Business Law

Selected Developments in Business Law — California Law of Contracts

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Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the April 2022 update to California Law of Contracts.  References are to the book’s section numbers.  The most significant legal developments since the last update include developments in such important topic areas as contract formation and interpretation, breach of contract, arbitration, and contract damages. 

California Law of Contracts

April 2022 Update

Contract formation

Effective January 1, 2022, CC §1568.5 provides that a minor’s representation that the minor’s parent or legal guardian has consented to a transaction will not be deemed to be consent for purposes of contract formation. The legislature was concerned that companies wishing to obtain consent to the terms and conditions of various internet services would often seek consent passively, through the minor child of a parent or guardian, and wanted to prevent contract formation in that manner. See §§2.2, 3.7, 4.65.

In Gordon v Atria Mgmt. Co., LLC (2021) 70 CA5th 1020, the court held that a family member holding a durable power of attorney (DPOA) was authorized to consent to arbitration on a resident’s behalf; language in the DPOA expressly authorized contracts for provision of residential care, authorized submission of claims to arbitration, and provided a broad grant of general powers. See §2.51.

Fraud in the execution must be distinguished from fraud in the inducement, when the promisor knows what they have signed but their consent has been induced by fraud. Fraud in the inducement negates freedom of consent and renders a contract voidable rather than wholly void. Najarro v Superior Court (2021) 70 CA5th 871, 886. See §3.6.

For negligent misrepresentation, actual intent to defraud (scienter) is not required. Borman v Brown (2021) 59 CA5th 1048, 1062 (not required that defendant knowingly made false representation or that defendant intended to deceive). See §3.16.

Contract interpretation

In Quidel Corp. v Superior Court (2020) 57 CA5th 155, 167, the court held that a rule of reason approach applies to evaluate noncompetition covenants outside the employment context. See §§3.37, 6.38.

In Dow v Honey Lake Valley Resource Conservation Dist. (2021) 63 CA5th 901, 914, the court held that the use of “or” in a water rights decree referred to an irrigation company’s entitlement to both divert and store water because surrounding circumstances indicated that the irrigation company provided language to ensure that it had the ability to exercise both diversion and storage rights. See §5.15.

In Hewlett-Packard Co. v Oracle Corp. (2021) 65 CA5th 506, 539, the court held that extrinsic evidence of a software developer’s unbroken practice of supporting newest versions of its product suite for server manufacturer’s existing platforms supported the developer’s obligation to continue to do so under the contract between the developer and a manufacturer, which stated that the developer “will continue to offer its product suite” on manufacturer’s platforms “in a manner consistent with [their] partnership as it existed” before developer hired manufacturer’s former chief executive officer. See §5.23.

Settlement agreements and releases of claims are contracts and are analyzed in the same manner as other contracts, unless there is a conflict with the relevant statute or applying those analytical principles would defeat the purpose of the agreement. Arriagarazo v BMW of N. Am., LLC (2021) 64 CA5th 742, 748; Coral Farms, L.P. v Mahony (2021) 63 CA5th 719, 726; J.B.B. Inv. Partners Ltd. v Fair (2019) 37 CA5th 1, 10. See §5.90.

Severability

In Alvarez v Altamed Health Servs. Corp. (2021) 60 CA5th 572, 595, the court found that a review provision in a mandatory arbitration agreement containing a severability clause was unconscionable, but was severable. See §5.70.

In Maldonado v Fast Auto Loans, Inc. (2021) 60 CA5th 710, 723, the court held that a class action waiver provision in an arbitration clause was not severable; it included “a ‘poison pill’ statement [that] ‘The parties acknowledge that the Class Action Waiver is material and essential to the arbitration of any disputes between them and is non-severable from this Arbitration Provision.'” See §5.71.

Unconscionability

Senate Bill 762 (Stats 2021, ch 222), codified at CC §1657.1, requires that any time period specified in an adhesion contract for the performance of an act that is required to be performed must be reasonable. See §5.73.

In Cabatit v Sunnova Energy Corp. (2020) 60 CA5th 317, 323, the court found that an arbitration clause in a solar power lease was procedurally unconscionable; the agreement was presented on an electronic device and scrolled through by a salesperson; the arbitration clause was not called to the plaintiffs’ attention; and the plaintiffs were not provided with a copy of the agreement. See §5.76.

In Alvarez v Altamed Health Servs. Corp. (2021) 60 CA5th 572, 589, the court found no procedural unconscionability based on an absence of a Spanish translation and a failure to provide a copy of the AAA rules; the plaintiff demonstrated a high degree of English fluency and merely preferred to read in Spanish; and her unconscionability challenge did not involve the AAA rules. See §§5.76, 5.79, 9.43.

Even if CC §1632 does not apply, the common law rule in California is that “a party who does not understand English sufficiently to comprehend the contents of a contract in that language is required to ‘have … it read or explained to him.'” Caballero v Premier Care Simi Valley LLC (2021) 69 CA5th 512, 515, citing Ramos v Westlake Servs. LLC (2015) 242 CA4th 674, 687. See §5.80.

Implied covenant of good faith and fair dealing

Breach of the implied covenant of good faith and fair dealing in the insurance context is referred to as “bad faith.” Major v Western Home Ins. (2009) 169 CA4th 1197, 1209. A claim of bad faith requires the court to find that the insurer acted unreasonably in some respect. Pinto v Farmers Ins. Exch. (2021) 61 CA5th 676, 681. See §6.37.

COVID-19 and force majeure

In Snow Phipps Group, LLC v KCAKE Acquisition, Inc. (Del Ch, Mar. 22, 2021, No. 2020–0282–KSJM) 2021 Del Ch Lexis 84, the parties entered into an agreement just before the COVID-19 pandemic for the buyer to acquire a company that sold cake decorations and technology to supermarket in-store bakeries. The court found that the buyer failed to show that a material adverse change had occurred. Although the seller experienced a large drop in sales, its sales then rebounded and were projected to continue to recover. In addition, the court held that the exception for effects arising from or related to changes in laws or orders by government entities applied because most of the decline in the seller’s sales arose from or were related to COVID-19-related government orders. See §6.47.

Non-delegable duties

In Manela v Stone (2021) 66 CA5th 90, 107, in regard to a custom home remodeling contract, the court held that “duties are not delegable in either of the following situations: (1) where in the nature or circumstances of the case, the skill, credit or other personal quality of the party was a distinctive characteristic of the thing stipulated for, namely, the personal nature of the contract itself, or (2) the personal quality of the party was a material inducement to the other party entering into the contract.” See §7.27.

Contract breach

If contracting parties agree that “the sufficiency of a party’s performance is to be decided by a third person (such as an engineer), that third person’s decision is conclusive and binding on the parties in the absence of bad faith, fraud, or gross negligence.” Coral Farms, L.P. v Mahony (2021) 63 CA5th 719, 722. See §8.2A.

In Hewlett-Packard Co. v Oracle Corp. (2021) 65 CA5th 506, 550, the court held that an anticipatory breach of contract occurs when the contract is repudiated by the promisor before the promisor’s performance is due. See §8.71.

Arbitration

Significantly, under CCP §1281.2, if a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party that arises out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common legal or factual issue, the court has several options under the statute, including the option to stay the arbitration pending the outcome of the court action or proceeding. In Nixon v AmeriHome Mortgage Co. (2021) 67 CA5th 934, the court of appeal held that the superior court did not abuse its discretion by declining to deny or stay arbitration under CCP §1281.2, because the lawsuit did not arise out of the same transaction as another former employee’s action and there was no likelihood of conflicting rulings. But see Los Angeles Unified Sch. Dist. v Safety Nat’l Cas. Corp. (2017) 13 CA5th 471, 483 (parties to arbitration agreement did not expressly agree to apply Federal Arbitration Act (FAA) procedures; thus, California state court procedures applied, and trial court had authority under CCP §1281.2(c) to deny motion to compel arbitration based on possibility of conflicting rulings in pending litigation with third parties). See §9.38.

In Romero v Watkins & Shepard Trucking, Inc. (9th Cir 2021) 9 F4th 1097, the Ninth Circuit held that the FAA’s transportation worker exemption could not be waived by private contract, but that the FAA simply did not apply to the arbitration agreement at issue. But see Capriole v Uber Techs., Inc. (9th Cir 2021) 7 F4th 854 (Uber drivers as class of workers do not fall within interstate commerce exemption from FAA). See §9.39A.

In Chamber of Commerce v Bonta (9th Cir 2021) 13 F4th 766, the Ninth Circuit reversed in part the district court’s conclusion that AB 51 was preempted by the FAA. The appellate court held that Lab C §432.6 was not preempted because it was solely concerned with pre-agreement employer behavior; it did not conflict with the FAA or create a contract defense by which executed arbitration agreements could be invalidated. A review of the FAA’s legislative history indicated that Congress was focused on the enforcement and validity of consensual written agreements to arbitrate and did not intend to preempt state laws requiring that agreements to arbitrate be voluntary. See §9.40C.

In Fisher v MoneyGram Int’l, Inc. (2021) 66 CA5th 1084, ruling that the arbitration provision in a consumer adhesion contract was procedurally unconscionable, the court found that it was hidden on the back of a money transfer order form in a tiny 6-point typeface that was virtually illegible. See §9.43.

In Maldonado v Fast Auto Loans, Inc. (2021) 60 CA5th 710, 721, following McGill v Citibank, N.A. (2017) 2 C5th 945, the court held that a class action waiver in an arbitration clause was invalid and unenforceable in plaintiffs’ putative class action and rejected the lender’s argument that McGill v Citibank was preempted by the FAA (9 USC §§1–16). See §9.47B.

In Smart Corner Owners Ass’n v CJUF Smart Corner, LLC (2021) 64 CA5th 439, 471, the court held that a CC&R requirement prohibiting a condominium owners association from suing developers without first obtaining consent of a majority of the owners violated a fundamental state policy by making it more difficult for the association to hold developers accountable for construction defects. See §9.52A.

In Speier v Advantage Fund, LLC (2021) 63 CA5th 134, 150, the court found that both parties’ counsel had business involvements with the ADR provider JAMS, but that the arbitrator’s failure to disclose his less than 1 percent interest in JAMS was not ground for vacating the arbitration award. See §9.52B.

In Monster Energy Co. v City Bevs., LLC (9th Cir 2019) 940 F3d 1130, 1138, the Ninth Circuit held that the arbitrator’s failure to disclose his ownership interest in JAMS, which had previously conducted 97 arbitrations for Monster Energy, created a reasonable impression of bias and supported vacatur of the arbitration award. However, the Monster Energy holding was limited in EHM Prods. v Starline Tours of Hollywood, Inc. (9th Cir 2021) 1 F4th 1164, 1171, which held that Monster Energy “only requires disclosure when an arbitrator holds an ownership interest in JAMS and JAMS engages in nontrivial business dealings with a party to the arbitration.” See §9.52C.

Damages for breach of contract

In Yoon v CAM IX Trust (2021) 60 CA5th 388, 393, the court held that negligence and fraud claims asserted by the borrower under a deed of trust in an effort to prevent the lender from enforcing its lien were claims “on the contract” and supported a prevailing-party attorney fee award to the lender. See §9.13.

Civil Code §3360 states that “[w]hen a breach of duty has caused no appreciable detriment to the party affected, he may yet recover nominal damages.” In Elation Sys., Inc. v Fenn Bridge, LLC (2021) 71 CA5th 958, 965, citing Sweet v Johnson (1959) 169 CA2d 630, 632, the court stated that CC §3360 has been applied to conclude that “[a] plaintiff is entitled to recover nominal damages for the breach of a contract, despite inability to show that actual damage was inflicted upon him.” In so holding, the court criticized two federal cases that held to the contrary as not controlling: Ruiz v Gap, Inc. (ND Cal 2009) 622 F Supp 2d 908, 917, aff’d (9th Cir 2010) 380 Fed Appx 689, and Aguilera v Pirelli Armstrong Tire Corp. (9th Cir 2000) 223 F3d 1010. See §10.10.

Under CC §3287(b), even if the amount of damages is unliquidated, the plaintiff in a breach of contract action may recover prejudgment interest in the court’s discretion, running from any date before entry of judgment that the court may fix, but not earlier than the date when the action was filed. For an example of a decision upholding a denial of an interest award under CC §3287(b), see Hewlett-Packard Co. v Oracle Corp. (2021) 65 CA5th 506, 576. See §10.24.


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