Contracts Gone Bad: The
Litigator’s Wish List for
Transactional Lawyers
Co-sponsored by the Litigation, Business Law, and
Real Property Sections
Speakers:
Hon. Leslie D. Alden
John C. Altmiller, Jr.
Mary C. Zinsner
John W. Hawthorne (Moderator)
Friday, June 19, 2015
Hilton Oceanfront Hotel, Virginia Beach
9:00-11:00 AM
2.0 MCLE Credits
Virginia State Bar - CLE Disclaimer
This material is presented with the understanding that the publisher and the author do not render
any legal, accounting or other professional service. It is intended for educational and informational
use by attorneys licensed to practice law in Virginia. Because of the rapidly- changing nature of the
law, information contained in this publication may become outdated. As a result, an attorney
using this material must always research original sources of authority and update information to
ensure accuracy when dealing with a specific client’s legal matters. In no event will the author, the
reviewers, or the publisher be liable for any direct, indirect or consequential damages resulting
from the use of this material. The views expressed herein are not necessarily those of the Virginia
State Bar.
Hon. Leslie M. Alden (Ret.) joined the faculty at the George Mason University School of Law in 2012 after
serving nearly 18 years on the Fairfax County Bench. She teaches Virginia Practice and Federal Rules of
Evidence. In more than 31 years, she has litigated, presided over or settled hundreds of cases, many
involving local government, real estate, construction law and other commercial issues. She is also a
Senior Professional with Juridical Solutions PLC, providing arbitration and mediation services.
For many years, Judge Alden has been a frequent participant in international legal and judicial programs,
notably having served as the President of the International Association of Women Judges, 2008-2010,
and remains on the IAWJ Board of Managerial Trustees. She served the National Association of Women
Judges (US) as its International Director for 5 years, developing the award-winning judicial program
Beyond Borders: The Impact of International Law in U.S. Courts.
Before joining the bench, Judge Alden was a shareholder in the law firm Verner, Liipfert, Bernhard,
McPherson & Hand in Washington, D.C., with a practice centered on commercial litigation and local
government law.
Judge Alden earned her J.D. in 1983 from George Mason University School of Law, and earned her B.S.
(Business Administration) in 1978 from George Mason University. In 2001, she completed the
Economics Institute for State Judges presented by the Law and Organizational Economics Center. In
2005, she completed the Sir Richard May Seminar on International Law and International Courts
presented by the International Judicial Academy.
A member of the Virginia State and the District of Columbia Bars, Judge Alden is a frequent lecturer and
remains active in numerous professional groups.
John C. Altmiller
7926 Jones Branch Drive
Suite 930
McLean, Virginia 22102
Education
Villanova University, Bachelor of Arts, 1992
George Mason University school of Law, Juris Doctor, 1992
Employment
Pesner Kawamoto, PLC, Partner, 2008-present General litigation practice focused on real estate,
construction and business litigation. Practice includes representing parties to real estate disputes, contract
disputes, counseling owners and associations regarding community law issues, representing lenders and
other parties in title disputes, litigating adversary proceedings in the Bankruptcy Court for the Eastern
District of Virginia, federal and state appellate practice, representation in corporate and partnership
disputes, and litigating trust and estate matters.
Hunzeker, Lyon & Leggett, P.C., Associate, 1998-2003 and Partner, 2003-2008 Headed the law firm’s
litigation department, which included the management of two associates. Practice was centered on real
estate, real estate litigation, and business and contract litigation. Acted as litigation counsel for the largest
settlement company in the metropolitan area, which included resolving title issues and pursuing collection
matters.
Langley & Langley, P.C., Associate, 1996-1997 Responsible attorney for the Fairfax County satellite office.
Practice was focused on general litigation, and divorce and criminal law.
Law Offices of John C. Altmiller, Sole Practitioner, 1995 Operated a general practice law firm focused on
litigation.
Joel A. DeBoe & Associates, Associate, 1992-1994 Practiced in the areas of personal injury, divorce and
criminal law. Primary responsible attorney for over 25 cases at any one time.
Admissions
Commonwealth of Virginia
U.S. Court of Appeals for the Fourth Circuit
U.S. District Court for the Eastern District of Virginia
U.S. Bankruptcy Court for the Eastern District of Virginia
Professional Offices and Activities
Fairfax County Bar Association, Property Section, Co-Chair, 2006-2007
NVAR Attorney Roundtable, Chairman, 2011
Reported Cases
Nicksolat v. Gharavi, 2013 Va. Cir. LEXIS 89 (Va. Cir. Ct. Sept. 16, 2013)
Ross v. R.A. North Dev., Inc. (In re Total Realty Mgmt., LLC), 2013 U.S. App. LEXIS 950, 6-7 (4th Cir. Jan.
14, 2013)
Zhou Jie Plant v. Merrifield Town Ctr. Ltd. P'ship, 482 Fed. Appx. 823, 826 (4th Cir. 2012)
Khader v. Hadi Enters., 2010 U.S. Dist. LEXIS 135514, 2-3 (E.D. Va. Dec. 22, 2010)
Pugsley v. Jalajel, 2010 WL 3946420, 2010 Bankr. LEXIS 3537 (Bkrtcy.E.D.Va. 2010)
Long v. Merrifield Town Center Ltd. Partnership, 611 F.3d 240 (4thCir. 2010)
Feeley v. Total Realty Management, 660 F.Supp.2d 700 (E.D.Va. 2009)
Khader v. Hadi Enterprises, 2010 WL 5300876, (E.D.Va., December 22, 2010)
Sedler v. Select Properties, Inc., 67 Va. Cir. 515 (2004)
Gilliam v. Gilliam, 2003 WL 22519683, Va. Cir. Ct., August 14, 2003
Anderson v. Corrigan , 59 Va. Cir. 219 (2002)
Seminars
Virginia CLE
28th Annual Real Estate Practice Seminar
The Essential Terms of Virginia Residential Real Estate Contract, May 2010
Neighbor Law
Disruptive Behavior Between Neighbors, September 2009 & 2011 & 2014 (upcoming)
17th Annual Advanced Real Estate Seminar
Everything You Wanted to Know About Real Estate Litigation (But Were Afraid to Ask), March 2013
31st Annual Real Estate Practice Seminar
Ethical Dilemmas For Real Estate Attorneys, May 2013
Virginia Trial Lawyers Association
52nd Annual Convention of the Virginia Trial Lawyers Association
The Real Estate Market’s Effect on Equitable Distribution in Agreements & Litigation: Values, Mortgages &
Title Issues, April 1, 2011
Fairfax County Bar Association
Real Estate Law for the New and Non Real Estate Practitioner,
Real Estate & Litigation, April 20, 2004
Important Recent Changes in Real Estate Law & Practice
Mandatory Disclosures and Arbitration in Virginia, January 30, 2008
National Business Institute
Essentials of Section 1031 Exchanges in Virginia, November, 2003, Arlington
Keys to Success in a Real Estate Transaction in Virginia, April, 2004, Fairfax
Closing the Deal: How to Succeed at Real Estate Transactions in Virginia, April, 2005, Fairfax
Resolving Real Estate Title Defects, July, 2006, Fairfax
Real Estate Transactions Made Painless and Efficient, September, 2006, Fairfax
Troubleshooting Title and Title Insurance Problems, August, 2007, Fairfax
Real Estate Transactions Made Painless and Efficient, September, 2007, Fairfax
Real Estate Litigation in Virginia, October, 2007, Fairfax
In-Depth Title Insurance Principles, June, 2008, Fairfax
Negotiating Real Estate Contracts, July 2008, Fairfax
Resolving Real Estate Title Defects, August, 2008, Fairfax
Minimizing Liability in the Real Estate Broker-Client Relationship, August, 2008, Fairfax
Real Estate Transactions Made Painless and Efficient, September, 2008, Fairfax
In-Depth Title Insurance Principles, June, 2009, Fairfax
Real Estate Law: Advanced Issues and Answers, October 2009
How to Obtain Good Title in Real Estate Transactions, September, 2010
Real Estate Law: Advanced Issues and Answers, October 2010
Mary C. Zinsner | Troutman Sanders LLP
Mary C. Zinsner
Pa r t ner
Tysons Corner
Bu sine ss Phon e : 703.734.4363
Bu sine ss Fa x : 703.448.6514
[email protected]
vCard
Re la t ed Pr a ct ice s
Financial Services
Litigation
Business Litigation
Consumer Credit
Regulations
Consumer Financial
Protection Bureau
(CFPB)
Litigation
Securities Litigation
Challenges to Mergers
and Acquisitions and
Other Transactional
Litigation
Corporate Governance
Disputes and D&O
Claims
Information
Technology
Privacy and Data
Security
Product Liability
Securities Class Action
and Shareholder
Derivative Litigation
Securities Litigation
Investigations and
Enforcement
Mary Zinsner's practice focuses on
business and commercial litigation and
representation of financial institutions in
lender liability, operations, consumer
finance, fiduciary and creditor’s rights
disputes. Mary regularly represents clients
in defense of litigation involving allegations
of identity theft and privacy matters. She
is a member of the firm’s Privacy and Data
Security practice and counsels clients and
speaks on issues relating to privacy laws
affecting financial institutions.
Mary practices extensively in the federal
courts in Virginia, Maryland, and the
District of Columbia, and has handled
many appellate matters before the
Supreme Court of Virginia and United
States Court of Appeals for the Fourth
Circuit. Having clerked for the Honorable
Claude M. Hilton, United States District
Judge for the Eastern District of Virginia,
she is very familiar with local federal court
practices and frequently lectures on
litigation practices in the "Rocket Docket."
Mary was selected as a 2008 Top
Washington Lawyers Finalist in Corporate
Litigation by Washingt on Business Journal.
Mary works extensively with clients to
achieve results compatible with business
practicalities, and workable approaches to
dispute resolution are considered in every
litigation matter.
http://www.troutmansanders.com/mary_zinsner/
Page 1 of 5
Educa t ion
• The George
Washington
University, J.D.,
1990
Moot Court Board
1988-1990
(Executive Council
1989-1990)
• College of the Holy
Cross, A.B., 1987
Economics and
History
Ba r Adm issions
• 1990 Virginia
• 1991 District of
Columbia
• 1998 Maryland
Cour t Adm issions
• 1990 Supreme
Court of Virginia
• 1991 U.S. District
Court for the
Eastern District of
Virginia
• 1991 U.S. Court of
Appeals for the
Fourth Circuit
• 1992 U.S. Court of
Appeals for the
District of
Columbia Circuit
• 1992 U.S. District
Court for the
District of
Columbia
• 1993 U.S. District
Court for the
District of
Maryland
1/9/2015
Mary C. Zinsner | Troutman Sanders LLP
Page 2 of 5
Re pr e se n t a t ive M a t t e r s
• 1995 U.S.
Supreme Court
Financial I nst it ut ion Lit igat ion
• 1998 Maryland
Court of Appeals
• Represent national banking
association in successful 12(b)(6)
motion before the federal district
court, affirmed by Fourth Circuit Court
of Appeals in published opinion,
holding that bank not liable to
customer for breach of written
contract for failing to follow alleged
oral investment directive of customer
where the discretionary investment
account agreement conferred
discretion on the bank to make
investment decisions and required
investment directives to be in writing
to be binding.
• Successful defense and resolution of
matter on behalf of national banking
association involving substantial
liability on warranty and
indemnification claims under the
National Automated Clearing House
Association (NACHA) rules and
regulations, with bank customer
assuming costs of defense and
settlement liability. Case involved
significant bank customer and
sensitive customer relation issues.
• Regular successful representation of
national banking associations, state
chartered banks, and community
banks in defense of cases involving
crooked bookkeepers and other
allegations of UCC liability.
• Multiple successful representations of
banks, credit card companies, and
mortgage lending institutions in
federal court litigation involving claims
of violation of the FDCPA, FCRA,
ECOA, TILA and other consumer
finance issues.
• Successfully defended and protected
bank/mortgage client lien interests in
dozens of cases filed by borrowers in
multiple states seeking to avert
foreclosure asserting violations of
federal and state consumer finance
and consumer protection statutes.
• Regular litigation of preemption
issues.
http://www.troutmansanders.com/mary_zinsner/
1/9/2015
Mary C. Zinsner | Troutman Sanders LLP
Page 3 of 5
• Prevailed on motion to dismiss filed on
behalf of national banking association
in case filed by court appointed
receiver seeking substantial damages
and punitives arising out of asset
freeze order served on bank in
connection with Ponzi scheme
orchestrated by former bank
depositor.
• Successful defense at trial court level
and prevailing party in Virginia
Supreme Court appeal in published
opinion representing national banking
association arising from allegations of
improper handling by the bank of a
multiple-party account.
• Successful defense of multiple
financial institutions in cases involving
identity theft and related state law
claims.
• Multiple successful representations of
financial institutions and
manufacturers in litigation filed to
seize collateral (including airplanes,
manufacturing equipment, computers
and intellectual property rights),
appoint receivers, request
prejudgment attachment, obtain
judgment and collect deficiencies
arising out of multi-million dollar
lending and secured lease
relationships.
Com m ercial Lit igat ion
• Represent Episcopal Diocese of
Virginia in multiple cases consolidated
under the Virginia Multiple Claimant
Litigation Act in the Circuit Court of
Fairfax County involving claims to
historic churches and millions of
dollars in real estate.
• Represent national not-for-profit sport
association in governance dispute
pending in federal court and
communications with press and
international governing council
regarding the association's sponsored
teams and interests.
• Representation of defendant in
copyright action pending in federal
court in Virginia involving computer
software program resulting in
http://www.troutmansanders.com/mary_zinsner/
1/9/2015
Mary C. Zinsner | Troutman Sanders LLP
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Page 4 of 5
significant attorney’s fee recovery for
defendant in settlement.
Multiple representations of companies
engaged in intellectual property and
contractual disputes involving
computer software.
Local counsel to leading
telecommunications company in case
pending in the United States District
Court for the Eastern District of
Virginia involving national implications
to telecommunications industry.
Virginia defense counsel to
pharmaceutical companies and
manufacturers in product liability
cases pending in Virginia with national
significance.
Represent landlord of large upscale
retail mall and other commercial
landlords in significant state and
federal court litigation.
Successful representation of insurers
in ERISA and insurance coverage
disputes.
Pr ofe ssiona l a n d Com m u nit y
I n volve m e nt
• Board of Governors, Virginia Bar
Association (Three year term
commencing January 2014)
• Virginia State Bar (Litigation Board of
Governors, 2004-present)
• Virginia Bar Association (Judiciary
Committee, 2004-present; Young
Lawyers Division, Executive
Committee, 1997-2001)
• Alexandria Bar Association (Chair,
Community Service Committee, 19951998)
• Member, Alexandria Historical
Restoration and Preservation
Commission, 1987-1998
• Board of Directors, Arlington Housing
Corporation, 1994-1997
• Board of Directors, Legal Services of
Northern Virginia, 1996-2000
• Board of Directors, Meeting House
Cooperative Preschool, 2005-2007
Ra nk ings a nd Re cognit ion
• Selected as a Virginia Super Lawyer in
Business Litigation by Law & Polit ics'
http://www.troutmansanders.com/mary_zinsner/
1/9/2015
Mary C. Zinsner | Troutman Sanders LLP
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Vir ginia Super Lawyers Magazine
(2013-2014).
Selected as a 2008 Top Washington
Lawyers Finalist in Corporate Litigation
by Washington Business Journal
Troutman Sanders LLP, James C.
Roberts Award recognizing
outstanding pro bono performance in
the firm's Northern Region, 2006
Virginia Bar Association 2001 Fellows
Award
Virginia Bar Association Young
Lawyers Division 1997 Emerson G.
Spies Award
Legal Services of Northern Virginia Pro
Bono Award, 1997
Mary has achieved MartindaleHubbell's highest rating for legal
ability and ethical standards.
Recognized in The Best Lawyers in
Am er ica in Commercial Litigation
(2013-2014).
http://www.troutmansanders.com/mary_zinsner/
1/9/2015
John H. Hawthorne is a partner at Protorae Law PLLC, a business law firm located in Tysons
Corner, Virginia. He heads the firm’s real estate practice group. Mr. Hawthorne has been
involved in the real estate field in various capacities for the past sixteen years. He maintains an
extensive transactional practice which includes matters with a specific emphasis on sales and
purchases of commercial real estate, distressed assets, leasingp projects and the development
of real estate. Such matters have included the negotiation of complex purchase and sale
transactions involving historic buildings, restaurants, church properties, retail establishments,
multi-party leasing arrangements, and tenancy in common agreements. Mr. Hawthorne also
represents clients in complex real estate litigation matters. He has represented clients in state
and federal courts and has particular experience with easement and boundary line disputes,
injunctions preventing the sale and encumbrance of real estate, complex landlord-tenant
disputes and other various contractual disputes involving the ownership of real estate. In
addition to his legal representation, Mr. Hawthorne has served as an adjunct lecturer for a
graduate business program and has been a presenter at continuing legal education classes. Mr.
Hawthorne has also routinely hosted and presented real estate seminars for local chambers
and other various real estate groups. Mr. Hawthorne is an Area Representative of the Virginia
State Bar’s Real Estate Section and is a member of the Fairfax Bar Association. He is licensed to
appear before all Virginia state courts, the Eastern District of Virginia of the United States
District Court and the United States Bankruptcy Court’s Eastern District of Virginia. He is a
graduate of the University of Virginia with a degree in Economics and he earned his J.D. from
the George Mason University School of Law.
A. LIMITATION OF TYPES OF CONTRACTUAL REMEDIES
a. Introduction.
The French writer Voltaire is often quoted for: “The perfect is the enemy of the good.”
When it comes to contracts, perfection matters and good is sometimes not enough. Contractual
remedies go to the heart of the contract. A dispute arises between contracting parties, remedies
are invoked, litigation ensues, and courts rule. Your contract must be perfect because the words
used will have meaning. This outline will address Virginia cases enforcing and disallowing
contractual remedies and the reasons for the rulings.
b. Know the contract construction rules.
1.
Courts uphold intent of parties as expressed through contractual language.
The cardinal rule in any action involving contract interpretation is that courts uphold the intent of
the contractual parties as expressed through contractual language. It is the court’s responsibility
to determine the intent of the parties from the language they employ. Seaboard Air Line R.R.
Co. v. Richmond-Petersburg Tpk. Auth., 202 Va. 1029, 1033, 121 S.E.2d 499, 503 (1961).
2.
Plain and ordinary meaning controls.
Courts adhere to the “plain meaning rule.”
Where the parties’ intent is clear and
contractual language amenable to only one reasonable interpretation, courts are to construe
contractual language according to its plain and ordinary meaning. See Appalachian Power Co. v.
Greater Lynchburg Transit Co., 236 Va. 292, 295, 374 S.E.2d 10, 12 (1988).
3.
Contract documents will be construed together.
When a transaction is based on more than one document executed contemporaneously by
the parties, it is the duty of the court to construe the documents together in order to determine
contractual intent. See American Realty Trust v. Chase Manhattan Bank, 222 Va. 392, 403, 281
S.E.2d 825, 830-31 (1981) (in action involving loan agreement, deed of trust, note, and guaranty
agreement, court stated that “where parties have entered into more than one document relating to
a business transaction, ‘these documents should be interpreted together [with] each one assisting
in determining the meaning intended to be expressed by the others.’” (quoting J. M. Turner &
Co. v. Delaney, 211 Va. 168, 171, 176 S.E.2d 422, 425 (1970))).
4.
Courts cannot rewrite contracts.
Even when the plain meaning rule renders a harsh result, courts are not at liberty to
rewrite contractual language. See Dominick v. Vassar, 235 Va. 295, 300, 367 S.E.2d 487, 489
(1988).
c. Understanding the Bender-Miller rule.
1.
Bender-Miller is the governing case regarding exclusivity of remedies. The
Supreme Court of Virginia stated the governing rule of law concerning exclusivity of remedies in
Bender-Miller Co. v. Thomwood Farms, Inc., 211 Va. 585, 588, 179 S.E.2d 636, 638 (1971).
That case provides:
[A]uthorities are not in accord as to the rules that govern the
construction of a contract when deciding whether a remedy
provided therein is exclusive of other remedies allowed by law. . . .
The better rule is that the remedy provided will be exclusive of
other possible remedies only where the language employed in the
contract clearly shows an intent that the remedy be exclusive.
Id. (internal citation omitted).
2.
Facts of Bender-Miller.
The case involved the construction of a guest dwelling on property owned by Thomwood
Farms. Id. at 586, 179 S.E.2d at 637. Thomwood Farms’ architect prepared the mechanical
drawings and specifications for the installation of a heating and cooling system on the property.
Id.
The system installed by Bender-Miller malfunctioned and Thomwood Farms blamed
Bender-Miller.
Id.
Another contractor was engaged to replace water lines that were
malfunctioning. Id. at 587, 179 S.E.2d at 638. Thomwood Farms thereafter instituted a lawsuit
against Bender-Miller and obtained a jury verdict of $7,895. Id. at 586, 179 S.E.2d at 637.
At issue on appeal were several jury instructions given over Bender-Miller’s objections and the
terms of a “Service Guarantee” which Bender-Miller contended was the exclusive remedy. Id. at
587-88, 179 S.E.2d at 638. The “Service Guarantee” provided:
This Contractor [Bender-Miller] shall deliver the Heating,
Ventilating, Air Conditioning and Refrigeration equipment
covered by the plans and specifications to Owners complete, and in
first class operating condition in every respect. He shall guarantee
that the material, equipment and workmanship furnished by him
shall be entirely free from defects and that he will repair or replace
at his own expense, as may be directed by the Architect, any
material, equipment or workmanship in which defects may develop
within one year after date of final payment for the work.
Id. at 587, 179 S.E.2d at 638. On appeal, Bender-Miller argued that a jury instruction granted by
the Court failed to tell the jury that a demand by the architect to repair the defects was necessary
before Bender-Miller could perform. Id. at 588, 179 S.E.2d at 638. Thomwood Farms argued
that the provisions of the “Service Guarantee” did not limit the remedy for breach of contract,
and that the remedy in the contract was permissive. Id. The Court agreed with Thomwood
Farms, finding that the contract did not express the requisite intent that the remedy be exclusive:
It does not specifically state that Thomwood Farms is limited to
the remedy provided therein, nor does it contain any words
necessarily implying a duty on Thomwood Farms, or any of its
agents, to make a demand upon Bender-Miller before seeking other
remedies. The phrase “as may be directed by the Architect” is
permissive and cannot be construed to require that a demand be
made.
Id. at 588-89, 179 S.E.2d at 639.
3.
Application of Bender-Miller.
Courts will find a listed remedy exclusive of other unlisted remedies “only where the
language employed in the contract clearly shows an intent that the [listed] remedy be exclusive.”
Id. at 588. Numerous courts have construed and applied Bender-Miller. See Atlas Machine &
Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709, 713 (4th Cir. 1993) (creditor’s petition
to place debtor into bankruptcy was not a breach of the agreement because the language of the
agreement did not explicitly exclude bankruptcy as a remedy nor require foreclosure as the
exclusive remedy); Ndeh v. Midtown Alexandria, L.L.C., No. 07-1639, 2008 U.S. App. LEXIS
23937, at *9-10 (4th Cir. Sept. 25, 2008) (unpublished) (equitable remedy of specific
performance available where real estate contract did not expressly limit buyer to return of
deposit); Safeway Inc. v. CESC Plaza Ltd. P’ship, 261 F. Supp. 2d 439, 444 n.1 (E.D. Va. 2003)
(finding that language in a lease between supermarket tenant and landlord did not limit remedy
available to cancellation of lease in the event that common areas were changed without tenant’s
approval); In re James R. Corbitt Co., 48 B.R. 937, 941 (Bankr. E.D. Va. 1985) (assignee of
purchasers’ claims for damages against residential builder were not foreclosed because language
in contract did not limit remedy available to only cancellation of contract); TQY Invs. v. Rodgers
Co., 26 Va. Cir. 40, 48 (Va. Cir. Ct. 1991) (“Where, however, there is no limitation in the
contract which makes the remedies enumerated therein exclusive, a party is entitled to the
remedies thus specified, or he may at his election pursue any other remedy which the law
affords.”)
d. Limitation of Damages and Specifying Other Remedies.
1.
Disclaimers.
Use of disclaimers can be tricky. Virginia law allows parties to a contract to disclaim and
limit liability for damages, including categories of damages such as “consequential damages”
that allow recovery of lost profits.
See Va. Code Ann. § 8.2-719 (2014) (“Consequential
damages may be limited or excluded unless the limitation or exclusion is unconscionable.”).
Sometimes the law requires that in certain types of contracts, disclaimers must appear in a
“conspicuous” manner. See Va. Code Ann. § 8.2-316(2) (2014) (requiring conspicuous language
to exclude or modify the implied warranties of merchantability or fitness for a particular
purpose).
2.
Liquidated damages.
Complex transactions or contracts involving intangibles can create a situation where it is
practically impossible to calculate or prove damages. To solve this problem, a contract can
specify an amount to be awarded upon a breach. However, if the amount agreed is unreasonably
high, or is triggered by a type of breach that the court things could have a measurable amount of
damages, then the court can refuse to follow the agreement.
Liquidated damage provisions are very tricky to draft correctly. If a liquidated damage
provision is utilized, it is wise to include a provision in the contract that the right to challenge a
liquidated damage clause is waived. See Gordonsville Energy, L.P. v. Va. Electric and Power
Co., 257 Va. 344, 355-56, 512 S.E.2d 811, 818 (1999).
3.
Equitable remedies.
If a contract is drafted so that equitable remedies are important—that is, the court can
compel performance by way of injunction to enforce the agreement—it is important to specify
the precise equitable remedies a court can use.
4.
Contract termination.
Consider including a contract termination provision, so that you are not in circumstances
where it is difficult unexpectedly to get out of a contract if the other party has breached. Under
Virginia law, absent agreement to the contrary, a party can terminate a contract upon the breach
of the other party only if the breach is material. Horton v. Horton, 254 Va. 111, 115-16, 487
S.E.2d 200, 203-04 (1997) (holding that wife’s conduct constituted a material breach that
excused the husband’s subsequent non-performance and prevented her enforcement of the
contract). Whether a breach is “material” is decided as a matter of fact based upon a multi-factor
test. To avoid this multi-faceted inquiry, specify that a breach of a particular obligation vests in
the non-breaching party a right of termination. See Fairfax Square LLC v. Hermes of Paris, Inc.,
Case No. 2014-06509, 2015 Va. Cir. LEXIS 8 (Va. Cir. Ct. Jan. 13, 2015).
a. The Hermes case. The Hermes case decided recently by the Circuit Court of
Fairfax County illustrates nicely the import of contractual drafting in the termination of lease
context. See id. At issue in Hermes was a Lease Addendum which included a termination
provision between luxury retailer Hermes and the commercial landlord. Id. at 2. Hermes sent a
letter to the landlord advising that it was in breach of a covenant in the Lease Addendum and
invoking termination rights. Id. at 3. The Lease addendum at issue required a “mix” of “quality
retail establishments which sell the highest quality good and which are ‘luxury’ tenants selling
premium brands, such as by way of example, Tiffany’s, Fendi and Gucci, and shall operate their
establishments in a manner which suggests the highest quality for their type of operation.” Id. at
3-4. The Lease Addendum further contained a provision which entitled Hermes to terminate the
lease if the violation continued for a period of 90 days after delivering notice of a violation of the
“luxury” tenant clause. Id. at 4.
The circuit court concluded that the landlord was in violation of the “luxury” tenant
clause by allowing tenants such as Miehle vacuum cleaner retail shop, which was “not equivalent
to the products sold by Tiffany, Fendi, Gucci, or Hermis.” Id. at 25. Accordingly, Hermes was
entitled to terminate its lease without further obligation to the Landlord. Id.
e. Lessons learned.
“Hey, let’s be careful out there!” Sergeant Phil Esterhaus, Hill Street Blues (MTM
Enterprises 1981-1987).
B. MERGER AND SURVIVABILITY
When an agreement is drafted, the prudent practitioner will place langue in the agreement
regarding the survivability of certain provisions as well as a merger provision. This is most
applicable in a contract for the sale of real property. Various contracts will contain language that
certain provisions of the contract will survive the termination or cancellation of the agreement as
well as the conveyance of the real property through the Deed. Additionally, the contract will
often include language that certain provisions, or even the remainder of the contract, will not
survive the performance of the contract and will be merged into the Deed of conveyance. Under
such a scenario, the intent is to prevent parties from litigating certain issues within the contract
that were specifically merged into the Deed.
This merger doctrine has long been recognized by Virginia courts. However, the
Virginia courts have established that the merger doctrine is not an absolute and that merely
stating that certain language will merge with the Deed is not sufficient to achieve this goal. In
the case of Empire Mgmt. & Dev. Co. v. Greenville Assocs., 255 Va. 49 (1998), the Court
explained that the merger doctrine “generally provides that, in the case of the sale of real
property, the deed of conveyance represents the final agreement of the parties and all prior
agreements, oral or written, are merged into the deed of conveyance.” However, the Court
further stated that “the merger doctrine is not absolute. Agreements which are collateral to the
passage of title and are not covered in the deed can survive the execution of the deed.” Id. at 52.
See also Davis v. Tazewell Place Associates, 254 Va. 257, 262-63 (1997); Miller v. Reynolds,
216 Va. 852, 855 (1976); Woodson v. Smith, 128 Va. 652, 656 (1920).
Furthermore, the Supreme Court of Virginia has held that attempted specific merger
language within the sales contract does not merge with the Deed if the language intended to be
merged is not within the Deed itself. In the case of Beck v. Smith, 260 Va. 452, 455 (2000), the
sales contract at issue “also provided that the representations and warranties of the seller
contained in the contract ‘SHALL BE DEEMED MERGED INTO THE DEED DELIVERED
AT SETTLEMENT AND SHALL NOT SURVIVE SETTLEMENT.’” However, in
rationalizing that the seller’s representations did not merge into the Deed of conveyance, the
Court stated “if [the statements] are distinct agreements made in connection with the sale of the
property, if they do not affect the title to the property, if they are not addressed in the deed, and if
they do not conflict with the deed. . . [they are] a collateral agreement, [they are] not merged into
the deed, and survive the execution of the deed.” Id. at 456. Any doubt that this ruling was casespecific was removed in the Court’s decision in Abi-Najm v. Concord Condominium, LLC, 280
Va. 350 (2010), which affirmed the ruling Beck in a case involving merger language in a builder
contract. 1
Under these decisions, the transactional attorney is left with limited options when
attempting to merge language with the deed of conveyance. The parties to the agreement would
have to specifically waive certain rights subsequent to the Deed within the original agreement or
the Deed of conveyance itself would have to specifically reference the matters that would be
merged into the Deed. From a practical perspective, this would require the drafters of the
contract to anticipate each issue for which there would be a dispute and have the non-breaching
party waive its rights to pursue such a breach. As such, the transactional attorneys are left with
1
The language in that contract: “Notwithstanding anything to the contrary herein, acceptance of the deed at
settlement shall constitute Purchaser's acknowledgment of full compliance by [Concord] with the terms of this
Agreement. The terms hereof shall be merged into and extinguished by delivery of the deed at settlement except for
Sections 4(b), 5, 17, 18, 21, 22 and 23 which shall survive delivery of the deed and shall not be merged therein.”
the warning that merging language into a Deed from the sales contract is problematic and simply
not feasible.
C. LIQUIDATED DAMAGES
a. When Permitted—Singh and O’Brian and the Difference Between the Ex Ante and
Ex Post Approach
Although parties to a contract may agree in advance as to the amount to be paid as
compensation for loss or injury which may result from a breach of the contract, such a clause is
subject to attack when either (i) the actual damages contemplated at the time of the agreement
are uncertain and difficult to determine with exactness or (ii) when the amount fixed is not out of
all proportion to the probable loss. 301 Dahlgren Ltd. Partnership v. Bd. of Supervisors of King
George County, 240 Va. 200, 202-03, 396 S.E.2d 651, 653 (1990). In Virginia, the cases
regarding the enforceability of liquidated damages clauses have focused largely upon the amount
fixed in such clauses.
For a long time, it seemed clear that a party challenging a liquidated damages clause
based upon a claim that the amount was grossly in excess of the actual damages was limited to
an ex ante approach. In other words, the question to be resolved was whether the amount fixed
in the contract was out of proportion with the damages the parties could reasonably anticipate at
the time the contract was entered into. This approach abruptly changed after the Virginia
Supreme Court’s decision in O'Brian v. Langley Sch., 256 Va. 547, 551-552 (1998).
In O’Brian, the Court held that a party opposing the imposition of liquidated damages is
entitled to conduct discovery and present relevant evidence that the stipulated damages are
grossly in excess of the actual damages suffered by the nonbreaching party. This appeared to
permit an ex post analysis, in which the party challenging the liquidated damages clause could
prove that the amount fixed grossly exceeded the actual damages once the breach has occurred.
In other words, a party could look to the damages actually incurred after the breach rather than
what was contemplated at the time the parties entered into the contract. After this ruling it
appeared that every liquidated damages clause was subject to attack depending upon how events
subsequently unfolded.
Fortunately, any confusion created by the O’Brian case was cleared up in the Court’s
decision in Boots, Inc. v. Singh, 274 Va. 513, 516-518 (2007). Boots involved the breach of a
real estate contract in which the seller sought to retain an earnest money deposit of $50,000. The
purchaser claimed that the liquidated damages clause was unenforceable because the seller
suffered no damages as a result of the breach, and actually realized an additional profit upon the
resale of the property. The Court ruled that this was not a relevant inquiry, stating that “a
liquidated damages clause is invalid only when the actual damages contemplated at the time of
the agreement are shown to be certain and not difficult to determine or the stipulated amount is
out of all proportion to the actual damages.” Boots at 518 (emphasis in original). In so ruling, the
Court affirmed that the inquiry as to whether liquidated damages grossly exceed the actual
damages is to be made at the time the parties enter into the contract, rather than after the breach
has occurred.
b. How Much Is Too Much?
Since the Virginia Supreme Court has endorsed an ex ante approach to the determination
of the enforceability of liquidated damages clauses, which means that the relevant inquiry as to
enforceability is made as of the time the parties entered into the contract. Although the amount of
a liquidated damages provision may appear excessive after the fact, this is not a basis for
challenging such a provision.
In that case, the Court found that a deposit of 3.3% of the purchase price was not
disproportionate. In doing so, the Court amounts of 4.6% and 10%. With regard to real estate
contracts, there is at least some guidance provided by the court in Singh. In that case, the Court
found that a deposit of 3.3% of the purchase price was not disproportionate. In doing so, the
Court amounts of 4.6%, in Taylor v. Sanders, 233 Va. 73, 353 S.E.2d 745 (1987), and 10%, in
Brooks v. Bankson, 248 Va. 197, 445 S.E.2d 473 (1994). This should offer some safe harbor to
attorneys when it comes to drafting liquidated damages clauses for purchase agreements.
Furthermore, as discussed more fully below, attorneys may be able to dodge this issue entirely
by including a provision waiving such challenges.
c. Is a Provision Granting the Parties the Option of Liquidated or Actual Damages
Enforceable—Understanding the Sagatov Case
Some contracts, particularly real estate contracts, will provide a party with an election of
remedies, including the right to elect either actual damages or liquidated damages. However, a
recent Circuit Court case called into question the enforceability of these provisions. The case,
Sagatov Builders LLC v. Hunt, 2014 Va. Cir. LEXIS 42, 2-5 (Va. Cir. Ct. July 9, 2014), involved
the alleged breach of the builder contract.
The court in first observed that liquidated damages may not function as a penalty, and
they must constitute a reasonable estimation of actual damages which by their nature are difficult
to ascertain. The court understood the question to the whether such a clause can satisfy the
underlying rationale for the enforceability of a liquidated damages provision if it is truly
optional. The court ruled that such a provision could not satisfy the underlying rationale, and
found the provision in that case to be unenforceable for two reasons:
First, the provisions of the Contract taken together do not meet the first test or
definition of liquidated damages.
It is competent to parties entering on an agreement to avoid all
future questions of damage which may result from a violation of
the contract, and to agree upon a definite sum as to which shall be
paid to the party who alleges and establishes the violation of the
agreement. In such a case the damages so fixed are termed
liquidated, stipulated or stated damages.
Welch v. McDonald, 85 Va. 500, 505, 8 S.E. 711, 713 (1888)(citing Sedgwick, A
Treatise On The Measure of Damages, Ch. XIV, marginal page 397). Clearly, the
damage provision of the Contract does not "avoid all future questions of damage"
and accordingly the option scheme fails to achieve the fundamental purpose of a
stipulated damage provision.
Second, the optional provision functions as a penalty.
[T]he option negates the possibility that the parties intended, in
agreeing to the provision, to establish a specific sum payable in
respect of a breach, and instead intended the provision to be
operative only where the deposit exceeded the actual damages
incurred, establishing the implication that the parties intended to
punish the defaulting party.
Richard Lord, Williston on Contracts, § 65:24 (4th ed. 2002).
Sagatov Builders at 4-5.
This ruling is arguably important for a few reasons. First, the rationale is fairly
sound. It may be that this opinion contains an incorrect analysis under Virginia law, but it
is not obviously incorrect. It is difficult to say how the Virginia Supreme Court would
rule on such an issue, if it ever appears before them. Second, the enforcement of these
provisions is quite common, so the issue is likely to arise with some frequency.
Finally, this case provides a roadmap for parties to arguing against the
enforcement of such provisions. Another words, every time a party seeks to enforce such
a provision, they will always be subject to attack, which substantially reduces the
likelihood that the case will be able to resolve for something close to the full amount of
the liquidated damages. As an old law professor once said, you do not impress your client
by taking his case all the way to the Supreme Court and prevailing; you impress him by
drafting a contract that does not require such steps.
d. Provisions Waiving Public Policy Challenges to a Liquidated Damages Clause—Are
They Enforceable?
Another tool in the drafter’s toolbox is the waiver clause. As the Virginia Supreme Court
held in Gordonsville Energy, L.P. v. Virginia Elec. & Power Co., 257 Va. 344, 355-356 (1999),
such clauses are enforceable when applied to liquidated damages provisions:
We decline to hold that Gordonsville's contractual waiver of the right to
object to a liquidated damages clause is "repugnant to public policy." We
long have recognized that a party may enter into an agreement in which he
waives a significant right. Generally, a party may waive by contract any
right conferred by law or contract. If the party being charged with
relinquishment of a right had knowledge of the right and intended to waive
it, the waiver will be enforced.
Gordonsville Energy, at 355-356 (1999)(citations omitted). There appears to be no reason why
this holding would not be equally applicable to any challenge to a liquidated damages clause,
including a clause offering a party the option of either actual damages or liquidated damages.
D. BREACH
a. Introduction
When drafting any type of agreement, a transactional attorney is well-served in assuming
that the agreement at issue will be breached; whether by the client or the opposite party to the
transaction. Furthermore, the transactional practitioner should contemplate the severity of the
breach and the effects on the client as the breaching party or the aggrieved party ready to sue.
Through this exercise, the transactional attorney can establish how the agreement at issue should
be negotiated and the approach the client should take in the negotiations.
The severity of the breach often rests on whether the breach itself was a material breach.
This section of the materials contemplates what constitutes a material breach and how such a
material breach can harm or even benefit the client. Next, the section will discuss what remedies
can be crafted through the original agreement that would be most appropriate for the
corresponding breach of agreement. Lastly, the section will provide warnings of how the
transactional practitioner should not simply assume that the common law will be there to provide
the remedy so desired through the drafting of the agreement.
b. Defining Materiality
When faced with a breach of contract question, the concept of materiality will often arise
in litigation when determining the liability of the parties and whether the breach defeats the
essence of the agreement. Such examples are whether the agreement may be enforced by a party
who has previously committed a breach under the same agreement (Horton v. Horton, 254 Va.
111 (1997)), whether failure to timely perform constitutes a material breach (Matzelle v.
Pratt, 332 F. Supp. 1010, (E.D. Va. 1971)) and whether the renunciation or abandonment of a
contract constitutes a repudiation of the agreement (Bennett v. Sage Payment Solutions, Inc., 282
Va. 49 , 58 (2011)) . In such occasions, the courts are left with the task of deciding what a
material breach is given the language of the agreement and the underlying purpose of the
agreement itself.
The Virginia Supreme has defined a material breach of an agreement as “a failure to do
something that is so fundamental to the contract that the failure to perform that obligation defeats
an essential purpose of the contract.” Mathews v. PHH Mortg. Corp., 283 Va. 723, 732 (2012)
(quoting Countryside Orthopaedics, P.C. v. Peyton, 261 Va. 142, 154 (2001)). In at least one
instance, the Virginia legislature has codified a material breach to be as follows:
A breach of contract is material if:
(1) the contract so provides;
(2) the breach is a substantial failure to perform a term that is an essential element
of the agreement; or
(3) the circumstances, including the language of the agreement, the reasonable
expectations of the parties, the standards and practices of the business, trade, or
industry, and the character of the breach, indicate that:
(A) the breach caused or is likely to cause substantial harm to the
aggrieved party; or
(B) the breach substantially deprived or is likely substantially to deprive
the aggrieved party of a significant benefit it reasonably expected under
the contract.
VA Code §59.1-507.1.
Given these particular cases and statute, the transactional attorney would be helpful to
keep in mind two elements in negotiating and drafting an agreement: the underlying purpose of
the agreement itself and what specific actions of the parties would rise to the level of allowing a
party to terminate the agreement or preclude another party from asserting a breach under the
terms of the agreement.
c. Providing Specific Remedies for Specific Breaches
Through the course of drafting or negotiating an agreement, the transactional attorney can
exert a surprising amount of control in the outcome of a breach among the parties to the
agreement. When negotiating the agreement in question, the parties would benefit from
establishing what type of remedy is suitable for the breach itself, especially if the breach would
otherwise be considered a material breach that would defeat the essential purpose of the
agreement.
In the case of Spotsylvania County School Board v. Seaboard Surety Company, 243 Va.
202, 211 (1992), the Supreme Court of Virginia contemplated the use of the term ‘material’ in a
jury instruction on material breach when the agreed upon test in the agreement when determining
whether the agreement could be terminated was a ‘substantial violation.’ The Court held that
the standard of ‘material breach’ would be the appropriate burden in a jury instruction on
terminating the agreement “where the parties have not agreed upon a test for determining when
the contract may be terminated.” Id. at 212. However, in this case, “‘substantial violation’ was
agreed upon as the test [among the parties], and we do not think the burden of proving a
substantial violation carries we do not think the burden of proving a substantial violation carries
with it the necessity of also proving that a breach defeats the purpose of the contract. Only if the
word ‘material’ is added to the test can the imposition of this further burden be justified.” Id.
Utilizing the rationale of the Spotsylvania decision, the transactional attorney can
determine what standard may be utilized by the parties, and likely utilized by the courts, in
determining whether the agreement may be terminated or rescinded by the non-breaching party
or enforced by a previously breaching party. Therefore, choosing these remedies in the drafting
process will establish the relationship among the parties well after the agreement has been
drafted and subsequently executed.
d. Don’t Assume That the Common Law Will Provide the Remedy You Want—
Understanding the Lesson of Definite Contract
The transactional attorney must take caution in assuming what remedies will be provided
by common law should there be a breach among the parties to the agreement itself. One such
example of this is the measurement of damages in a contractual breach. When measuring
damages, the Supreme Court of Virginia has held that the measure of damages when being
forced to re-sell property resulting from a purchaser’s breach is utilizing the value of the property
at issue at the time of the breach and NOT at the time the property is actually sold. The lesson in
this case came from Definite Contract Bldg. & Loan Ass'n v. Tumin, 158 Va. 771 (1932)
whereby the Supreme Court held that the measure of recovery of damages is the difference
between the contract price and the market value of the property at the time of the breach. In
Definite Contract, the contract at issue was a contract for the sale of real property through a
foreclosure. The bid purchaser refused to purchase the real property and the trustee was forced
to re-sell the property through the identical advertising and auction process. In determining the
measure of damages, the Supreme Court of Virginia held that "generally the measure of
[plaintiff's] damages is the difference between the contract price and the [saleable] or market
value of the property at the time of the breach." Id. at 784 (emphasis added).
This rule was reiterated in the case of Barr v. MacGlothlin, 176 Va. 474, 482,
(1940) whereby the Court held that “[t]he general rule is that where there is a breach by the
vendee of an executory agreement to purchase land and a subsequent resale, either public or
private, by the vendor, the measure of damages ordinarily is the difference between the contract
price and the saleable or market value at the time of the breach." Id. (emphasis added). In
rationalizing this holding, the Court stated that “[t]he general purpose of the law, in fixing the
amount of the damages for the nonperformance of a contract, is to give such compensation as
will put the plaintiff in the same position in which he would have been had the defendant kept his
contract.” Id. at 484.
A more recent lesson in assuming the remedies that will be available came from the
Fairfax County Circuit Court’s recent decision in Fairfax Square LLC v. Hermes of Paris, Inc.,
2015 Va. Cir. LEXIS 8 (Fairfax County, 2015). In this case, Fairfax Square LLC was the owner
of a trio of buildings operating as a premium office and retail complex in the Tysons Corner area
of Northern Virginia. Hermes, a tenant in one of the buildings, delivered notice to Fairfax
Square that it was terminating its lease agreement because Fairfax Square had violated a
‘material covenant’ that the retail establishments in the buildings be
establishments which sell the highest quality goods which are ‘luxury’ tenants
selling premium brands such as by way of example, Tiffany's (sic), Fendi and
Gucci, and shall operate their establishments in a manner in which suggests the
highest quality for their type of operation. High quality service businesses such as
banks are also permitted.
Id. at 3-4.
Prior the Hermes’ termination notice, Fairfax Square had recently established new
tenants including “an internationally known luxury and upscale appliance retailer” and a
“well-known local jeweler that sells luxury goods and internationally known luxury
brands.” Id. at 6. As such, Fairfax Square contended that it had satisfied the requirements
of the material covenant at issue and filed an action in the Circuit Court of Fairfax
County, Virginia requesting the Fairfax Court to declare that the covenant had not been
violated and to enjoin Hermes from terminating the lease agreement and vacating the
premises at issue. Through its efforts to place luxury retailers in the buildings, including
a branch of USAA bank, Fairfax Square argued that it had satisfied the requirements of
the covenant at issue and had placed luxury retailers as required by the agreement.
In his ruling, the Fairfax judge held that the material covenant at issue had been breached
by Fairfax Square and that the tenants placed in the building subsequent to the lease agreement
had not fit the specific description of retailers contained within the lease agreement. As a result,
Hermes was allowed to terminate its lease agreement and vacate the premises. In such a
scenario, the parties had placed a very specific covenant in the lease agreement and, despite the
efforts of one party to adhere to the covenant, the remedy sought was not provided by the court
due to the ambiguous nature of the language involved.
Although the court had the unenviable task of interpreting the intent of the parties
involved with the covenant, the Fairfax Square case serves as a lesson to all transactional
attorneys that the language included in an agreement may very well be interpreted contrary to the
party’s expectations. As such, the transactional attorney must be careful in the language utilized
in the agreement at issue to prevent such similar disputes that could only be reconciled and
resolved by a court of law.
E. ARBITRATION
a. Introduction
Increasingly, alternative dispute resolution (ADR) has become a popular tool in an effort
to avoid or limit litigation expenses and damages in the event of a dispute. Various forms of
arbitration and mediation are amongst the most common ADR channels from which parties may
choose. Mediation involves a more informal, yet structured negotiation process, in which a third
party neutral assists the parties’ negotiations, largely guided by whatever rules the parties set for
themselves. 2 The mediation is usually confidential and the mediator may caucus privately with
each party. In contrast, litigation is the most structured process, and is governed by the various
rules of court. 3 Arbitration then is a midway point between mediation and litigation, and permits
the parties to determine ahead of time, the process to be employed and the parameters in the
event of a dispute. Arbitration is usually binding, and results in an award that may be enforced
by way of a court order. 4
2
See Keith Finch & Brian S. Wheeler, Effective and Efficient Arbitration in Virginia, 9 Appalachian J. L. 143
(2010).
3
Id.
4
Va. Code Ann. 8.01-581.012.
Many complain these days that arbitration has become nearly as expensive and time
consuming as court litigation. Others complain that arbitration can be a risky alternative to
litigation because of the lack of judicial oversight of awards and the inability to appeal an
arbitration decision that may be erroneous as a matter of law. 5
But there are steps that can be taken to enhance the satisfaction of the arbitration process.
Although constrained by statute, because an agreement to arbitrate is largely a creature of
contract, the arbitration provisions can be tailored to the range of disputes likely to arise under
the specific contract. For example, the parties can choose where the arbitration will occur, how
to select the arbitrator(s), limits on discovery and, to some extent, applicable law. This
memorandum is intended to help contract drafters by addressing some of the pitfalls that can
arise from an arbitration agreement that is poorly drafted, and how parties can best draft an
agreement to avoid such issues. Among other things, at the time of contracting, the parties are
free to identify (i) whether and to what extent they agree to arbitrate; (ii) who decides what
disputes get arbitrated; and (iii) the law that is used to resolve the dispute.
b. Arbitration as an Alternative to Litigation
1. An Agreement to Arbitrate is Enforceable
The public policy of Virginia favors arbitration and such agreements will be enforced
unless the contact or arbitration provision is itself void or unenforceable. 6 Hence, the Uniform
Arbitration Act (“VUAA”), which Virginia enacted in 1986, provides: “A written agreement to
submit any existing controversy to arbitration or a provision in a written contract to submit to
arbitration any controversy thereafter arising between the parties is valid, enforceable, and
irrevocable, except upon such grounds as exists at law or in equity for the revocation of any
5
6
Stephen Willis Murphy, Judicial Review of Arbitration Awards Under State Law, 96 Va. L. Rev. 887, 889 (2010).
TM Delmarva Power, LLC., v. NCP of Virginia, LLC., 263 Va. 116, 122 (2002).
contract.” 7 Accordingly, in order for an arbitration provision to be enforceable (i) the agreement
must be in writing; (ii) the agreement must cover the disputed question; and (iii) there must not
be grounds for revocation of the agreement. Therefore, a party cannot be compelled to submit to
arbitration unless he has first agreed to arbitrate. 8
The law of contracts governs the question whether there exists a valid and enforceable
agreement to arbitrate. Such an agreement must contain the essential elements of a valid contract
at common law. 9 When the question before the court is whether the parties have agreed to
arbitrate, there is no presumption in favor of arbitrability. Instead, the existence of an agreement
to arbitrate between parties must be proven as with any other contract. 10 Thus, arbitration
agreements are subject to the same defenses that would invalidate any other contract. 11
So, the VUAA also provides for the event wherein a party may deny the existence of the
agreement to arbitrate: “The court shall proceed summarily to the determination of the issue of
the existence of an agreement and shall order arbitration only if found for the moving party.” 12
A party may deny the existence of the agreement to arbitrate by questioning the validity of the
arbitration agreement itself. 13 For example, the opposing party may dispute the existence of an
agreement by arguing that it was not a party to the agreement. 14 An opponent may argue that the
7
Va. Code Ann. § 8.01-581.01.
Doyle & Russell, Inc. v. Roanoke Hosp. Assn., 213 Va. 489 (1973).
9
Phillips v. Mazyck, 273 Va. 630, 635 (2007) (citations omitted).
10
Mission Residential, LLC v. Triple Net Properties, LLC, 275 Va. 157 (2008) (citations omitted).
11
Finch, supra note 1, at 145.
12
Va. Code Ann. § 8.01-581.02(A).
13
Finch, supra note 1, at 146.
14
Mission Residential, LLC v. Triple Net Properties, LLC, 275 Va. 157 (2008) (Members of an LLC required to
arbitrate disputes under operating agreement not required to arbitrate disputes with LLC as LLC not a party to
operating agreement).
8
arbitration agreement is permissive rather than mandatory. 15 All of these issues are resolved by
the court pursuant to § 8.01-581.02(A). 16
The VUAA also makes clear, however, that if an agreement to arbitrate is found to exist
then the court “shall order the parties to proceed to arbitration.” 17 This order compelling
arbitration is not a final order, thus it is not subject to appeal. 18
A presumption in favor of arbitrability arises only after the existence of the arbitration
agreement has been proved, and the remaining question becomes whether the scope of the
agreement is broad enough to contain the disputed issue. 19 Ultimately, if a valid agreement to
arbitrate is found to exist based upon common law contract principles, a court will order
arbitration.
2. Is the Particular Dispute Subject to the Arbitration Agreement
Once the existence of an agreement to arbitrate is established, the remaining inquiry is
whether the parties actually agreed to arbitrate the particular issue in question. 20 If the party
seeking to avoid arbitration fails in its attempt to have the arbitration clause itself thrown out,
that party may then argue that the parties never agreed to arbitrate the particular issue(s) in
question. 21
15
See, dissent, TM Delmarva Power, LLC., v. NCP of Virginia, LLC., 263 Va. 116, 123 (2002).
Weitz v. Hudson, 262 Va. 224 (2001).
17
Va. Code Ann. 8.01-581.02 (A).
18
See Seguin v. Northrop Grumman Sys. Corp., 277 Va. 244, 672 S.E.2d 877, (2009). However, the denial of a
motion to compel arbitration is an appealable order pursuant to 8.01-581.016(1). Bank of the Commonwealth v.
Hudspeth, 282 Va. 216 (2011).
19
See Weitz v. Hudson, 262 Va. 224 (2001).
20
Mission Residential, 275 Va. at 161.
21
Waterfront Marine Construction, Inc. v. North End 49ERS, 251 Va. 417 (1996) (Second demand for arbitration to
enforce compliance with first award was not arbitrable).
16
By carefully wording the arbitration agreement, parties can ensure that a particular
dispute is arbitrated. 22 One approach is to draft the arbitration agreement in a way where
virtually all disputes arising out of the contractual relationship between the parties will be subject
to arbitration. 23 For example, the American Arbitration Association suggests the following
clause: “Any controversy or claim arising out of or relating to this contract, or the breach thereof,
shall be settled by arbitration administered by the American Arbitration Association under its
Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof”. 24 An arbitration clause that provides for
resolution of "any claim or controversy arising out of or relating to this contract [or agreement]
or a breach thereof" is considered "a broad arbitration clause" and is usually found to cover not
only claims that may arise as a result of the language of the contract or agreement but also any
claims that arise as a result of the relationship between the parties created by the overall
contract. 25
By the same token, parties to a contract may limit the scope of the agreement to arbitrate
as little or as much as they choose. An arbitration clause that is limited to a claim or controversy
"arising hereunder" or "arising out of" the contract or agreement, may be construed to be a
narrower provision. 26 This narrower arbitration clause has been found to limit arbitration to
disputes regarding terms of the contract or matters of performance of the contract. 27
Furthermore, parties may even choose to arbitrate only a specific type of issue or issues, or to
exclude specific issues from a broad arbitration clause. Regardless of whether the issues subject
22
Finch, supra note 1, at 150.
Id.
24
Id.
25
Id. See Weitz v. Hudson, 262 Va. 224 (2001), citing McMullen v. Union Land & Mgmt. Co., 242 Va. 337, 340,
(1991) (”Broad language of this nature covers contract-generated or contract-related disputes between the parties
however labeled.”)
26
McMullen v. Union Land & Mgmt. Co., supra at 341.
27
Id.
23
to arbitration are broad or narrow, it is important that the arbitration clause be drafted to reflect
the parties' desires clearly. For example, a party may want to expressly reserve a right to seek
injunctive or declaratory relief from a court.
An arbitration clause can be written even more narrowly ex ante by having it cover only
"disputes about the amount of liquidated damages" or "disputes relating to the Contract
Documents," as the courts in Virginia allow the arbitrators to decide only those issues that match
that category. 28 In addition, a party concerned about particular types of awards, such as punitive
or liquidated damages, might structure the arbitration clause in such a way as to avoid those
classes of damages, perhaps by limiting the arbitrator to an award of compensatory damages. 29
However, such a restriction would not completely restrict arbitrators' discretion—even under
such a restriction, an arbitrator could award any damages it deemed appropriate, merely by
designating those damages as flowing from a category of recovery that was authorized by the
agreement. 30
A cautious drafter might construct a provision such as that used in a case in Iowa:
The arbitrator shall only have authority to determine the compliance with the agreement.
The arbitrator shall not have jurisdiction or authority to add to, amend, modify, nullify or
ignore in any way the provisions of the Agreement and shall not make any award which
in effect would grant to the [party] any matters which were not obtained in the
negotiation process. 31
Although the efficacy of the provision was not tested in the case before the court, this
provision is an example of how specifically a party might attempt to circumscribe the discretion
of an arbitrator by narrowly limiting the matters to be considered by the arbitrator.
28
Id. See, Trustees of Asbury United Methodist Church v. Taylor & Parrish, 249 Va. 144 (1995) (arbitrator
exceeded his authority by making a quantum meruit award when only the contract documents were the subject of
arbitration).
29
See, BBF, Inc. v. Alstom Power, 274 Va. 326 (2007) (arbitrator empowered to award liquidated damages).
30
Murphy, supra note 4, at 901.
31
O’Malley v. Gundermann, 618 N.W.2d 286 (Iowa 2000).
Another way to limit the discretion of an arbitrator is to narrow the range of outcomes the
arbitrator may select. An alternative to the traditional methods of arbitration includes baseball
arbitration (both night baseball and day baseball). In baseball arbitration, each party submits a
proposed monetary award to the arbitrator. At the conclusion of the proceedings, the arbitrator
must choose one or the other outcome. This type of arbitration limits the discretion in arriving at
a decision and strategically forces the parties to offer a reasonable proposal to the arbitrator.
In night baseball, the parties’ proposed submissions are kept confidential from the
arbitrator until the arbitrator’s decision is made. The submission which is mathematically closest
to the decision of the arbitrator’s award becomes the binding award. In day baseball, the
arbitrator is aware of the proposals and chooses the one that most nearly approaches the
arbitrator’s evaluation of the case. 32
Parties can enter arbitration with a “high-low” or “bracketed” agreement regarding an
amount to be awarded. The parties agree in advance to the parameters within which the
arbitrator may issue an award. If the award is lower than the pre-set “low,” the defendant will
pay the low figure. If the award is higher than the pre-set “high,” the plaintiff will accept the
high figure. If the award is in between the high-low, the parties agree to accept the award. 33
Another option to consider is the joint expert meeting and report. In this circumstance,
the opposing experts meet to discuss the issues and prepare a report identifying the issues they
agree upon and those they do not agree upon. This method can reduce the number of disputed
issues, thus reducing the hearing time and removing the undisputed issues from the decision
maker’s deliberations. The expert report can serve also as a basis for settlement. 34
32
See, U.S. Legal.com Definitions, http://definitions.uslegal.com/b/baseball-arbitration/.
See, JAMS website, http://www.jamsadr.com/arbitration-defined/.
34
For additional discussion regarding non- traditional methods for resolving disputes, from informal dispute
resolution boards to the use of a Judge Pro Tempore or a statutory summary jury proceeding, see, Andrew
33
3. Who Decides the Issue of Arbitrability
Under the VUAA, the court determines whether the parties agreed to arbitrate a particular
dispute; in other words, the Court, rather than the arbitrator, is authorized to determine the
arbitrability of a specific dispute. 35 Ultimately, once a court finds that an agreement to arbitrate
does exist, a presumption arises that the parties intended to arbitrate the dispute in question
unless it clearly falls outside the scope of the arbitration agreement.
36
Although Virginia has held that the court, rather than the arbitrator, is authorized to
decide the question of arbitrability, the parties can agree by their contract that those issues be
decided by the arbitrator. 37 However, in the absence of a clear agreement showing that the
parties intended that the arbitrator decide the question of arbitrability, that question is to be
resolved by the court. 38 The Virginia Supreme Court has also ruled that whether disputes over
compliance with a final arbitration award are subject to arbitration is also a matter of the parties’
agreement. Because the VUAA provides for a limited time within which the parties may ask the
arbitrator to reconsider or modify the award, the Court has concluded that after the expiration of
that time, the arbitrator becomes functus officio, unless the parties have agreed that the arbitrator
has further authority over the award. 39
Stephenson & Shannon Briglia & Hon. Leslie Alden (Ret.), Resolving Complex Construction Disputes, VIRGINIA
CONTINUING LEGAL EDUCATION, November 2014, at 12-20.
35
Va. Code Ann. § 8.01-581.02(B); Waterfront Marine Const. Co. v North End 49ERS, 251 Va. 417 (1996).
36
In her dissent in TM Delmarva Power, 263 Va. at 116, Justice Lacy points out that a presumption in favor of
arbitration arises only in the context of whether the dispute falls within the agreement to arbitrate, not to the issue of
whether there exits an agreement to arbitrate.
37
Waterfront Marine Const. v. North End 49ers, 251 Va. 417 (1996).
38
Id.
39
Id.; Virginia Code 8.01- 581.08.
4. Despite the Existence of an Arbitration Agreement, It May be Waived
There is no mandatory authority from Virginia courts on the issue of waiver of
arbitration; however, there is ample persuasive authority from the Fourth Circuit Court of
Appeals interpreting the Federal Arbitration Act (FAA), which has been frequently cited by other
circuit courts in Virginia. 40 According to the Fourth Circuit Court of Appeals interpretation, a
party may waive its right to insist on arbitration if the party so substantially utilizes the litigation
machinery that to subsequently permit arbitration would prejudice the party opposing the stay. 41
However, even in cases where the party seeking arbitration has invoked the litigation machinery
to some degree, the question becomes whether the party objecting to arbitration has suffered
actual prejudice. 42 Neither the delay nor the filing of pleadings by the party seeking a stay will
suffice, on its own, to establish waiver of arbitration. 43 Instead, material factors in assessing a
plea of prejudice are delay and the extent of the moving party's trial-oriented activity. 44 The
party opposing arbitration bears the heavy burden of proving waiver. 45 Ultimately in Virginia
courts, a determination of a waiver of the right to arbitration is fact-specific and made on a caseby-case basis considering the unique circumstances of the case. 46
c. Procedures
Parties should consider whether they want to agree to a dispute resolution scheme that
would precede the institution of a more formal process. For instance, it may be prudent to
40
See Shoosmith Bros., Inc. v. Hopewell Nursing Home, L.L.C., 78 Va. Cir. 427, 2009 Va. Cir. LEXIS 170 (Va. Cir.
Ct. 2009).
41
Microstrategy, Inc. v. Lauricia, 268 F.3d 244, 249-50 (4th Cir. 2001).
42
Id.
43
Id.
44
Id.
45
See Shoosmith Bros., Inc. v. Hopewell Nursing Home, L.L.C., 78 Va. Cir. 427, 2009 Va. Cir. LEXIS 170 (Va. Cir.
Ct. 2009).
46
Id.
identify joint discussion meetings, joint expert review or an informal mediation session as
strategies to employ in order to avert the institution of a formal proceeding. 47
The parties should agree on a specific arbitration service or a specific arbitrator, and
should provide in the agreement the method of selection of the arbitration apparatus. The
arbitration clause should set out clearly how the arbitrator or panel of arbitrators is to be selected.
If arbitration is agreed to but the parties have failed to agree on the arbitrators, or if the agreed
upon method of selection of arbitrators has failed, the arbitrators will be appointed by the court. 48
A neutral, mutually convenient (or inconvenient) location for the arbitration proceeding should
also be selected in the agreement.
The parties should also agree upon the appropriate arbitral rules. The various arbitration
services each have rules that will be followed in the absence of the parties’ agreement to the
contrary. 49 Parties may also set time limits in the arbitration agreement for various stages of
advancing the dispute.
Recalcitrant parties may be compelled to submit to arbitration and to proceed with
arbitration. 50 As mentioned, a party who seeks to oppose arbitration, whether or not arbitration
has commenced, can seek relief from the court. The court can stay the arbitration proceeding
which has already begun or been threatened, upon a showing that there is no agreement to
arbitrate. In order to avoid preliminary delays regarding the subject of arbitrability, the parties
should agree by contract to allow the arbitrators to determine issues of arbitrability.
47
See, for example, the conflict resolution scheme involved in TM Delmarva, 263 Va. at 120.
VA Code. Ann. § 8.01-581.03; Schuiling v. Harris 286 Va. 187 (2013) (provision of agreement designating
specific arbitrator is severable and 8.01-581.03 will control.)
49
Finch, supra note 1, at 156.
50
Va. Code Ann. § 8.01-581.02(A).
48
Alternatively, if the parties do not want to allow the arbitrators to determine questions of
arbitrability, an explicit contract provision will speed up the arbitration process. 51
In addition, in order to have a smoother arbitration process, the arbitration provision
should state clearly that either party unilaterally may demand arbitration for any issue in
dispute. 52 Otherwise, if the agreement explicitly or implicitly provides that the parties jointly
must agree to submit an issue to arbitration, it may be possible for one party to obstruct the
resolution of a dispute when a stalemate is reached, thereby procuring a tactical advantage or
leverage in the dispute. 53
The parties should decide in the agreement whether discovery will be had and the extent
to which it will proceed. Once arbitration has been invoked, the arbitrator may issue subpoenas
for the attendance of witnesses, and for the production of documents and other evidence, and
may permit the taking of depositions. The arbitrator has the power to administer oaths. 54
A hearing is held at which the parties are entitled to be heard, present evidence, cross
examine witnesses and be represented by counsel. 55 At the conclusion of the proceeding, the
arbitrator issues a written award which may be confirmed by a court of competent jurisdiction. 56
Parties by contract can prohibit all judicial review of an award, however, their intention to do so
must be clear and unequivocal. Obviously, a prohibition of judicial review in order to vacate or
modify an award can shorten the arbitration process greatly. 57
51
Perhaps the only effective form of judicial constraint upon the power wielded by arbitrators in Virginia is the
Virginia Court’s holding that - absent an express agreement by the parties - it is the court, not the arbitrators, which
decides whether a dispute is covered by an arbitration agreement.
52
TM Delmarva Power v. NCP of Virginia, 263 Va. 116 (2002).
53
Id.
54
Va. Code Ann. 8.01-581.06.
55
Va. Code Ann. 8.01-581.04, 8.01-581.05.
56
Va. Code Ann. 8.01-581.07, 8.01-581.09.
57
Finch, supra note 1, at 162.
d. What Law Is Used To Resolve the Dispute/Scope of Judicial Review
What a great question! This appears to be the most significant constraint to consider
when deciding upon the use of arbitration, and it may be one that is out of the control of the
parties. It appears that arbitrators are not required to follow Virginia law, nor are they bound to
decide a case pursuant to established law. For example, the statute provides: “The fact that the
relief was such that it could not or would not be granted by a court of law or equity is not
grounds for vacating or refusing to confirm the award.” 58
This limitation on a court's authority to review arbitration awards is jurisdictional;
therefore, parties to an arbitration agreement cannot expand upon these grounds by contract. 59
The Court has ruled that when agreeing to submit to arbitration, the parties also agree that the
decision reached by the arbitrators will not be set aside by a court based on traditional legal
principles, but only upon those grounds set out in the statute. 60
However, the grounds upon which the circuit court may vacate an award are very limited.
Section 8.01- 581.010 of the VUAA allows a court to vacate an arbitration award only in the
case of (1) corruption, fraud, or other undue means, (2) evident partiality, corruption or
misconduct by an arbitrator prejudicing the rights of any party, (3) the arbitrators' having
exceeded their powers, (4) conduct of the hearing so as to substantially prejudice the rights of a
party, or (5) lack of an arbitration agreement. 61
Therefore, the Virginia Court has held that once a reviewing court determines that the
issue in question is arbitrable, the court’s review under the arbitration statute is complete, and
58
Va. Code Ann. 8.01-581.10.
See, Hall St. Assocs., LLC v. Mattell, Inc, 128 S.Ct. 1396 (2008) (under the FAA parties cannot expand their
appeal rights by contractual agreement).
60
Lackman v. Long & Foster Real Estate Inc., 266 Va. 20 (2003).
61
Va. Code Ann. § 8.01-581.10.
59
neither the trial court nor the appellate court may review the merits of the arbitrator’s decision. 62
For example, the Court has held that the arbitrators are the final judges of both law and fact, their
award not being subject to reversal for mistake of either. 63
Indeed, a manifest disregard of the law by an arbitrator is not a reason to vacate an award.
As the Virginia Supreme Court has made clear:
“Even though courts in other jurisdictions have vacated arbitration awards when there has
been a manifest disregard of the law, we refuse to adopt that standard in this case because to do
so would require that this Court add words to Code § 8.01-581.010, which enumerates the bases
on which a court shall vacate an arbitration award. Conspicuously missing from this statute is a
provision that permits a court to vacate a judicial award when the arbitration panel has exhibited
a manifest disregard of the law. In this Commonwealth, courts are required to apply the plain
meaning of statutes, and we are not free to add language, nor to ignore language, contained in
statutes.” 64
The Court, in so ruling, worried that court review of an arbitrators’ conclusions of law
would allow disgruntled parties to use a “legal error” standard of review to relitigate the merits
of the arbitration or to invite the court to review the sufficiency of the evidence in the record. 65
Further, the Supreme Court of Virginia has held that a party cannot seek to vacate an
arbitration award on the ground that the award of liquidated damages violated the public policy
in Virginia. 66 In reiterating its consistent rejection of efforts to vacate an award on grounds not
specified in Code 8.01-581.010, the Court took note of the fact that enactment of the VUAA in
1986 eliminated the ability of a court to invoke its equity powers when reviewing arbitration
awards attacked on the grounds of fraud, estoppel or unclean hands. 67
62
Signal Corp. v. Keane Fed. Sys., 265 Va. 38 at 45. (2003).
Id.
64
Id.
65
Id.
66
BBF, Inc., v. Alstom Power, Inc., 274 Va. 326 (2007).
67
Id. at 330.
63
Current case law suggests that the “misconduct” contemplated by the statute to be a
ground for vacating an award covers only procedural matters by the arbitrators, such as the
arbitrator’s failure to allow for the cross examination of witnesses. 68 The Court has vacated an
award that was arrived at in the absence of a hearing, on the ground that a hearing is a
fundamental part of the arbitration process, after which the arbitrators are the final judges of both
law and fact. 69
The court does have the authority to modify or correct an award where (1) there is an
evident miscalculation of figures or mistake in the description of a thing referred to in an award,
(2) the arbitrators have awarded on a matter not submitted to them which can be corrected
without affecting the merits of the decision upon the issues submitted, or (3) the award is
imperfect in a form not affecting the merits. 70 The author has found no Virginia Supreme Court
case which construes this provision of the Code.
Despite these limits on the review of an arbitration award, parties do have the power to
decide which arbitration statute (either the FAA, VUAA or other state statute) will control the
arbitration proceedings and any ultimate court review or modification of the award obtained. 71
Although the VUAA and the FAA are practically identical, the VUAA, unlike the FAA,
absolutely prohibits a court from vacating an award based upon a "manifest disregard of the law"
standard. 72 Thus, parties to an arbitration agreement can limit or expand a court's review of an
arbitration award somewhat if they specifically identify which arbitration statute will be
controlling. 73
68
Lackman v. Long & Foster, 266 Va. 20 (2003).
Bates v. McQueen, 270 Va. 95 (2005).
70
Va. Code Ann. 8.01-581.011.
71
Finch, supra note 1, at 159.
72
Id.
73
In order to enforce an agreement under the FAA, the agreement must also involve interstate or foreign commerce.
Brown v. Green Tree Services, LLC., 585 F. Supp. 2d 770 774 (D.S.C.2008).
69
F. SEVERABILITY
Whether contractual provisions are severable is determined from the intention of the
parties. Eschner v. Eschner, 146 Va. 417, 422, 131 S.E. 800, 802 (1926). Therefore, it behooves
a drafter to clarify the intention of the parties with regard to making certain provisions severable.
A good example of the Virginia Supreme Court’s treatment of the issue severability is found in
the case of Vega v. Chattan Assocs., 246 Va. 196 (1993).
Vega involved a contract for the purchase of unimproved real estate. The contract was
subject to several conditions precedent, including the receipt of final approval from Fairfax
County for subdivision of the subject property, approval from the Fairfax County for a five
bedroom percolation site, and the obtaining of acceptable financing. The contract also contained
provisions stating that "in the event the contract was declared null and void, Sellers would
reimburse Purchaser for the deposits it had paid and "any other costs" it might have incurred in
preparation for improving the land.
Although the purchaser obtained the necessary county approvals, the purchaser notified
seller that it had not been able to obtain acceptable financing, and gave notice that the contract
was therefore, by its terms, null and void. The purchaser also demanded return of the deposit
money and for reimbursement of the improvement costs it had incurred. The seller refused,
arguing that the purchaser could not force the term of the contract related to return of the deposit
and reimbursement of costs because "it is well settled that a contract which is null and void
cannot be enforced." In determining the issue severability, the Court stated:
From a consideration of the contractual terms outlined above, it is
obvious the parties intended that the provision relating to deposit
refund and cost reimbursement would be severable and would
survive the contract becoming null and void according to its terms.
To read the contract otherwise would render the deposit-refund and
cost-reimbursement provision meaningless.
Vega v. Chattan Assocs., 246 Va. 196, 197-199 (1993).
G. INTEGRATION AND ANTI-FRAUD PROVISIONS
a. Do Integration Clauses Provide a Defense to Fraud Claims in Virginia?
Contracts will frequently employ integration clauses, which state that the contract
contains the entire agreement between the parties, and that any other prior oral or written
agreements or promises are not enforceable unless memorialized in the contract. Some
provisions will go even further, stating that the parties are not relying upon any representations
or promises not contained in the agreement. The purpose for such clauses is twofold.
First, each party will want to avoid claims by the other party based upon alleged rights or
obligations not contained in the parties’ contract. Second, such a clause would ideally insulate
each party from claims of fraud in the inducement based upon alleged statements or promises
made prior to the execution of the agreement. The idea is that since each party has disclaimed
reliance upon prior statements or promises, any alleged reliance upon a prior statement or
promise would be unreasonable. Because one of the elements of fraud is that the alleged reliance
must be reasonable, it is argued a properly drafted integration clause would defeat such a claim.
However, the case law in Virginia casts some doubt on the effectiveness of an integration clause
as a defense to fraud in the inducement.
Perhaps the seminal case on this point is Packard Norfolk, Inc. v. Miller, 198 Va. 557
(1956). In that case, in which a purchaser claim to fraud based upon a seller’s statement that an
automobile was “in perfect condition”, the Court disagreed with the defendant’s contention “that
the false representation which induced the contract has no legal consequence because the
contract provides that ‘the front and back of this order comprise the entire agreement effecting
this purchase and no other agreement or understanding of any nature concerning same has been
made or entered into, or will be recognized.’” 198 Va. 564. In so ruling, the Court in Packard
seemed to indicate that a fraudulent representation would void the entire contract, regardless of
what was stated therein:
Because of the fraud practiced in the procurement of the contract, the entire
instrument -- the whole contract -- is rendered voidable at the instance of the
defrauded party. At his election the quoted provision as well as all other
provisions of the contract are voided for no binding contract ever came into
existence. A seller may not rely upon and claim the benefits of a contract and at
the same time through that instrument contract against and relieve himself of the
consequences of his fraud that induced the other party to enter into the contract.
198 Va. 564. Subsequent Virginia cases have echoed this sentiment. 74
Earlier this year, in a case involving a real estate contract with an as-is clause, the
Virginia Supreme Court cited Packard with approval, going on to say that “such disclaimer
language stands no higher than the contract which is initiated by the fraud.” Devine v. Buki, 767
S.E.2d 459, 466 (2015).
It is also useful to note that an integration clause does not prohibit the admission of parol
evidence which does not contradict or vary the terms of the contract, but rather explains the
meaning of its terms. Prospect Dev. Co. v. Bershader, 258 Va. 75, 84-85 (1999)
74
The Court finds that Langmaid's claims of breach for failure of ability to convey contracted for property are
allegations of fraud, concealment or misrepresentation emanating from non-disclosure of the Benhoff affair, not
breach of contract. The factual allegations in the Complaint recounting seller's actual or constructive fraud about the
Keyser survey vitiate the integration clause in ¶26 of the Contract.
Langmaid v. Lee V, 86 Va. Cir. 118, 124 (Va. Cir. Ct. 2013)
To the extent the contracts contain an integration clause, such inclusion of a provision in the contract would not bar
a claim for fraud in the inducement. Intent of the party alleged to have committed fraud and reliance by the person
defrauded are matters of fact that cannot be shorthanded on demurrer by reference to the terms of the underlying
contract.
Britt Constr., Inc. v. Magazzine Clean, L.L.C., 69 Va. Cir. 478 (Va. Cir. Ct. 2006)
b. How to Draft a Provision for Maximum Effectiveness
Although integration clauses have proven to be of limited utility in defending claims of
fraud, they are still routinely enforced as a defense against claims of alleged rights and
obligations not contained in the written agreement. So, as an initial matter, practitioners should
always be drafting such clauses with an eye toward preventing such claims. Drafting provisions
that will avoid subsequent claims of fraud, however, require even more care.
One approach is to include language in the provision to the effect that neither party is
bound by representations not contained in the agreement. For example, the standard residential
real estate contract promulgated by the Northern Virginia Association of Realtors has the
following provision in its integration clause: “This Contract, unless amended in writing, contains
the final and entire agreement of the parties and the parties will not be bound by any terms,
conditions, oral statements, warranties or representations not herein contained.” 75 The problem
with such a provision is that it arguably falls within the species of provision that the Court in
Packard and Devine have found to be ineffective to defend such claims. In short, seeking to use
the provision itself as a defense would appear to be of questionable efficacy.
On the other hand, a provision that expressly states that the parties are not relying upon—
and are not entitled to rely upon—statements made prior to the execution of the contract would
arguably be distinguishable from the provisions addressed in Packard and its progeny. This is
because the defense does not arise from the contract itself, but rather from the affirmative
representation of the party that he has not relied—and cannot rely—upon statements made by the
other party prior to the execution of the agreement. Without reasonable reliance, a fraud claim
75
The author has argued before the court more than once that this provision is an absolute defense to a fraud claim,
with mixed results.
cannot stand. In fact, this approach might be even more effective if such a representation was
made in a separate document, although such a tactic might not be practical in many cases.
A fairly novel approach to this issue has been taken by some residential home builders in
their standard contracts. The builders, who frequently have to contend with claims that promises
not contained in the contract were made by various salespersons and other employees of the
builder, have included a provision in which the purchaser is to expressly state in the contract all
oral promises upon which they are relying. One is probably not surprised to learn that almost
every contract has the word “None” in the blank lines provided. Again, the idea is that if the
provision constitutes more of a representation by a party, rather than a provision which is to be
enforced against that party, it is more likely to constitute a defense to fraud based upon the
reasonable reliance requirement. In fact, in the case of a provision in which a party affirmatively
states all of the oral representations upon which they are relying to enter the contract, the
argument is even more elemental: a party cannot recover for fraud when they have expressly
stated that they relied upon no representations made by the other party.