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Litigation: “Don’t sign that yet”: Common contract terms that can get you into court

Subjective performance clauses can produce protracted litigation if worded incorrectly

Reaching “yes” on contract terms is often made easier by using commonly-employed subjective performance clauses, rather than developing and negotiating agreement on objective criteria for contract performance. Transactional lawyers and their clients take comfort from the familiar sound of these clauses, such as “reasonable” or “best efforts” provisions, “materiality” limitations and “consent” clauses. Comfort can become angst after the closing, when the practical meaning of those familiar-sounding clauses becomes hard to pin-down.

Subjective performance clauses are not merely seeds for later disputes — they can produce protracted litigation. Loosely-defined terms destroy prospects for a quick victory through a motion to dismiss or for summary judgment. For example, if the contract includes the word “material” without a specific definition, courts may interpret it in unexpected ways, applying vague and subjective standards of “materiality” that vary by jurisdiction: Does the term go to the root of the agreement between the parties? Does it affect a party’s decision to enter into the contract? Skilled litigators can shape nearly any set of facts to raise a summary judgment-defeating question of fact concerning an undefined materiality clause. The inherent subjectivity of performance clauses lacking objective benchmarks can lead to prolonged discovery and a trial (or an unfavorable settlement in lieu of trial), rather than a quick and predictable judgment.

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Edwin Baum

Edwin Baum is a partner in Crowell & Moring's Commercial Litigation Group in New York, the head of the firm’s New York office, and a...

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Contributing Author

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Kathleen Balderrama

Based in Los Angeles, Kathleen Balderrama is a counsel in Crowell & Moring's Commercial Litigation Group and focuses on complex financial cases for Fortune 500...

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