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Contract drafters sometimes put entire paragraphs into all-capital letters in the hope of making them "conspicuous"; you've probably seen examples of this particular disorder in warranty disclaimers and limitations of liability. But keeping the all-caps going for line, after line, after line, can be self-defeating, as the Georgia supreme court observed (arguably in dicta):

No one should make the mistake of thinking, however, that capitalization always and necessarily renders the capitalized language conspicuous and prominent.

In this case, the entirety of the fine print appears in capital letters, all in a relatively small font, rendering it difficult for the author of this opinion, among others, to read it.

Moreover, the capitalized disclaimers are mixed with a hodgepodge of other seemingly unrelated, boilerplate contractual provisions — provisions about, for instance, a daily storage fee and a restocking charge for returned vehicles — all of which are capitalized and in the same small font.

Raysoni v. Payless Auto Deals, LLC, No. S13G1826, slip op. at 6 n.5 (Ga. Nov. 17, 2014) (reversing and remanding judgment on the pleadings) (emphasis and extra paragraphing added).

The drafting tips here, of course, are:

1. Be judicious about what you put in all-caps.

2. Don't use too-small a font for language that you want to be conspicuous.

I'll be adding this to the commentary of the Common Draft research note on conspicuousness.

Georgia's supreme court seems to think that the words in a contract's warranty disclaimers mean whatever the court wants them to mean. In that court's November 17 opinion in Raysoni v. Payless Auto Deals, the main facts (in my view) were the following:

• The plaintiff, Raysoni, had bought a used minivan. Before the sale, he allegedly asked the sales representative whether the vehicle had ever been in an accident; the sales rep allegedly said no, and gave Raysoni a clean CarFax report.

• The sales contract included numerous disclaimers — and also said that at the auction (where presumably the dealership acquired the vehicle), the vehicle had been announced as having had unibody damage; moreover, the contract said, the buyer was urged to have the vehicle checked out before buying it.

• Two months after the sale, Raysoni allegedly learned that the vehicle had in fact been in an accident and suffered frame damage. The dealership rejected Raysoni's request to undo the deal and get his money back. Raysoni sued for fraud.

• The trial court granted judgment on the pleadings in favor of the dealership, saying that in view of the disclaimers in the sales contract, it would have been unreasonable for Raysoni to rely on the alleged written- and oral statements by the sales representative, and therefore Raysoni's fraud claims couldn't succeed. The court of appeals affirmed.

But then the state's supreme court took, how shall I put this, an intriguing view of the meaning of the disclaimer language, holding that:

The more prominent and general disclaimer of warranties—a provision that the minivan was sold "AS IS NO WARRANTY"—is followed immediately by an explanation that arguably qualifies and limits [sic] that disclaimer: "The dealership assumes no responsibility for any repairs regardless of any oral statements about the vehicle."

Raysoni v. Payless Auto Deals, LLC, No. S13G1826, slip op. at 5 (Ga. Nov. 17, 2014) (emphasis added).

Seriously? The court's interpretation seems totally contrary to the plain, unambiguous language of the contract. The agreement's no-responsibility-for-repairs sentence doesn't qualify or limit the as-is-no-warranty disclaimer, it emphasizes one of its implications.

And that's not all—the supreme court continued:

Likewise, the additional disclaimers of specific warranties that appear in the fine print of the contract are followed by the provision that "NO SALESMAN VERBAL REPRESENTATION IS BINDING ON THE COMPANY," and to the extent that the latter provision can be understood as an explanation of the foregoing disclaimers, it limits [sic] those disclaimers.

Id. (emphasis added).

Look, I get it; the supreme court didn't like it that the dealership allegedly gave the buyer a clean CarFax report but then tried to rely on a warranty disclaimer and a written warning that the car had been reported to have been damaged. But despite the supreme court's unanimous opinion, I still don't see how anyone could reasonably conclude that the dealership's warranty disclaimer was "qualifie[d] and limit[ed]" by the additional contract language. Moreover, on the facts as stated by the supreme court, I'm not sure what else the dealership could reasonably have done.

The danger now is that every contract drafter whose work might end up in a Georgia court must wonder whether even the most hard-hitting of warranty disclaimers will be enough to avoid a jury trial on fraud charges.

So what's the drafting tip here? All I can think of is to say, after a warranty disclaimer, that "The following additional provisions are not intended to limit the warranty disclaimer of the previous sentence." I've put comparable language into the Common Draft implied-warranty disclaimer. It seems a pity, though, that this might be necessary.

Audit rights can come in handy

Why ask for audit rights? Because mistakes happen—and so do creative accounting, stonewalling, and even outright fraud. Audit provisions can help to detect, and thus to deter, all of the above. (The nuclear Navy has a saying: You don't get what you expect, you get what you inspect.)

Consider, for example, the recent case of Zaki Kulaibee Establishment v. McFliker, No. 11-15207 (11th Cir. Nov. 18, 2014), where the appeals court reversed, as an abuse of discretion, a district court's refusal to order an accounting. In that case:

• Zaki, a Saudi company signed a consignment agreement with ANI, a Florida company, under which the Florida company would sell what was expected to be around $500 million worth of aircraft parts and remit the proceeds, less a commission, to the Saudi company.

• The parties apparently didn't have any parts-inventory procedure in place for confirming just what parts the Saudi company had shipped to the Florida company.

• A dispute over payment arose, during which the Saudi company tried repeatedly but unsuccessfully to get discovery to find out just how many parts the Florida company had really received and how many it had really sold. According to the appellate court:

ANI also manipulated the discovery procedures to prevent Zaki from discovering how many of its parts remained.

ANI retained possession and control of the remainder of Zaki’s parts—and along with them, the only conclusive means of determining the existence and extent of any damages.

Yet ANI repeatedly stymied Zaki’s attempts to conduct an inventory of those parts while simultaneously spinning out the discovery process for as long as possible.

Id., slip op. at 30 (extra paragraphing added).

• The parties' contract included an audit provision, see id., slip op. at 5, but the district court refused to order an accounting.

• The appeals court reversed on that point—but it took the Saudi company years of litigation and who knows how much in legal fees to get even that far. The appellate court seems not to have relied on the contract's audit provision, but instead on the Florida company's fiduciary duty as a consignee. And if the contract hadn't included an audit provision, who knows whether the appellate court would have taken the view it did.

Lesson for drafters: When the other side will have all the information needed to determine whether your client is getting everything to which it's entitled, it's a very good idea to include an audit provision.

I'll be adding a summary of this case in the research notes for the Common Draft audit provisions.

Noble Drilling, an oil-well drilling contractor, pled guilty to eight felony charges relating to Noble's operation of two offshore drilling rigs in the Arctic for Shell Oil. (Noble apparently had problems with pollution, propulsion equipment failures and record-keeping.) Shell doesn't seem to have been charged. See Jennifer A. Dlouhy, Arctic charges result in guilty plea, Houston Chronicle, Dec. 9, 2014, at D1 col. 1.

It's a safe bet that Shell Oil's contract with Noble Drilling included at least two types of provision requiring Noble Drilling to:

  • comply with applicable law; and
  • "handle it," that is, defend and indemnify Shell Oil (and probably all of its affiliates) if something were to go wrong on the legal-compliance front.

See, for example, the Common Draft compliance-with-law section, which goes into detail about just what laws must be complied with and also includes an indemnity clause. (I took a quick look at Noble Drilling's SEC filings but didn't see that it had filed any drilling contracts.)

I just updated the Legally Lean page with links to useful resources about Y Combinator's "safes" (Simple Agreement for Future Equity) as a low-cost vehicle for startups to take very-early investment.

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