forum statute.²⁵

But let's just say it's … unusual to assert that California's or Texas's law somehow requires an Idaho court to concern itself with Idaho's public policy.

Drafting lesson: If doing business with an Idaho company, don't expect your forum-selection provision to be given effect by an Idaho court — so be prepared to race to your preferred courthouse if it looks as though litigation is on the horizon.

In September 2024, a new form of Texas state court, limited to business cases and with appeals heard by a new court of appeals in Austin, opened for business.²⁶