Report on Third-Party Remedies Opinions - 2007 Update
Appendix 9: Report on the Enforceability Subcommittee

I. California Enforceability Issues: Are California Courts Different?

One explanation for the historical difference of view between the TriBar Opinion Committee and the California State Bar Business Law Section about the meaning and scope of the remedies opinion (discussed in Appendix 8) is a perception that the law in California is significantly different from the law in other states (especially New York). Some have argued that California courts have an unusual tendency not to enforce contract provisions literally, when confronted with concerns about harsh or inequitable results. Proponents of this view claim that California courts are much quicker than others to apply such principles as an implied covenant of good faith and fair dealing and exceptions to the parol evidence rule in order to "do justice" in the face of contrary written contractual provisions. As a result, they argue that California courts are less inclined to give effect to the written words in agreements governed by California law, and thus that it is more difficult for California lawyers to give opinions that each and every written provision is enforceable in accordance with its terms.

II. Analytical Approach and Limitations

The Opinions Committee did not have the time or resources to do an exhaustive comparison of California contract law and the behavior of California courts when enforcing contracts with the contract law and judicial behavior in the other 49 states. To make this undertaking manageable, we adopted the following more limited approach.

We compared California only with New York and not any other state. We selected New York because:

  1. The TriBar Opinion Committee, the leading advocate of the "each and every" approach, is based in New York.
  2. New York has a well-developed body of contract law.
  3. Many of our members practice in firms with offices in New York.
  4. California transactions with significant New York contacts are sufficiently common that we have some threshold familiarity with New York law.
  5. The common perception of New York contract law as applied by New York courts is the opposite of that of California. New York courts supposedly are "strict constructionists" -- ready, willing and able to enforce contracts as written, unaffected by the impulse to "do justice" that is said to infect California courts.

Therefore, we limited our comparative analysis to two states, California and New York. We needed to limit the scope of our analysis further, because we were not in a position to do a comprehensive comparison of all aspects of California and New York contract law. Instead, we focused only on certain key aspects of contract law, as described in the following section. In addition, we excluded consumer transactions from our review, because (1) consumer law contains many issues unique to the consumer context and (2) third-party legal opinions are rarely if ever given in consumer transactions. Also, although we have certain contacts with New York as noted above, most of us are not New York lawyers. It may also bear noting that we were limited to reported cases, i.e., cases that resulted in appellate decisions; we were unable to research trial court decisions or settlements following adverse preliminary rulings.

These various limitations in our approach were appropriate, in light of the potential scope of the undertaking and the resources available to conduct it. Despite these limitations, hundreds of hours of effort were devoted to this work.

In addition to legal research, we also conducted selected empirical investigations:

  1. Discussions with experienced California and New York business litigators.
  2. Comparisons of remedies opinions rendered by prominent California and New York law firms.

We believe the scope and quality of the investigation we undertook were sufficient to achieve our objective, namely, testing the common perception that a "continental divide" exists between California and New York with respect to the enforcement of contracts.

III. Summary of Results -- An "Urban Legend" Dispelled

Our findings did not support the common perception of a wide gap between California and New York in the enforcement of contracts. To the contrary, we generally found a high degree of consistency between California and New York, including in the following areas:

  1. The prima facie case required to establish the existence of an enforceable contract.1
  2. The existence of the implied covenant of good faith and fair dealing and the manner in which it is applied.2
  3. The application of the concept of reasonableness.3
  4. The doctrine of unconscionability and the manner in which it is applied.4
  5. The concept of materiality (including the requirement that a breach of contract be material before a remedy will be enforced) and the manner in which it is applied.5
  6. The enforceability of oral modifications to a written contract.6
  7. The enforceability of unwritten waivers (evidenced by either conduct or oral statements) of written provisions of a contract.7
  8. The enforceability of force majeure provisions.8
  9. Restriction against forfeitures.9

In sum, we found that the common perception that a wide gap exists between California and New York in their contract law and the willingness of their courts to enforce contracts as written is in the nature of an "urban legend," i.e., the perception is not borne out by the evidence. In particular, the stereotype of California courts as unprincipled forums for the exercise of "barnyard equity," and the contrary stereotype of New York courts as soulless automatons enforcing the literal terms of contracts regardless of any other consideration, are just that -- stereotypes. The more mundane and complex reality is that the courts of both California and New York, in applying the laws of their states, show a similar strong proclivity to enforce contracts in accordance with their terms, subject to some important shared legal limitations.

IV. Two Immaterial Exceptions

We found two exceptions to the general conclusions summarized in the preceding section:

1. The parol evidence rule is applied more strictly in New York than California. Neither state permits admission of extrinsic evidence to contradict the terms of an integrated10 contract. However, California is more open than New York to (a) considering whether a contract was integrated and (b) admitting extrinsic evidence to explain, clarify or supplement (but not contradict) the written terms of a contract.11

2. New York's defense based on post-signing events rendering performance of a contract impossible or impractical is more limited than California's. California will excuse performance when the cost to perform becomes "excessive and unreasonable" and therefore performance is "impracticable."12 New York will not excuse failure to perform just because performance becomes economically detrimental.13

While these two areas of divergence between California and New York law are noteworthy, neither is material in the context of third-party remedies opinions.

As to the parol evidence rule, the Business Laws Section's Corporations Committee stated in footnote 98 of its 1989 Report (the Corporations Committee's 2007 Report does not address this issue):

"[T]he possibility of parol evidence being introduced in order to aid in the interpretation of contract provisions, even if the result may be to frustrate one party's view of the proper interpretation of the contract language, is an implicit assumption in every remedies opinion and need not be expressly stated as an additional exception in the ever-growing 'laundry list' of opinion qualifications."

Given that California law with respect to parol evidence has not materially changed since 1989 and we concur with the 1989 Report's analysis of this point, we do not believe that any specific "parol evidence" exception needs to be included (though some lawyers include such an exception) in a remedies opinion on California law. We believe the 1989 Report's conclusion on this point remains valid and is unaffected by the divergence between California and New York law with respect to the parol evidence rule.

As to the defense of impracticability, it is immaterial to remedies opinions for two reasons:

1. The defense arises out of courts' traditional equitable powers; consequently it is covered by the equitable principles limitation.14

2. The opinion giver is rendering an opinion as of its date based on the facts that exist at that time15. The opinion giver is not responsible for taking into account post-closing conduct by the parties or other post-closing events unless the opinion giver has knowledge beforehand of the possibility of such post-closing events. The opinion giver is responsible for future facts and events that relate to performance subsequent to the date of the opinion letter only when the parties clearly contemplate that the facts and events will come into existence as a result of rights conferred or satisfaction of duties imposed by the contract. This is not the case for events that may give rise to a defense of impracticability.

Since the defense of impracticability is immaterial to remedies opinions, there is no need to modify opinion practice based on the divergence between California and New York law in this area.

V. Conclusion

Whatever other bases there may be for the historical difference between the "California" and "New York" views of the remedies opinion, we found no basis for this difference in our comparative review of California and New York contract law as currently applied by the courts of those states.

Endnotes

1 Nevills v. Moore Mining. Co., 135 Cal. 561 (1902); Justice v. Lang, 42 N.Y. 493 (1870). Back

2 Both California and New York imply the covenant in contracts, as long as it does not contradict the express terms of a written contract. Third Story Music, Inc. v. Waits, 41 Cal. App. 4th 798 (1995); Weider v. Skala, 80 N.Y.2d 628 (1992); Prestige Foods v. Whale Sec. Co., L.P., 243 A.D.2d 281 (N.Y. Sup. Ct. 1997). Back

3 Both California and New York courts uphold contracts, even in the absence of certain terms, applying standards of reasonableness. Denver D. Darling, Inc. v. Controlled Env'ts Constr. Inc., 89 Cal. App. 4th 1221 (2001); Khoury v. Maly's of California, Inc., 14 Cal. App. 4th 612 (1993); Sutton v. E. River Sav. Bank, 55 N.Y.2d 550 (1982). Back

4 Dean Witter Reynolds, Inc. v. Superior Court, 211 Cal. App. 3d 758 (1989); Brower v. Gateway 2000, 246 A.D.2d 246 (N.Y. Sup. Ct. 1998). Back

5 Both New York and California allow a remedy where one of the parties committed a material breach of the contract. FPI Dev, Inc. v. Nakashima, 231 Cal. App. 3d 367 (1991); CT Chems., Inc. v. Vinmar Imprex, Inc., 81 N.Y.2d 174 (1993). Back

6 Oral modifications generally will be considered enforceable by New York courts unless an express term prohibits oral modification. Turk v. Ariello, 721 N.Y.S.2d 122 (N.Y. App. Div. 2001). However, even if the contract contains such a clause, an unwritten modification will be enforceable if it has been performed or if there has been conduct supporting claims of partial performance or detrimental reliance. Rose v. Spa Realty Assoc., 42 N.Y.2d 338 (1977). Similarly, an unperformed oral modification to a written contract is only enforceable in California if it is supported by new bargained-for consideration, which consideration can include performance, or grounds for application of estoppel can be established. Sanders Constr. Co., Inc. v. San Joaquin First Fed. Sav. & Loan Ass'n, 136 Cal. App. 3d 387 (1982). Back

7 To be considered enforceable by either a New York or a California court, an unwritten waiver must be clearly intentional and evidenced either by conduct or by conduct and an oral agreement. DRG v. Chopstix, 30 Cal. 4th 54 (1994); Squadron Boulevard Realty Co. v. Emrite, Inc., 99 Misc. 2d 975 (N.Y. Misc. 1979). Back

8 In both California and New York force majeure clauses excuse nonperformance when circumstances beyond the control of the parties prevent performance and the nonperformance was specifically contemplated by the force majeure clause. Hariscom Svenska, AB v. Harris Corp., 3 F.3d 576 (2nd Cir. 1993); Watson Lab., Inc. v. Rhone-Poulenc Rover, Inc., 178 F. Supp. 2d 1099 (D. Cal. 2001); San Mateo Cmty. Coll. v. Half Moon Bay, L.P., 65 Cal. App. 4th 401 (1998). Back

9 Forfeiture clauses are disfavored in both California and New York. Hawley v. Orange County Flood Control Dist., 211 Cal. App. 2d 708 (1963); Birnbaum v. Rollerrama, Inc., 36 Misc. 2d 101 (N.Y. Misc. 1962). Back

10 Compare Banco do Brasil, S.A. v. Latian, Inc., 234 Cal. App. 3d 973 (1991), with Mitchell v. Lath, 247 N.Y. 377 (1928). Back

11 See Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (N.Y. 2002) (comparing California's and New York's approaches to the parol evidence rule). Compare S. Pac. Transp. Co. v. Santa Fe Pac. Pipelines, Inc., 74 Cal. App. 4th 1232 (1st Dist. 1999) and Esbensen v. Userware Int'l, Inc., 11 Cal. App. 4th 631 (4th Dist. 1992), with Alexander & Alexander Servs. Inc. These Certain Underwriters at Lloyd's London, 136 F.3d 82 (2nd Cir. 1998). Back

12 Mineral Park Land Co. v. Howard, 172 Cal. 289, 293 (1916). Back

13 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (N.Y. 1968). Back

14 See Am. Bar Ass'n. Comm. on Legal Opinions, Third-Party Legal Opinion Report, Including the Legal Opinion Accord of the Section of Business Law, American Bar Association, 47 Bus. Law. 167, § 13(f) (1991); infra App. 10 Annex B n. 32 (application of the equitable principles limitation to contractual waivers of the defense of impracticability). Back

15 Am. Bar Ass'n. Comm, on Legal Opinions, Legal Opinion Principles, 53 Bus. Law. 831, § IV (1998); The TriBar Opinion Committee, Third-Party "Closing" Opinions, 53 Bus. Law. 591, § 1.2(b) (1998). Back

Appendix 10 / Report on Third-Party Remedies Opinions