California choice-of-law cheat sheet
Table of contents
- 1 Any attorneys’ fees provision is treated as a prevailing-party provision
- 2 Facts recited in a contract are conclusively presumed true as between the parties
- 3 Choice-of-law provisions are liberally enforced
- 4 Consent to assignment of a real-property lease cannot be standard-less
- 5 Consequential damages exclusion disappears if exclusive remedy fails of its intended purpose
- 6 Automated renewals in consumer contracts are restricted
- 7 Contractors can be liable for wages of employees of unlicensed subcontractors
- 8 Liquidated-damages clauses are presumptively valid in business contracts
- 9 Non-competition clauses: Some of the most common ones are almost per se unenforceable
- 10 Resale price maintenance (“vertical price fixing”) can cause serious trouble under state law
- 11 Trade-secret status may be jeopardized by Green Chemistry law
- 12 Unfair competition law has teeth
- 13 Work-make-for-hire agreements with California consultants can cause significant problems under state law
- 14 Starting licensed work without a license may cost big bucks
- 15 Indemnity obligation may implicitly require claim defense
- 16 Indemnity obligation for own active negligence must be “particularly clear and explicit”
- 17 Jury-trial waivers (pre-dispute) are unconstitutional
- 18 Parol evidence rule is more liberal
- 19 Agreements to negotiate in good faith may be enforceable
Any attorneys’ fees provision is treated as a prevailing-party provision
See Cal. Civ. Code § 1717 (accessed 2010-01-29).
Facts recited in a contract are conclusively presumed true as between the parties
The recitals and representations of a contract may carry special weight in California, whose evidence code section 622 provides: The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration. (Hat tip to commenter “Kazu” at the AdamsDrafting blog.)
Choice-of-law provisions are liberally enforced
[ADDED 2011-07-10] In addition to the usual rules governing contractual choice of law, a California statutory provision expressly validates a contractual choice of California law for non-personal contracts having a value of at least $250,000, even if there is no relationship between the contract and California. See Cal. Civ. Code § 1646.5.
Consent to assignment of a real-property lease cannot be standard-less
Section 1995.260 of the California Civil Code provides that “If a restriction on transfer of the tenant’s interest in a lease requires the landlord’s consent for transfer but provides no standard for giving or withholding consent, the restriction on transfer shall be construed to include an implied standard that the landlord’s consent may not be unreasonably withheld. …”
A California appeals court held in 2008 that a contract provision allowing the landlord to withhold consent “for any reason or no reason” was not to be construed as including an unreasonably-withheld standard, saying that “the parties’ express agreement to a ‘sole discretion’ standard is permitted under legal standards existing before and after enactment of section 1995.260, as long as the provision is freely negotiated and not illegal.” Nevada Atlantic Corp. v. Wrec Lido Venture, LLC, No. G039825 (Cal. App. Dec. 8, 2008) (unpublished; reversing trial-court judgment that withholding of consent was unreasonable). [ADDED 2011-06-09]
Consequential damages exclusion disappears if exclusive remedy fails of its intended purpose
In its Hawaiian Telephone case, the Ninth Circuit explained its prior decision applying California law in RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985):
In RRX Industries we affirmed the trial court’s award of consequential damages notwithstanding a provision in a computer software contract which limited the seller’s liability to the contract price.
The seller in RRX Industries completed installation of a computer software system for the buyer, but was unable to get the bugs out of the system or make it operate reliably.
We noted that “the software never functioned as intended …[, the seller] failed to correct adequately programming errors …[, and] did not provide [the buyer's] employees with sufficient training.” Id. at 546.
We held this evidence supported the trial court’s finding of a breach of the contract and that the trial court properly found the default by the seller “so total and fundamental that its consequential damages limitation was expunged from the contract.” Id. at 547
(Emphasis and extra paragraphing added.)
Automated renewals in consumer contracts are restricted
Contractors can be liable for wages of employees of unlicensed subcontractors
California courts have looked to Cal. Lab. Code § 2750.5 to hold that a contractor that uses an unlicensed subcontractor is responsible for unpaid wages, withholding, and worker’s compensation premiums of the subcontractor’s employees; see generally this Pillsbury Winthrop memo.
Liquidated-damages clauses are presumptively valid in business contracts
In California, “a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” Cal. Civ. Code § 1671(b); see also this post.
Non-competition clauses: Some of the most common ones are almost per se unenforceable
Post-employment non-competition clauses are pretty much verboten in California; the state is fiercely protective of "open competition and employee mobility." Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 189 P.3d 285, 81 Cal. Rptr.3d 282 (2008) (affirming court of appeals ruling that post-employment non-competition covenant was void).
Even putting a non-competition clause in a California employment agreement is deemed unfair competition under Cal. Bus. & Prof. Code § 17200 – see Applied Materials, Inc., v. Advanced Micro-Fabrication Equipment (Shanghai) Co., No. C 07-05248 JW (N.D. Cal. May 20, 2009) (granting defendant’s motion for summary judgment on its counterclaim for unfair competition); see also this post.
On the other hand, the California Supreme Court has held that an employer can require an employee who resigns (or is terminated for cause) to forfeit unvested restricted stock that the employee elected to accept in lieu of a portion of the employee’s cash compensation, along with cash to be used to purchase such stock. See Schachter v. Citigroup, Inc., No. S161385 (Cal. Nov. 2, 2009) (in effect affirming summary judgment in favor of employer). [ADDED 2009-11-17; hat tip: Sidley Austin LLP]
Resale price maintenance (“vertical price fixing”) can cause serious trouble under state law
Drafters of distributor- and reseller agreements should be extremely cautious about agreeing to the pricing that the “downstream” party will charge to its own customers. See a spring 2010 article by Scott Martin of Greenberg Traurig at http://goo.gl/eAky.
Trade-secret status may be jeopardized by Green Chemistry law
“In order to assure the consuming public that products sold in California contain ‘safe’ chemicals, California’s recent Green Chemistry Initiative promises to open up a manufacturer’s internal processes to public disclosure, inspection and comment by any party—including environmental advocacy groups and business competitors.” Alston & Bird LLP, Increased Risks to Disclosure of Proprietary Information and Trade Secrets Presented by New California Environmental Legislation (Oct. 18, 2010; accessed Nov. 1, 2010).
Unfair competition law has teeth
California’s legendary unfair competition law was once abused as a shakedown tool by certain lawyers, some of whom were disbarred as a result.
California voters amended the law in 2004 by approving Proposition 64, so that under section 17204, standing to sue is now limited to private plaintiffs who suffered injury in fact and lost money or property as a result of the unfair competition, along with the attorney general, district attorneys, and certain other government attorneys.
Regardless, the UCL still has significant teeth, and should be kept in mind by companies that might be amenable to suit in California.
Work-make-for-hire agreements with California consultants can cause significant problems under state law
See this January 2011 blog posting.
Starting licensed work without a license may cost big bucks
In California, a contractor that undertakes work required to be done by a licensed contractor (e.g., certain construction- or remodeling work), but that does not itself have the proper license(s) at all times while performing the work, may forfeit its right to be paid for any of the work. See, e.g., Great West Contractors, Inc., v. WSS Industrial Construction, Inc., 162 Cal.App.4th 581, 76 Cal.Rptr.3d 8, No. B191662 (Cal. App. Apr. 28, 2008) (reversing $220,000-plus judgment in favor of subcontractor, on grounds that subcontractor had not obtained the required license when it prepared initial shop drawings and did other preliminary work).
Moreover, under a 2002 ‘disgorgement’ amendment to the California statute, such a contractor might have to repay any payments it did receive for the work. See Kyle A. Ostergard, California Contractors Beware: You Must Be Properly Licensed at All Times! for more analysis and cautions.
Indemnity obligation may implicitly require claim defense
The California Supreme Court has held that, by statute — specifically, Cal. Civ. Code § 2778(3) — unless the parties to a contract agree otherwise, a party having an indemnity obligation under the contract is also obligated, upon request, to provide a defense for the protected party. See Crawford v. Weather Shield Mfg. Inc., 44 Cal.4th 541, 553 (2008) (affirming court of appeal’s affirmance of trial-court judgment).
[UPDATED 2010-12-09:] A California appeals court held in 2010 that the duty to defend applies even without an allegation that the indemnifying party was negligent. See Universal Development vs. CH2M Hill, No. H033610, 181 Cal.App.4th 10 (2010) (affirming judgment that engineering firm was liable to real-estate developer for cost of defending against negligence suit by homeowner association).
Apparently in response to the Universal Development decision, in 2010 the California legislature enacted a statute limiting the duty of design professionals to indemnify or defend public agencies with which they contract. See S.B. 972, amending Cal. Civ. Code § 2782.8.
Indemnity obligation for own active negligence must be “particularly clear and explicit”
[ADDED 2012-10-06:] “… it has been said that if one seeks, in a noninsurance agreement, to be indemnified for his or her own active negligence, or regardless of the indemnitor’s fault — protections beyond those afforded by the doctrines of implied or equitable indemnity — language on the point must be particularly clear and explicit, and will be construed strictly against the indemnitee.” Crawford v. Weather Shield Mfg. Inc., 44 Cal.4th 541, 552 (2008) (extensive citations omitted; not relevant to the court’s holding).
Jury-trial waivers (pre-dispute) are unconstitutional
[ADDED 2010-12-08:] See Grafton Partners L.P. v. Superior Court, No. S123344 (Cal. Aug. 4, 2005) (affirming ruling that pre-trial waiver of jury trial was unconstitutional because it did not fit within one of the statutorily-permitted waivers). For suggestions on other alternatives to a jury trial in California, see Susan Alker, Jury Trial Waivers - California is Just Different (Nov. 12, 2010; accessed Dec. 8, 2010).
Parol evidence rule is more liberal
[ADDED 2011-10-13:] California seems to be more liberal than some other states in allowing parol evidence — for example, evidence concerning the parties’ pre-signature negotiations — to help establish the meaning of a disputed contract term. As stated by one court, “[t]he test of whether parol evidence is admissible to construe an ambiguity is not whether the language appears to the court to be unambiguous, but whether the evidence presented is relevant to prove a meaning to which the language is ‘reasonably susceptible.’” Winet v. Price, 4 Cal.App.4th at 1165, 6 Cal.Rptr.2d 554 (internal citation omitted). [Adapted with permission from a blog posting by my former law partner David Healey.]
Agreements to negotiate in good faith may be enforceable
[ADDED 2011-10-13:] California will enforce contracts to negotiate in good faith: Whether defendants negotiated in good faith is a not a question of law—it is a question of fact for the jury. Copeland v. Baskin Robbins U.S.A. 96 Cal.App.4th 1251, 1261. [Adapted with permission from a blog posting by my former law partner David Healey.]