"Famous Last Words"

Unenforceable Under the Law (June 2006)

Dear Jim:

I try to be very careful and clear during contract negotiations. There are often some seemingly ludicrous things in first-draft contracts – for example, neither party could engage in class action suits against the other, or each party forfeits the right to a jury trial against the other. That seems rather fishy to me and frankly, I can't possibly see why it would be legal to revoke such rights even if I were to sign such a contract.

So here is my question: Are there any rights that simply can not be legally signed away in a contract?

Dear EvaUnit02:

The whole practice of contracting, in theory anyway, gives two independent parties operating from equal bargaining positions, the right to determine the nature and terms of their agreement through give-and-take arms-length negotiation.

The freedom of the marketplace gives each party the right to walk away if terms are not to its liking.

Under these circumstances, the law is loath to interfere. Parties have wide latitude within which to reach agreement before terms may be deemed unenforceable under the law.

That being said, there are outer limits beyond which no contract may go.

For example, contracts that require actions or involve products or services that are illegal can not be enforced.

Examples of unenforceable contracts may include requiring someone to employ minors in violation of child labor laws, or to employ anyone under circumstances that violate federal employment or state wage and hour laws, importing goods into the United States from Cuba or some other country with which contact is prohibited, dealing in endangered species, purchase and sale of controlled or illegal substances or products, or a contract to commit a crime.

Beyond these extreme situations, consulting agreements that provide for hourly wages below the minimums set by law, agreements in which one contracts him or herself into bondage or prostitution (remember, Lincoln freed the slaves), or contracts that require performance of illegal activities (for example, a minor who agrees under contract to drink a fifth of whiskey, or agrees to steal a car) would be unenforceable.

Contracts in which one party admits in advance it has defaulted as a way to ease an action for recovery by the other side (called a “cognovit action,” or “confession of judgment”) have been held unenforceable.

Penalty clauses in contracts are generally not enforceable. The remedy for failure to perform a contract is an action for damages – not enforcement of a penalty.

In certain situations, where the amount of actual damages could be difficult to ascertain, but an estimate can be made that is based, in some way, on the real loss suffered, the parties may agree to what is called “liquidated damages” as a way to short-circuit a time consuming and costly lawsuit for damages. But contract penalties, per say, are generally not enforceable.

If the terms of a contract for sale of goods are vague, courts look to the Uniform Commercial Code (or “UCC” for short) to fill the gaps. The UCC is a general set of laws that are applicable in 49 states (all except Louisiana). The UCC provides, for example, that every contract for sale of goods has underlying warranties made by the seller. These include that the goods are fit for their intended purposes and are “merchantable” (salable and fit for the market). But to demonstrate the power of the individual contracting process, these warranties can and often are waived in contracts (in bold capital letters as required by the UCC).

Game dev contracts, and employment contracts within the games industry, frequently have non-compete clauses. This language prohibits a person from accepting a job from, or performing services for, a direct competitor for some period of time after leaving the present employer.

In the news recently has been the case of Martin Tremblay, who left his job as COO of Ubisoft Montreal. Because Mr. Tremblay had signed an employment contract containing a non-compete clause, Ubisoft has been able to secure an injunction (court order) preventing him from accepting employment at Vivendi or from any Ubisoft competitor in the United States, Canada, or Mexico.

Enforcement of these non-compete clauses differs on a state by state basis. If Mr. Tremblay were to come to California, he would find the state will not permit enforcement of these clauses except under the narrowest circumstances. These circumstances generally center on an agreement not to compete when someone sells an interest in a business. Provided that Mr. Tremblay did not sell a material interest in Ubisoft when he departed, California public policy would be unlikely to permit enforcement of the Ubisoft non-compete or recognize the validity of the injunction. He would be free to literally leave his job and start the next day in the same position for a direct competitor across the street.

While other states may not take the extremely broad view of California in such matters (it is obvious Canada does not in that Ubisoft has successfully enjoined Mr. Tremblay from accepting employment from a competitor), the enforceability of non-competes generally hinges on whether the court believes the restrictions are “reasonable” under the circumstances. So a ninety day restriction within a hundred mile radius may be reasonable; a two year restriction covering all of North America may not. This determination can be highly fact sensitive.

In your question, two clauses were described. I have never seen an agreement that prohibits a party from participating in class-action litigation. But agreements can and do prescribe dispute resolution procedures. This is usually in the form of setting choice of laws, and sometimes, choice of venue. In the alternative, the parties may agree on a mediation and arbitration process when disputes arise.

If you are presented with a prohibition on participating in class-action litigation, ask the other side why it is there. Find out what interest they are trying to protect. Then determine whether such an extreme provision may be acceptable under the circumstances. If it is important enough to the other side, maybe there is a concession you can gain by accepting this.

Waiving the right to trial by jury is permitted. While it may be challenged later under extraordinary circumstances (for example, the development of circumstances far beyond those that either party had anticipated at the time the agreement was entered into), this waiver is generally enforceable.

UPDATE/EXTENSION

Hi Jim,

Furthering your [above] listing of several unenforceable contract provisions, I'd like to know more about what qualifies a provision as "unconscionable" and hence invalid, as was seen in the Art Buchwald lawsuit against Paramount.

Cheers,
Bill D

Dear Bill,

I won't comment on the Art Buchwald litigation as it is beyond the scope of our games-industry focus here.

As for what qualifies as unconscionable terms in a contract, I will let each reader use his or her own imagination.

But here are two definitions that appear in my law student's edition of Black's Law Dictionary, revised 4th edition:

“Unconscionable Bargain: An unconscionable bargain or contract is one which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept, on the other.”

“Unconscionable Conduct: Conduct that is monsterously harsh and shocking to the conscience.”

We all hope never to be confronted with circumstances that would qualify as unconscionable between two parties contracting in good faith.