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When is a Broker Entitled to his Commission Fee – An Examination of the ‘Procuring Cause’ Requirement in California

January 19, 2022/in All Blog Posts, Corporate Litigation, Real Estate/by Dylan Contreras

Most, if not all, California real estate brokers (and agents) earn a living by helping people buy and sell homes. Brokers are often paid on a commission basis, usually 2%-3% of the sales price, and do not enjoy the luxury of a steady, bi-weekly paycheck. Given the “feast or famine” nature of the industry, brokers often find themselves in a commission fee dispute with another broker or their client.

In California, a real estate broker earns his commission fee when he produces a “ready, willing, and able” buyer to purchase the property. The broker must also be the “procuring cause” in effectuating the sale. Most brokers, agents, and lawyers are familiar with the former requirement—we have all heard that phrase before. However, the “procuring cause” element is often overlooked and misunderstood amongst real estate professionals. Although the California Association of Realtors (“C.A.R.”) has released helpful guidelines and even included these requirements in its model rules, confusion remains as to what “procuring cause” means. This blog article fills that void by exploring California’s case law on the ‘procuring cause’ requirement.

Ready, Willing, and Able – A Brief Summary

Under California law, a broker has satisfied the ready, willing, and able requirement when he has produced a buyer willing to purchase the property for the price and terms specified by the seller. (See Steve Schmidt & Co. v. Berry (1986) 183 Cal.App.3d 1299, 1305-06.) The buyer doesn’t need to make an offer to purchase the home, but an offer does indicate that the buyer is ready and willing to buy the home. (See Martin v. Culver Enterprises, Inc. (1966) 239 Cal.App.2d 925, 929.) In addition, the prospective purchaser must have the financial capability to purchase the property, such as the necessary capital, or is pre-approved for a home loan. (See Steve Schmidt, 183 Cal.App.3d at 1305-1306.).

In Steve Schmidt, the broker satisfied the ready, willing, and able requirement because the buyer possessed sufficient funds to purchase the property or, at a minimum, could obtain a loan to finance the transaction. In comparison, in Park v. First American Title Co. (2011) 201 Cal.App.4th 1418, 1426, the buyer was unable to purchase the property, which meant that the broker was not entitled to his commission fee. The buyer did not produce any evidence that indicated he had the financial capability to close the transaction, such as pay stubs and bank statements, nor had he been pre-approved for a home loan. The main takeaway is that a broker satisfies this first requirement if the buyer is serious about purchasing the property and has the financial wherewithal to do so.

Procuring Cause Requirement

The National Association of Realtors (“N.A.R.”) defines procuring cause as the “uninterrupted series of casual events, which results in the successful transaction.” C.A.R. has adopted N.A.R.’s definition and baked the procuring cause requirement into its Multiple Listing Services Rules (“M.L.S. Rules”). M.L.S. Rule 7.13 states that a buyer’s-broker’s offer is accepted by the selling broker “by procuring a buyer which ultimately results in the creation of a sales or lease contract.” The N.A.R.’s and M.L.S.’s respective definitions of procuring cause derive from the century-old landmark case of Sessions v. Pacific Improvement Co. (1922) 57 Cal.App. 1.

In Sessions, the plaintiff-broker was employed by the defendant-seller for the sole purpose of selling a shipping yard located near the San Francisco Bay. The plaintiff-broker completed all of the due diligence associated with the sale, such as obtaining the necessary maps and surveys and obtaining a permit to dredge the shipping yard, among other things. After the plaintiff-broker left his employ with the defendant-seller, he provided tract maps to the parties and even helped resolve a drainage issue on the shipping yard. The defendant-seller ultimately closed the transaction at the $1 million purchase price plaintiff-broker had previously proposed; however, the plaintiff-broker was not paid his commission fee.

In reviewing these facts, the California Supreme Court issued the ironclad rule that California Courts rely on to this day: a broker is entitled to his commission fee when he “set[s] in motion a chain of events, which, without a break in their continuity, cause the buyer and seller to come to terms as the proximate result of his peculiar activities.” (Sessions, 57 Cal.App. at 20.) The Supreme Court found that the plaintiff broker was an integral part of the sale because he had “performed the most effective and. . . .hardest and most expensive part of the whole undertaking.” (Id. at 32.) The Court concluded that the plaintiff-broker was entitled to his commission fee for his efforts in helping effectuate the sale of the shipping yard. (Id.)

Although Sessions was decided during the roaring twenties, California Courts have continuously relied on the case. For example, in Duffy v. Campbell (1967) 250 Cal.App.2d 662, the plaintiff-broker was the seller’s agent. The plaintiff-broker introduced the buyer to the seller, negotiated the sales price and contract terms, and even opened an escrow account for the parties. During the escrow period, the buyer and seller held a meeting at the exclusion of the plaintiff-broker and reduced the sale’s price by the amount of the broker’s commission fee. In addition, the parties conveniently closed the sale of the home after the last day the broker could claim a commission fee under the listing agreement.

The Court held that the plaintiff-broker was the procuring cause in effectuating the sale. (See generally Duffy, 250 Cal.App.2d at 665-57.) Akin to Sessions, the plaintiff-broker did all of the heavy lifting. He introduced the parties, negotiated the sales price, and even opened an escrow account for the parties. (Id.) The fact that the parties amended the agreement, principally to exclude the plaintiff-broker from the transaction, did not preclude the plaintiff-broker from collecting his commission fee. (Id. at 668.)

Although Sessions and Duffy may provide a sigh of relief to a broker currently involved in a commission fee dispute, it is important to examine cases in which the Court found that the complaining broker was not the procuring cause.

In Westside Estate Agency, Inc. v. Randall (2016) 6 Cal.App.5th 317, the plaintiff-broker made a $42 million offer for a Bel Air home on behalf of his clients. The offer was rejected, but the plaintiff-broker continued to negotiate and exchange offers with the seller’s broker. After the seller conditionally accepted the plaintiff-broker’s offer, the buyer contacted his attorney for additional advice and told the plaintiff-broker to cancel the deal. The plaintiff-broker did not submit any more offers for the buyer. Three months later, the buyer purchased the property for $1.25 million more than the plaintiff-broker’s original offer and used their attorney as the acting broker. The plaintiff-broker sued, claiming that he was entitled to a commission fee based on the new purchase price.

The Court disagreed and held that the plaintiff-broker “merely put the prospective buyer on track to purchase the property,” which did not entitle him to his commission fee. (Westside Estate Agency, Inc., 6 Cal.App.5th at 331.) The Court found that the plaintiff-broker’s efforts, albeit helpful, were too attenuated from the closing date to award him a commission fee because the transaction closed approximately three months after the buyer told the plaintiff-broker to cancel the deal. Moreover, the buyer purchased the home on different terms than those initially negotiated by the plaintiff-broker. (Id.)

In Schiro v. Parker (1955) 137 Cal.App.2d 503, the Court reached a similar conclusion as Westside Estate Agency, Inc. In Schiro, the property’s listed sale price was $366,000. The plaintiff-broker represented the buyer and submitted two offers at $320,000 and $325,000, both of which the seller rejected. The Plaintiff-broker later learned that the seller was inclined to sell the property for $330,000 or $335,000. The Plaintiff-broker communicated this information to the buyer, but the buyer chose not to submit another offer to the seller. A few weeks later, the buyer met with a separate broker, or the closing-broker, and told him that he thought the “deal was off.” Acting at the buyer’s direction, the closing-broker made two offers to the seller, and the seller accepted the closing-broker’s second offer for $330,000.

Based on these facts, the Court held that the plaintiff-broker was not entitled to his commission fee. The Court focused on the buyer’s state of mind in reaching its decision. The Court was persuaded by the fact that the buyer thought the “deal was off,” and he was, therefore, “free to believe that [plaintiff-broker] was unable to procure an acceptable offer from the seller.” (Schiro 137 Cal.App.2d. at 507-08.)

The holdings in Westside Estate Agency and Schiro teach us the Courts will examine multiple factors when determining whether the complaining broker was the procuring cause in effectuating the sale. In Westside Estate Agency, Inc., the Court focused on the fact that the plaintiff-broker’s efforts were too attenuated from the closing date to be considered the procuring cause. On the other hand, in Schiro, the Court’s relied on the buyer’s beliefs and state of mind concerning the transaction and his relationship with the plaintiff-broker.

There are noticeable factual differences in the case in which the broker was the procuring cause (i.e., Sessions and Duffy) and the cases in which the Court found the broker was not (i.e., Westside Estate Agency, Inc., and Schiro). In Sessions and Duffy, the plaintiff-brokers completed all of the major tasks related to the sale, and their efforts were closely related to the transactions in time and purpose. In comparison, in Westside Estate Agency, Inc. and Schiro, the brokers’ actions were too attenuated from the transaction (i.e., Westside Estate Agency, Inc.) and were not a significant factor or cause of the buyer and seller completing the sale.

The C.A.R. has adopted the case holdings described above and created four categories of factors to guide brokers, arbitrators, and courts in determining whether a broker was the procuring cause in the transaction. The four categories are outlined below:

Connection to the Transaction: These factors focus on who showed the property to the client, made offers on the client’s behalf, the amount of time that elapsed between the intro broker’s efforts and the sale of the property, and the services each competing broker provided. These factors were discussed in Westside Estate Agency, Inc., Sessions, and Duffy.
Buyer’s Choice: This set pertains to the client’s choice between brokers and his/her state of mind as to who was representing them. This factor was central to the holding in Schiro.
Broker’s Conduct: This category relates to the steps the competing brokers took to secure their commission fee and relationship with their clients. In other words, did the closing broker ask the seller if he/she had engaged with another broker? Did the intro-broker know that his/her client was attending open houses on their own? And did the intro-broker tell his client to inform other brokers that he/she was already represented?
Other – Catch-All: This set solely relates to whether any contractual agreements existed between the broker and the client, such as a Buyer-Representation Agreement.

It is important that California real estate brokers and agents keep these factors, as well as the cases discussed above, in mind when negotiating a sales contract on behalf of their client(s). Any ambiguity on who is entitled to a commission fee may negatively impact a broker’s livelihood and result in an arduous and time-consuming litigation process. Contact a California real estate attorney if you or another agent are involved in a commission-fee dispute.

The materials available at this website are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this web site or any of the e-mail links contained within the site do not create an attorney-client relationship. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

Author: Dylan Contreras

Debtor’s Motion to Dismiss v. Creditor’s Motion to Convert In Chapter 13—The 9th Circuit’s Ruling in In Re Nichols

January 6, 2022/in All Blog Posts, Bankruptcy, Corporate Litigation/by Dylan Contreras

On September 1, 2021, the Ninth Circuit issued its ruling in the case of In Re Nichols. The Circuit Court held that a debtor has an absolute right—without exception—to dismiss his Chapter 13 bankruptcy case under Section 1307 (b) of the Bankruptcy Code. In reaching its holding, the Ninth Circuit departed from an established precedent that when the bankruptcy court is confronted with a debtor’s motion to dismiss under Section 1307 (b) on the one hand, and a creditor’s motion to convert under Section 1307 (c) on the other, the court may convert the case from Chapter 13 to a Chapter 7 proceeding if there is evidence of bad faith or abuse of the bankruptcy process by the debtor. In Re Nichols is a significant and impactful holding in the Ninth Circuit because it informs all bankruptcy practitioners and creditors that even when a debtor has abused the bankruptcy process and engaged in bad faith, the debtor may escape the consequences of his actions by filing a motion to dismiss, which, according to In re Nichols, the court must grant.

The Relevant Statutes & Prior Law

The relevant statutes are Sections 1307 (b) and (c) of the Bankruptcy Code. Section 1307 (b) states in pertinent part:

On request of the Debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.

(emphasis added).

In comparison, Section 1307 (c) of the Code states:

Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including— [omitted].

(emphasis added).

The prior leading case on this subject was Marrama v. Citizens Bank, 549 U.S. 365 (2007) (“Marrama”). In Marrama, the primary question was whether a debtor’s bad-faith conduct permitted the bankruptcy court to deny the debtor’s motion to convert from a Chapter 7 to a Chapter 13 bankruptcy under Section 706 (a) of the Bankruptcy Code. The paradox was that Section 706 (a) granted the debtor a one-time unqualified right to convert from a Chapter 7 to a Chapter 13; however, Section 706 (d) specified that the debtor’s absolute right was conditioned on his ability to qualify as a debtor under Chapter 13.[1]

The Supreme Court first pointed out that Section 1307 (c) permitted the bankruptcy court to dismiss or convert a Chapter 13 case “for cause,” which encompasses a debtor that engaged in bad faith or abused the bankruptcy process. The Supreme Court reaffirmed that bankruptcy courts are courts of equity and have “broad authority . . . to take any action necessary or appropriate ‘to prevent an abuse of the process.’” Id. at 1111-12 (quoting 11 U.S.C. § 105 (a)). Armed with the expansive powers of Section 105 (a), the Supreme Court bridged the gap between Sections 706 (d) and 1307 (c). The Court held that when a debtor engages in bad faith conduct or abuses the bankruptcy process, the debtor is not a qualified debtor under Chapter 13 and thus, cannot satisfy the requirements of Section 706 (d).

Many courts throughout the country, including the Ninth Circuit, interpreted Marrama to hold that Section 105 (a) permitted bankruptcy courts to abrogate the absolute rights of debtors when there is evidence that the debtor engaged in fraud, bad faith, or abused the bankruptcy process. The expansive interpretation of Marrama paved the way for the Ninth Circuit’s holding in Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 777 (Ninth Cir. 2008) (“Rosson”) and other cases throughout the country.

In Rosson, the bankruptcy court ordered the debtor to deposit his arbitration award with the Chapter 13 Trustee to fund his reorganization plan. The debtor failed to do so, and the bankruptcy court moved, sua sponte, to convert the case to a Chapter 7 proceeding. Before the bankruptcy court entered its final order, the debtor filed a motion to dismiss, pursuant to Section 1307 (b). The bankruptcy court denied the debtor’s motion, and the debtor appealed.

Relying on Marrama, the Ninth Circuit held there was no analytical distinction between a debtor’s dismissal rights under Section 1307 (b) and a debtor’s right to convert from a Chapter 7 to a Chapter 13 under Section 706 (a). In other words, the same limitations imposed on a debtor’s right to convert from a Chapter 7 to a Chapter 13 under Section 706 (a) and (d) applied with equal force to a debtor’s right to dismiss his Chapter 13 case under Section 1307 (b). The Ninth Circuit held that the debtor’s “right of voluntary dismissal under Section 1307 (b) is not absolute but is qualified by the authority of a bankruptcy court to deny dismissal on the grounds of bad-faith conduct or to prevent an abuse of process.” Id. at 774. Based on this line of reasoning, the Ninth Circuit affirmed the bankruptcy court’s ruling.

Rosson bolstered the broad interpretation of Marrama and was cited by numerous bankruptcy courts in the Ninth Circuit and elsewhere. See In re Brown, 547 B.R. 846, 853 (Bankr. S.D. Cal. 2016) (“under § 1307 (c), where bad faith is present, the court decides how the case is to proceed, if at all, in the interests of the creditors rather than of the debtor”); see also In re Armstrong (Bankr. E.D.N.Y. 2009) 408 B.R. 559, 569 (same).

The New Law – In Re Nichols & Law v. Seigel

Similar to Rosson, the primary question in Nichols v. Marana Stockyard & Livestock Mkt., Inc. (In re Nichols) (Ninth Cir. Sep. 1, 2021, No. 20-60043) 2021 U.S. App. LEXIS 26366 (“Nichols”) was whether there was an implied exception to the debtor’s right to dismiss its Chapter 13 bankruptcy under Section 1307 (b) of the Bankruptcy Code. The Ninth Circuit held that there was no such exception and overruled its prior decision in Rosson. In reaching its decision, the Ninth Circuit relied heavily on the Supreme Court’s holding in Law v. Siegel 571 U.S. 415 (2014) (“Law”).

In Law, the trustee expended over $500,000 in attorneys’ fees in an adversary proceeding against the debtor. The trustee alleged the debtor fraudulently created a second position lien on his property to preserve his equity in the same. The bankruptcy court found in favor of the trustee. At the conclusion of the proceeding, the bankruptcy court granted the trustee’s motion to surcharge the entirety of the debtor’s homestead exemption to pay for the trustee’s attorneys’ fees. Section 522 (k) of the Bankruptcy Code states that funds safeguarded by the homestead exemption cannot be used to pay for administrative expenses.

In a unanimous decision, the Supreme Court held that Section 105 (a) “does not allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code.” Id. at 11. The Supreme Court found that the lower court “exceeded [the] limits of its authority under Section 105 (a) by surcharging the debtor’s entire homestead exemption,” which the Court found was a clear violation of Section 522 (k) of the Bankruptcy Code. The Supreme Court then turned its attention to clarifying its ruling in Marrama.

Writing for the Supreme Court, the late Justice Scalia wrote that Marrama stands for the limited proposition that courts may use, as a supplement to Section 706 (d), their equitable powers under Section 105 (a) to deny a debtor’s motion to convert from a Chapter 7 to a Chapter 13. The Supreme Court reasoned that Section 105 (a) was only relevant to the holding in Marrama because it allowed the Court to avoid the “procedural niceties” of granting the 706 (a) motion to convert, then dismissing or converting the case pursuant to Section 1307 (c) due to the debtor’s bad faith. More bluntly put, Section 105 (a) and its application in Marrama “did not endorse . . . the view that equitable considerations permit a bankruptcy court to contravene express provisions of the Code.” Id. at 426.

In Nichols, the Ninth Circuit found that Law rejected the broad sweeping language in Marrama that the Circuit Court relied upon to reach its decision in Rosson. The Ninth Court held that Rosson was no longer good law because Law made clear that even when there is evidence of bad faith, the bankruptcy court cannot utilize its equitable powers under Section 105 (a) to override the debtor’s absolute right to dismiss under Section 1307 (b) of the Bankruptcy Code.

Because Law overruled Rosson, the Ninth Circuit revisited the actual text of Section 1307 (b), which states in pertinent part: “on request of the debtor at any time . . . the court shall dismiss the case under any chapter.” [emphasis added]. The term “shall” “creates an obligation impervious to judicial discretion” and mandates action by the court. Id. at 13. Finding no other exception to Section 1307 (b), the Circuit Court held that Lawoverruled Rosson and that, in the Ninth Circuit, the debtor has an unqualified right to dismiss their Chapter 13 case at any time.

The holdings in Nichols and Law are significant and impactful for all bankruptcy practitioners. For Nichols, it is clear that the debtor has an absolute right to dismiss their case at any time—without exception. On the other hand, Law is entirely expansive. The holding in Law teaches us that the bankruptcy court’s equitable powers under Section 105 (a) are limited. The bankruptcy courts cannot explore the equities of the case when interpreting a statute that uses the terms “shall” or “must”; but, instead, the bankruptcy court must strictly comply with the Bankruptcy Code and, essentially, turn a blind eye to the realities of the case and circumstances. Only time will tell whether Nichols and Law further the spirit of the Bankruptcy Code and provide equal protection to debtors and creditors in bankruptcy court.

[1] Section 706 of the Bankruptcy Code states in pertinent part:

(a) The Debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.

(d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the Debtor may be a debtor under such chapter.

Author: Dylan Contreras

Contracting Around the Discovery Rule? Don’t be SOL

December 17, 2020/in All Blog Posts, Corporate Litigation/by Dylan Contreras

In legal practice, all lawyers stress about blowing deadlines. Perhaps the most popular deadline that keeps lawyers up at night is the statute of limitations. The statute of limitations is a legal principle that requires parties to file their legal claims within a specific time. An exception to the statute of limitations is the discovery rule. The discovery rule provides that the statute of limitations for a legal claim does not begin to accrue (or start) until the injured party either (1) discovers their injury or (2) should have discovered their injury through reasonable diligence. In short, the discovery rule is an effective counter to the statute of limitations defense.

Often, attorneys insert specific clauses into a contract that shortens the statute of limitations otherwise provided by law. It is an effective tactic because it further restricts the amount of time the potentially injured party can bring a claim related to that contract. As further discussed below, parties are permitted to shorten the limitations period through a contract, albeit certain requirements must be met. However, what is often overlooked is the issue of how these contractual provisions impact California’s discovery rule. In other words, does including a contractual provision that shortens the statute of limitations eliminate the application of the discovery rule?

This blog article explores the case law on this distinct issue and provides a brief synopsis on the statute of limitations, the delayed discovery rule, and what requirements must be met for a court to uphold a shortened statute of limitations clause in a contract.

The Statute of Limitations

The statute of limitations operates to limit the amount of time an injured party can bring their legal claim in court. An essential point that is regularly overlooked by litigators, law students, and laypersons is that the statute of limitations begins to accrue (or starts running) from the date all elements of the claim are satisfied. (See Grisham v. Philip Morris U.S.A., Inc. (2007) 40 Cal.4th 623, 634; Civ. Proc. § 312.) For most legal claims sounding in tort or contract, the statute of limitations accrues from the date the party suffers its injury, whether it be physical or monetary. (See Naftzger v. American Numismatic Society (1996) 42 Cal.App.4th 421, 428.)

California’s Discovery Rule

The discovery rule modifies the rule that the statute of limitations accrues on the date of injury. In essence, the discovery rule postpones the accrual of the statute of limitations until the plaintiff actually discovers their injury or the cause of their injury, or should have discovered their injury, had they exercised reasonable diligence. (See April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 832.) The discovery rule operates as an equity-based exception as it protects parties who are ‘ignorant’ of their cause of action through no fault of their own and allows these parties to pursue their claims in court. (Id.) To assert the discovery rule, the plaintiff must show: “(1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808.)

The discovery rule frequently applies to cases in which a fiduciary relationship exists between the parties and/or it is difficult to detect the breach, such as Fox v. Ethicon Endo-Surgery, Inc.

In Fox, the plaintiff underwent gastric bypass surgery, but suffered complications and required further hospitalization after the surgery. Plaintiff commenced a medical malpractice suit against the performing doctor and the hospital. During the performing doctor’s deposition, it was revealed that the stapler the doctor used to seal the plaintiff’s incisions might have caused the plaintiff’s injuries. Thereafter, the plaintiff filed an amended complaint asserting a product liability action against the manufacturer of the stapler. However, the amended complaint was challenged by the manufacturer because the statute of limitations for a product liability action was one year from the injury date, and the plaintiff filed the amended complaint two years after suffering the injury.

The court found that the plaintiff timely filed her amended complaint asserting the product liability cause of action because, prior to the doctor’s deposition, the plaintiff had no reason to suspect the stapler was the cause of her injuries. The performing doctor’s reports did not mention the stapler malfunction or misfired. During post-surgical care, the performing doctor never stated that the stapler may have caused the plaintiff’s injuries or had caused similar injuries to other patients in the past. Additionally, the doctor’s deposition was taken only a short time after the complaint was filed, which illustrates that the plaintiff was diligently investigating the causes of her injuries. With these facts in mind, the court found that, under the discovery rule, there was no cognizable reason for the plaintiff to suspect the stapler was the ultimate cause of her injury when she filed her first complaint. For these reasons, the court held the statute of limitations for the products liability action began to accrue on the doctor’s deposition date, and the plaintiff timely filed her amended complaint.

The Fox case demonstrates when it is difficult for the plaintiff to detect the cause of the injury. In these rare situations, the plaintiff has suffered an injury but cannot determine the ultimate cause of the injury. As illustrated above, if the plaintiff was diligent in their investigation, the court will likely apply the discovery rule. The next phase of this article discusses the requirements that must be met for a court to uphold a contractual clause that shortens the statute of limitations.

Shortening the Statute of Limitations Through Contract

Through contract negotiations, attorneys strive to limit their client’s potential liability, among other things. An easy way to achieve this goal is to insert a provision in the contract that shortens the statute of limitations provided by statute. This tactic further restricts the amount of time the potentially injured party can bring a legal claim related to the contract. California courts have upheld this practice by hanging their hat on freedom of contract principles, holding that contractual “parties [have] substantial freedom to modify the length of the statute of limitations.” (Hambrecht & Quist Venture Partners v. American Medical Internat., Inc. (1995) 38 Cal.App.4th 1532, 1548.) The only caveat to this broad rule is that the limitation must be ‘reasonable.’ (See Moreno v. Sanchez (2003) 106 Cal.App.4th 1415, 1430.) A provision shortening the statute of limitations is reasonable “if it provides sufficient time to effectively pursue a judicial remedy.” (Id.)

The common theme in California is that the shortened limitations period is reasonable if the legal claim is obvious to the plaintiff. In other words, the plaintiff learns of their legal claim immediately after the wrongful event occurred.

For instance, in Capehart v. Heady (1962) 206 Cal.App.2d 386, a lease agreement shortened the statute of limitations for a breach of contract claim from four years to three months. The plaintiff sued for breach of written lease seven months after the alleged breach, which was then challenged by the landlord as being untimely. The plaintiff argued that the costs he incurred in relocating his business prevented him from bringing this lawsuit within the shortened limitation period. The court sided with the landlord, holding that such costs were natural and expected business expenses, and the tenant should have considered these potential expenses when negotiating the lease and agreeing to the shortened limitation period.

Similarly, in Tebbets v. Fidelity and Casualty Co. (1909) 155 Cal. 137, the life insurance policy stipulated that any action to recover under the policy had to be brought within six months from the date of death. The aggrieved party did not file the claim until after the limitation period expired. The court found that the shortened limitation period was reasonable because, akin to Capehart, the triggering event was evident because it was the death date, and plaintiffs should have asserted their claim within the limitation period provided in the policy.

The underlying denominator in these cases is that the breach was straight-forward and readily apparent. The breach was not hard to detect and was not done in secret. Instead, the breach had a ‘triggering event,’ which helped the court find the limitations period ‘reasonable.’ This leads to the discussion of the discovery rule and whether it is effectively terminated in contracts where the limitations period is shortened.

The Discovery Rule & Contracts That Limit the Statute of Limitations

The discovery rule and contracts that limit the statute of limitations are in direct competition with each other. The discovery rule allows parties to pursue their legal claims after the statute of limitations would have otherwise expired. On the other hand, parties that mutually agree to a shortened limitation period know precisely when they must bring their legal claims related to that contract. The holdings in Moreno and Brisbane Lodging, L.P. are perhaps the two leading cases that split this hair on when the discovery rule applies to cases in which the parties have mutually agreed to a shortened limitation period.

In Moreno v. Sanchez (2003) 106 Cal.App.4th 1415, the plaintiff home-buyers sued the defendant home inspector after discovering the inspector did not disclose defects in the property. The contract between the plaintiffs and the inspector limited the statute of limitations to one year from the inspection date. The plaintiffs filed suit against the inspector approximately 14 months after the inspector completed his inspection. The issue on appeal was whether the contract eliminated the discovery rule.

In a 2-1 decision, the court held that eliminating the discovery rule in contracts entered into between laypersons and professionals in which the contract shortened the statute of limitations period violated California’s public policy. In reaching this broad conclusion, the court emphasized that the discovery rule is founded on crucial public policy considerations and is appropriate in instances where a fiduciary relationship exists. (Id. at 1429.) As touched on above, the court reasoned that in the context of fiduciary relationships, the fiduciary’s breach of the agreement and/or the injury caused is difficult to discover.

Armed with this principle, the court held that a fiduciary relationship existed between the plaintiff and the inspector. The inspector, albeit not the ordinary professional, was a tradesman and possessed specialized skills and knowledge to analyze a residence’s structural and component parts. Furthermore, the plaintiffs trusted the inspector to disclose any property defects, so the plaintiffs could decide to purchase the property. For these reasons, the court concluded that the discovery rule equally applied to home inspectors as it did to other professionals, such as doctors, lawyers, and engineers.

The court then concluded that the discovery rule could not be terminated through a contractual provision that shortened the limitations period. Central to the court’s holding was that the discovery rule was a judicially created exception to the statute of limitations enacted by the Legislature. And if the laws enacted by our Legislature had to yield to the judicially made discovery rule, so too did contractual clauses that provided a shortened statute of limitations. Moreover, the court held that the cases that upheld contractually created limitation periods were cases in which the breach or injury was readily apparent to the plaintiff. Those cases, such as the ones touched on above—Tebbets and Capehart—were instances in which the plaintiff knew of their injury exactly when it occurred, and no fiduciary relationship existed between the parties. The court noted that these cases were strikingly different from the one at hand wherein the plaintiffs did not learn of the inspector’s breach until well after his inadequate inspection of the property. For these reasons, the court concluded that the discovery rule applied to cases in which there existed a fiduciary relationship between the parties, regardless of whether the contract stipulated for a shorter limitations period. [1]

Moreno is the first case to decide that shorter limitations periods in contracts do not abrogate the discovery rule in the context of a fiduciary relationship between the parties. However, in Brisbane Lodging, L.P. v. Webcor Builders, Inc. (2013) 216 Cal.App.4th 1249, the court distinguished Moreno and ruled that when there are sophisticated parties, who possess equal bargaining power, the shorter limitation period terminates the discovery rule.

In Brisbane, the developer-plaintiff entered into a contract with the builder-defendant to construct a hotel in San Francisco, California. Through their lawyers, agents, and other representatives, the parties engaged in extensive contract negotiations, evidenced by the numerous revisions made to the contract at issue. As part of the negotiations, the parties mutually agreed that the statute of limitations for any claim related to the project’s construction began to accrue upon completion of the project. The project was completed in July 2000, and the statute of limitations for breach of written contract was (and still is) four years, which meant any claim related to the project had to be filed by or before July 2004. After discovering multiple defects with the project, the plaintiff filed suit in 2008. The plaintiff argued that the contract eliminated the discovery rule and that such provision violated California’s public policy, as articulated in Moreno.

The court disagreed and held that the discovery rule did not apply to the contract at issue. Central to the court’s holding was the sophistication of the parties. Different from Moreno, the parties were professionals and were represented by lawyers and agents who exchanged multiple iterations of the contract and understood the potential consequences of the contractual provisions they agreed to. Additionally, in Moreno, a fiduciary relationship existed between the parties, which was vital to that court holding that the contractual provision did not eliminate the discovery rule. In this case, no fiduciary relationship existed between the parties, and the parties negotiated the contract at arm’s length and on equal footing. [2]

Together, the holdings in Moreno and Brisbane teach us that the discovery rule will likely continue in full force when there is a fiduciary relationship between the parties, regardless of whether the contract stipulates for a shorter limitations period. On the other hand, when the parties are sophisticated and bargain on equal footing, a contractual provision that shortens the limitations period terminates the discovery rule, per the ruling in Brisbane.

In closing, the distinction between Moreno and Brisbane is essential for laypeople and attorneys to understand when they are faced with a contract that shortens the statute of limitation ns period. For attorneys especially, they must be careful not to shorten the limitations period to an extent that it harms their client down the road.

[1] Reaffirmed in William L. Lyon & Associates, Inc. v. Superior Court (2012) 204 Cal.App.4th 1294, 1310 (finding that the delayed discovery rule applied to a broker-buyer contract that limited the statute of limitations to two years and in which the broker was a dual agent and helped the sellers conceal defects in the property sold to plaintiff-buyers).

[2] The holding in Brisbane was affirmed in Wind Dancer Production Group v. Walt Disney Pictures (2017) 10 Cal.App.5th 56, 73 (holding that the contractually agreed 24 months statute of limitations was not inherently unreasonable because the contracting parties negotiated the agreement with equal bargaining power as they were represented by attorneys and other professionals).

Update for California Landlords and Renters: California’s Eviction Ban Is Expected to Be Lifted

August 12, 2020/in All Blog Posts, Corporate Litigation/by Dylan Contreras

On August 13, 2020, the Judicial Council of California will vote on a proposal to lift California’s statewide eviction ban. If the ban is lifted, starting September 1, 2020, California State Courts can resume all unlawful detainer proceedings that came to a sudden halt in April of 2020 and begin processing all unlawful detainer complaints filed during the eviction freeze.

In response to the Coronavirus pandemic, on April 6, 2020, the Judicial Council of California, the policymaking body of California State Courts, adopted multiple Emergency Rules including Emergency Rule No. 1 (the “Emergency Rule”). The Emergency Rule froze all on-going eviction proceedings—regardless of whether the tenant was affected by COVID-19—and prohibited all California State Courts from issuing a summons for any unlawful detainer complaint. The Emergency Rule essentially serves as a blanket suspension on all commercial and residential evictions across California.

The Judicial Council’s intent to lift the statewide eviction ban and amend the Emergency Rule is founded on the rationale that the Emergency Rule was always meant to be temporary. California Chief Justice Tani G. Cantil-Sakauye has repeatedly insisted that the inevitable eviction crisis is best left to the legislative and executive branches of government where open and transparent meetings and hearings can be had to determine “permanent measures and permanent solutions.”

The Judicial Council’s likely decision to lift the Emergency Rule comes at an uncertain time during our nation’s fight against the novel Coronavirus pandemic. Federal unemployment benefits were recently reduced from $600 to $400 per week, and California’s unemployment rate still lingers around 16.3 percent—four percentage points higher than it was during the Great Recession. However, the Emergency Rule’s purpose was less of a tenant relief measure and more a measure meant to alleviate stress on the Courts. Stress caused by a reduction in Court workers, mandatory stay-at-home orders, and an overall lack of infrastructure to support a wave of unlawful detainer filings that would otherwise flood the resource-strapped Courts.

Given the unstable economic condition, the Judicial Council’s plan to lift the Emergency Rule may only worsen California’s renters’ financial struggles, but only if the legislative and/or executive branches do not take swift action. To this point, California lawmakers are already asking the Judicial Council to postpone the vote to lift the eviction ban for another three weeks.

Although the Emergency Rule has protected California renters from eviction, landlords have argued that the Emergency Rule is too broad. For over five months, the Emergency Rule has prevented landlords from taking any legal action against any tenant, regardless of whether the tenant has been affected by COVID-19. Landlords claim that the Emergency Rule prevents them from evicting a tenant that has simply chosen not to pay rent knowing that the landlord has no recourse. In this instance, the Emergency Rule effectively permits tenants to occupy the property rent-free, while the landlord carries the burden of paying for the property’s mortgage and other related expenses.

Another complaint amongst landlords is a tenant that refuses to vacate the property, despite the landlord serving the tenant with proper notice of lease termination. Again, the landlord is forced to tolerate a tenant that occupies the property unlawfully and likely rent-free while also paying for the property’s mortgage and other expenses.

The California Legislature is intent on passing a solution to afford relief to residential tenants. One such measure that the State Legislature is considering is AB 1436, which strikes a balance of protecting financially impacted tenants from eviction while also preserving landlords’ rights.

AB 1436 prohibits landlords from evicting tenants that cannot pay rent due to the economic effects of COVID-19. However, the proposed law permits landlords to evict a tenant that is not financially affected by COVID-19 and fails to pay rent, or a tenant that occupies the property unlawfully. In its current form, AB 1436 satisfies landlords’ interests and concerns and protects tenants that have felt the financial impacts of COVID-19. AB 1436 does not apply to commercial tenancies.

The first time the Judicial Council attempted to lift the statewide eviction ban caused by the Emergency Rule, back in early-June, tremendous pushback from State Legislature and tenant organizations caused the Judicial Council to, ultimately, delay its vote. The Judicial Council recently received similar complaints from tenants that fear they will become homeless if the Emergency Rule is repealed and small landlords that face losing their livelihoods or filing for bankruptcy if the Emergency Rule remains in effect. If the Judicial Council does in-fact lift the eviction ban, the Emergency Rule will sunset on September 1, 2020. Check back to our website for updates about the Emergency Rule and AB 1436.

Update: San Diego City Council Extends Moratorium on Evictions and Approves $15.1 Million Rental Assistance Program

July 6, 2020/in All Blog Posts, Corporate Litigation/by Dylan Contreras

On June 30, 2020, the San Diego City Council (the “City Council”) voted to extend the moratorium on commercial and residential evictions through September 30, 2020, and approved a $15.1 million rental assistance program that will provide qualified households with a one-time payment to pay for past-due or upcoming rent.

Extension of Moratorium on Commercial and Residential Evictions

At the outset of the novel Coronavirus, the City Council issued a city-wide moratorium on commercial and residential evictions (the “Order”). The Order essentially provides that if a residential or commercial tenant is unable to pay rent due to the effects of COVID-19, then landlords cannot take any action to evict the tenant for non-payment of rent that was due on or after Mach 12, 2020. Landlord actions prohibited by the Order are broad in scope and not only prohibit filing or prosecuting unlawful detainer actions, but also prohibits simply serving a 3-Day Notice to Pay or Quit.

This initial Order was set to be effective through May 31, 2020; however, with the pandemic continuing to affect commercial and residential tenants, the City Council has previously extended the effective date of the Order. Now, as the Order was set to expire at the end of June 2020, the City Council again extended the effective date of the Order through September 30, 2020.

The City Council’s election to extend the Order did not change or alter any of the requirements that commercial and residential tenants must satisfy to defer rental payments. The three requirements that tenants must satisfy are explained below.

First, the tenant must be unable to pay rent due to the “financial impacts” “related to COVID-19.”

The term “financial impacts” is defined as a substantial decrease in household income for a residential tenant, or business income for a commercial tenant, due to business closure, loss of compensable hours of work or wages, layoffs, or substantial out-of-pocket medical expenses.
A financial impact is “related to COVID-19” if: it is caused by the COVID-19 pandemic or any governmental response to the COVID-19 pandemic, including complying with any public health orders or recommended guidance related to COVID-19 from local, state, or federal governmental authorities.

Second, the tenant must notify the landlord of its inability to pay rent due to the financial impacts of COVID-19 and must do so on or before the day rent is due. The tenant’s notice must be in writing, which can be in the form of an email, letter, or even a text message. The San Diego Housing Commission has provided a sample letter that tenants can use, which can be accessed here: Sample Letter.

Third, within a week of providing notice to the landlord, the tenant must then give the landlord “objectionably verifiable information” that shows how COVID-19 and the related governmental responses have negatively impacted the tenant’s financial condition. Common examples of “objectionably verifiable information” are:

pay stubs that show a decrease in wages or hours;
a letter from a past or current employer that states the tenant was laid off or his/her hours were reduced;
bank statements that illustrate a decrease in income; or
any other reliable documentation that shows the effects of COVID-19 has negatively impacted the tenant’s income or stream of revenue.

Tenants that satisfy the three requirements above are relieved from paying rent for the duration of the Order. However, tenants must pay all past rent owed six months after the Order is no longer in effect or the withdrawal of Governor Newsom’s Executive Order N-28-20, whichever occurs first. Tenants that vacate their property while Order is in effect must pay all past rent owed upon moving out.

Moreover, landlords cannot evict a tenant for a “no fault” cause if the tenant has satisfied the three requirements outlined above. A “no-fault” cause is an eviction that is not based or caused by the tenant’s actions. Common examples of “no-fault” evictions is when the landlord evicts the tenant because the landlord decides to sell or renovate the property or allows a close family member to move into the property. This subtle wrinkle prevents a potential work-around of the Order.

Last, the Judicial Council of California, Emergency Rule One, which remains in effect until 90 days after Governor Newsom lifts the State of Emergency Declaration, prohibits all California Courts from issuing a summons for any unlawful detainer proceeding. The Judicial Council of California, the policymaking body of all California Courts, enacted Emergency Rule One in response to the economic effects of COVID-19.

Although the extension of the Order and Emergency Rule One protect tenants during this uncertain time, there is nothing preventing landlords and tenants from discussing deferred rental payment options, lease addendums, or any other mutual agreement that benefits both parties involved. Tenants should always explore these options, before invoking the protections afforded under the Order.

San Diego’s Rental Assistance Program

In addition to extending the moratorium on evictions, the City Council also approved the COVID-19 Emergency Rental Assistance Program (the “Program”). The Program provides a one-time payment of up to $4,000 to qualified residential tenants to pay for any past-owed or upcoming rent. The Program is not available to commercial tenants.

To qualify for assistance under the Program, the following requirements must be satisfied:

the tenant’s primary residence must be located in the City of San Diego;
the household income as of January 1, 2020, must be no more than 60% of the median income in San Diego;
the household must not have enough money in a savings account to meet their financial obligations;
the household has eligible immigration status;
the tenant must not be a tenant of a property owned or managed by the San Diego Housing Commission; and
the household must be experiencing a financial hardship that is directly related to the effects of COVID-19.

The San Diego Housing Commission (the “SDHC”), which is in charge of administering the Program, has stated that tenants may begin applying for rental assistance payments under the Program “no later than July 20, 2020.” The SDHC will employ a “random-selection” system that prioritizes households with children and people 62 and older to determine what applicants receive rental assistance. If an applicant is chosen, then the SDHC will contact the tenant and coordinate with their landlord to disburse the rental payment directly to the landlord.

The City Council allocated $15.1 million to fund the Program, and projects that over 3,500 households will receive a rental assistance payment under the Program.

The Program, coupled with the extension of the Order, provides much needed relief to commercial and residential tenants that are struggling to pay rent during the COVID-19 pandemic. If you or your company is distressed due to the economic impacts of COVID-19 and have questions about the above, then contact a California attorney.

Does The Coronavirus Pandemic Qualify As a Force Majeure Event?

March 31, 2020/in All Blog Posts, Bankruptcy/by Dylan Contreras

In the wake of the Coronavirus (COVID-19) pandemic, state and local governments throughout the U.S. have ordered restaurants, bars, and shopping centers to shut down, while businesses that sell essential products can remain open. Due to the pandemic, small and large companies are forced to close their doors and find clever ways to remain competitive in a world where “dining in” is no longer an option.

As companies prepare for the unknown, they should also ask how this turbulent time will affect their contracts, and more importantly, whether they are still required to perform their contractual obligations during this global health crisis. This article will provide a thorough analysis of the force majeure defense that may excuse a party from performing his or her otherwise required contractual duties.

What is Force Majeure?

Force majeure—which means “superior force” en français—excuses a party’s nonperformance of a given contractual duty when an unanticipated event, such as a pandemic or epidemic, occurs. The force majeure defense is available by statute and the force majeure clause, which is included in many contracts.

Force Majeure By Statute

Section 1511 of the Cal. Civ. Code provides that a party is excused from a contractual obligation when performance is prevented or delayed by (1) operation of law or (2) an irresistible or superhuman cause.

Operation of Law, Cal. Civ. Code 1511 (1)

The broad language of section 1511 (1) invites the question of whether Governor Newsom’s Stay at Home Order renders performance of a contractual obligation illegal, impracticable, or frustrates the underlying purpose for why both parties entered into the contract. California courts have consistently reinforced the broad language of section 1511.

For instance, in Indus. Dev. & Land Co. v. Goldschmidt, 56 Cal. App. 507 (1922), the plaintiff entered into a commercial lease agreement that restricted his use of the property to the operation of a liquor business. After Congress passed the Prohibition Amendment, the plaintiff argued that he was excused from paying any further rents because the operation of his business became illegal. The court sided with the plaintiff, finding that the lease agreement became inoperative after the passage of the 18th Amendment, which made performance of his contractual duty illegal. Id at 509.

Likewise, in Johnson v. Atkins, 53 Cal. App. 2d 430 (1942), the court held that a Colombian buyer was not liable for breach of contract because the Colombian government refused to issue the buyer a legal permit to accept a shipment. The court reasoned that had the buyer accepted the goods he would have committed an unlawful act, which justified his nonperformance. Id. at 432.

However, just because an event may fall within the purview of section 1511(1), it does not mean that a party is automatically excused from satisfying their contractual obligations. There are limits to this rule, and each potential application of section 1511 will require a fact-intensive inquiry of the circumstances.

In Dwight v. Callaghan, 53 Cal. App. 132 (1921), for instance, the defendant claimed he could not satisfy his contractual duties because the U.S. government purchased a large quantity of the same materials the defendant needed to satisfy his contractual obligations. The court found that the plaintiff had acquired the same materials from other suppliers such that the government’s interference with defendant’s performance did not render performance impossible; but, instead, just more expensive than the defendant had initially anticipated. Id. at 137. This case, and the many that came after it, showcases how the concept of force majeure can be misused by parties and how what appears “impossible” to one person is, in reality, just merely more difficult. In such circumstances, a Court will not permit a party to avoid liability simply because performance is more costly or burdensome than originally anticipated. See Habitat Tr. for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1306, 1336 (2009).

Turning to the present and the Coronavirus pandemic, it is hard to say how broadly (or narrowly) section 1511 (1) could arguably be applied to excuse performance of contracting parties. On one hand, whether performance of a given contractual duty will result in a violation of Governor Newsom’s Stay at Home Order thereby making it illegal is unclear. Police have not begun enforcing the order, by either ordering people to return home or issuing citations (at least at the time of this article). However, government actions are evolving, and it is reasonable to predict that Governor Newsom may order law enforcement officials to enforce the executive order by way of citations or other means. On the other hand, by issuing an order that requires individuals to remain at home and “shelter in place,” and that requires months’ long closures of businesses, Governor Newsom’s Order almost certainly prevents, or at the very least delays, performance of certain categories of contractual obligations. If that is the case, then a vast amount of contractual duties will likely be excused.

Irresistible or Superhuman Causes, Cal. Civ. Code 1511 (2)

“Acts of God” encompass the latter section of 1511(2), and excuse a party’s nonperformance if a natural event, like a pandemic, earthquake, or flood occurs that renders performance impossible. In most instances, the court’s ruling will often turn on whether the natural event was unanticipated by the parties at the time of contracting. See Ryan v. Rogers, 96 Cal. 349 (1892).

For example, in Ryan v. Rogers, 96 Cal. 349 (1892), the defendant pleaded that he was unable to complete his deliveries because heavy rainfall had flooded his usual delivery route. The court found that the defendant knew—before signing the contract—that rainstorms were a common occurrence during that time of year, and defendant’s usual delivery route was often flooded after a heavy rainstorm. Based on these findings, the court concluded that the flood was not unforeseeable, but expected at some point during the life of the contract and held the defendant liable for breach of contract. Id. at 353.

In comparison, the court in Ontario Deciduous Fruit-Growers’ Ass’n v. Cutting Fruit-Packing Co., 134 Cal. 21 (1901) held that a farmer was excused from furnishing specific varieties of fruit because the farmer’s orchards were “so far affected by an extraordinary drought.” Id. at 25. The court concluded that the farmer “[cannot] be made to perform impossibilities” in light of extreme weather conditions that were not contemplated by the parties when they signed the contract. Id.

Both cases teach us that courts are not willing to excuse a party’s nonperformance just because a natural event, like severe weather, interferes with the party’s performance. The court’s critical inquiry is whether the natural event was foreseeable by the parties when they executed the contract. If an impediment to a party’s performance is anticipated or foreseeable at the time of contracting, courts take the position that the party concerned about such impediment should draft contract terms to account for such risk or concern.

In closing, the Coronavirus pandemic may on its surface qualify as an “Act of God.” However, different from the courts’ usual probe, the main question here will be whether the Coronavirus qualifies as a “natural event” for purposes of section 1511 (2). Some argue that the Coronavirus outbreak is a natural event because we did not intentionally create the virus; rather, it is a natural product of our interactions and actions. Even if the Coronavirus does not meet the definition of “natural event,” the resulting effects of the pandemic, such as Governor Newsom’s order touched on above, would likely trigger the application of section 1511 to a variety of otherwise required contractual obligations. Courts throughout California will be forced to answer these questions with no precedent to rely on, as our country has not been confronted with a global health crisis, like this one, before.

Force Majeure By Contract

Before resorting to section 1511, nonperforming parties should first turn to their contract to determine whether a force majeure clause is included in their contract. Force majeure clauses are worded differently from contract to contract; but, generally, a force majeure clause will excuse a party’s nonperformance (or delay performance) of a given contractual duty when an unanticipated event specified in the clause occurs, rendering performance temporarily impossible.

The occurrence of an event specified in the force majeure clause does not automatically excuse a party from fulfilling their contractual commitments. Instead, the nonperforming party claiming nonperformance was justified due to an unforeseen event must satisfy two requirements.

The first requirement is the event that caused the party’s nonperformance must have been unforeseeable at the time the parties signed the contract. This requirement is akin to the analysis above regarding section 1511(2) and the holding in Ryan v. Rogers, 96 Cal. 349 (1892).

Second, performance must have been “impracticable” or “impossible” when performance was due, which largely mirrors the analysis of section 1511(1). Specific to force majeure provisions included in a contract, the nonperforming party must demonstrate that performance would cause them to suffer “an extreme loss, expense, difficulty, or injury.” Butler v. Nepple, 54 Cal. 2d 589, 599 (1960). However, a party cannot avoid liability merely because performance was more costly or burdensome than originally anticipated. Id.

In Butler v. Nepple, Nepple breached the contract because the steelworkers’ union went on strike, and he could not obtain the steel needed to satisfy his contractual commitments. Critical to Nepple’s argument was that the force majeure clause specified that if the steelworkers’ union went on strike, his performance was excused. Despite the clear language of the force majeure provision, the California Supreme Court disagreed. The court held that Nepple failed to show the other steel manufacturers’ prices were “extreme and unreasonable” based on what he usually paid. The court concluded that had Nepple satisfied his contractual obligations and obtained the requisite steel, Nepple would have only incurred a “mere increase in expense,” which does not justify a party’s nonperformance of a given contractual duty. Id.

Force majeure clauses are often overlooked during contract negotiations and are not given the attention they deserve. As such, businesses and people alike may find that their contracts contain boilerplate force majeure clauses that do not specifically address the Coronavirus pandemic. Whether a force majeure clause covers the current Coronavirus pandemic will not only depend on the exact language of the provision itself (e.g. acts of god, “catch-all” provisions), but also the specific circumstances of the case and to what extent the unforeseen event impacted a party’s performance—was it made impractical, or just more difficult?

It must be clarified that the defenses described, including the ones by statute, will likely only excuse a party’s performance temporarily. A party must resume satisfying its contractual obligations if and when it is no longer impossible to do so.

Protecting Your Legal Interests Right Now

The Coronavirus pandemic has made us question whether we can perform our contractual obligations, whether the other party has the means to perform, and what measures we should take to protect our interests. Below are some tips that address each of these questions:

Have You Determined That You Cannot Perform Your Contractual Duties?

Explore and evaluate other options to complete performance—that is, like Nepple, seek out alternative suppliers, vendors, etc., and determine the added expense of using such alternative options;
Communicate your position with the other contracting parties early to make each party aware of the circumstances, and to see whether you can work together to facilitate a resolution.

Are You Owed Performance?

Contact the performing party to ensure that they can or intend to satisfy their contractual obligations during the pandemic.
If the performing party cannot uphold their contractual commitments, then explore other options with the nonperforming party to find a solution, if possible. Courts frown upon non-breaching parties that refuse to work with the nonperforming party during a national crisis.

Are You Drafting A Contract?

Include a force majeure clause that specifies if the Coronavirus makes performance illegal or impossible, then the party is excused from performing its contractual obligations.
Force majeure clauses can also include any events that the parties believe will safeguard their interests. Do not be afraid to add any other language such as national emergency, terrorist attacks, riots, civil unrest, executive orders, etc.

Conclusion

Overall, the discharge of a given contractual duty is a fact-intensive inquiry that is determined on a case-by-case basis. If you are unsure whether your performance is excused or whether you can hold a party in breach of a contract for failing to perform, then speak to a California attorney for guidance.

The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this web site or any of the e-mail links contained within the site do not create an attorney-client relationship. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.