Liabilities Arising From Contract Negotiations

by Dorsey & Whitney LLP

Yesterday evening, I had the pleasure of moderating a panel comprised of two distinguished in-house counsel, Zachary Zahrek and Teigue Thomas, discussing liabilities and litigation risks that arise from contractual negotiations.  Dorsey and the Southern California Chapter of the Association of Corporate Counsel hosted the CLE in the press club room at Angels Stadium–which was a terrific venue–and we then enjoyed a baseball game after the CLE.

L to R:  Zachary Zaharek, VP and Division Counsel, First American; Teigue Thomas, President, Chief Legal and Administrative Officer, Tuttare, LLC;  Kent Schmidt, Dorsey & Whitney.  Note:  No performance enhancing drugs were used prior to this CLE presentation.

 L to R: Zachary Zaharek, VP and Division Counsel, First American; Teigue Thomas, President, Chief Legal and Administrative Officer, Tuttare, LLC; Kent Schmidt, Dorsey & Whitney. Note: No performance enhancing drugs were used prior to this CLE presentation.

I have previously touched on this important topic of negotiation liabilities at this blog and written about the issue in the Orange County Business Journal.
Here is a summary of what was presented.  Companies are increasingly facing claims arising in the context of negotiating contracts.  Those liabilities are separate and distinct from contractual liabilities because they attach even if a contract is not ultimately signed. If your company (a) ever negotiates contracts; and (b) wants you to identify ways to avoid costly litigation, this topic is relevant to you.  There are four principal risks that we identified:
  • The “Contract” That You Did Not Know Was Created: Parties engaged in contract negotiations may inadvertently trigger contract or quasi-contractual liability even if a final agreement is never signed and one of the parties contends that there is no enforceable contract. The conventional wisdom and operating assumption is that, unless and until a final agreement is executed in the traditional sense, no agreement has been created.  This is not always the case.
  • When Hardnosed Negotiations Create Tort Liabilities:  Parties engaged in contract negotiations may inadvertently trigger duties of good faith toward one another including a duty to attempt in good faith to reach a deal.  Courts recognize a duty to attempt to reach a deal and that claims for damages may arise from the failure of one of the parties to negotiate in good faith.
  • Whose Secret Was It Anyway?  Parties engaged in preliminary discussions involving a potential arrangement by which one party will share its technology may be exposed to litigation risks. These communications may trigger significant legal obligations and expose the parties to claims arising from the receipt of allegedly confidential information. In these cases (unlike what has been discussed above), there may not be an alleged enforceable agreement between the parties other than perhaps vague oligations set forth in a nondisclosure agreement (“NDA”). The risk is not necessarily contractual but that a misappropriation of trade secrets claim will be asserted years later.  A disappointed party may be motivated to bring a lawsuit in large part because a deal was never reached.
  • Promises and Parol Evidence:  Parties engaged in contract negotiations may trigger new risks arising from statements made by the individuals who negotiated the agreement. In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., 55 Cal. 4th 1169 (2013), the Supreme Court reversed 78 years of precedent (and what all of us were taught in law school) to hold that evidence of terms that varied the contract terms is admissible.
I will be writing a series of four posts summarizing these four risks in the near future.  Thanks to the Association of Corporate CounselSara Van Dusen and my learned co-panelists for making this CLE a success.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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