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Texas case discusses contractual exculpatory cause July 7, 2017

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Texas case discusses contractual exculpatory cause
July 7,  2017
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Texas case discusses contractual exculpatory cause
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    A recent Texas appellate court decision caught my attention and I thougth it worthy of comment here.  It's not an alarm case but a franchise agreement dispute.  However, the law regarding contract enforcement and interpretation applies to the alarm industry.  Court of Appeals of Texas, San Antonio.
WHATABURGER, INC.; et al Appellants v. WHATABURGER OF ALICE, LTD., Appellee.
    One of the parties in the case claimed the contract under review was entirely unenforceable because it contained an exculpatory clause.  The argument, relying on a prior decision from this same court,  was that an exculpatory clause rendered the contract void for lack of consideration.  The Court rejected the argument and found the contract valid. First the Court addressed contract law:
    "The interpretation of an unambiguous contract is a question of law for the court.  In interpreting a contract, a court's “primary concern is to determine the true intent of the parties as expressed by the plain language of the agreement.”  “To achieve this objective,” we “examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless.”  We “construe contracts from a utilitarian standpoint bearing in mind the particular business activity sought to be served and avoiding unreasonable constructions when possible and proper.”  (citation omitted).
    “A contract is not ambiguous if the contract's language can be given a certain or definite meaning.”  “On the other hand, a contract is ambiguous if it is susceptible to more than one reasonable interpretation.” “An ambiguity, however, does not arise merely because parties to an agreement proffer different interpretations of a term.” “For ambiguity to exist, both interpretations must be reasonable.” “Deciding whether a contract is ambiguous is a question of law for the court.” 

    Before getting to the exculpatory clause those of you in Texas may find this interesting:
    "... the {Texas} supreme court has expressly rejected the inclusion of a general implied covenant of good faith and fair dealing in Texas contracts. “There is no general duty of good faith and fair dealing in ordinary, arms-length commercial transactions.” citations omitted.
    Regarding the exculpatory clause:
    "In the second case, Arabella Petroleum, 2012 WL 2450803, at *1, this Court considered whether an agreement to pay Appellee Baldwin for an oil and gas lease was enforceable. This Court considered whether the agreement was unenforceable because it lacked mutuality. Id. This Court held that the “no liability” clause “is an exculpatory clause that causes the parties' agreement to fail for lack of mutuality.”
It is in this context, that WOA points to language from Arabella, which it claims “clarified that ‘reasonable efforts' equates to a covenant of good faith and fair dealing”:
    Although facially appealing, we must disagree with the Eighth Circuit's logic for several reasons. First, the Texas Supreme Court has instructed us that we must construe the lease and the draft together, not as independent documents. In addition, because the draft provides conditions precedent to the formation of the parties' overall agreement and given that the “no liability” clause states liability shall not attach to any party for “payment or otherwise,” viewing the obligations under the draft independent of the lease also appears to be contrary to the contractual language. Furthermore, the draft expressly states that it is drawn “to pay for Oil and Gas Lease dated July 23rd, 2008, and covering” Baldwin's interest in the North Tract. Accordingly, to construe the language in the lease as providing consideration independent of the draft is problematic. Moreover, the Eighth Circuit's effort to distinguish Spellman appears to be based on a misreading of the opinion since the Houston court clearly held that the “contract” failed for want of mutuality, not that the “draft” failed for want of mutuality.
 Finally, it is important to note that in the absence of a contractual requirement that a party make a reasonable effort to perform, Texas law will not imply such a requirement because Texas law does not impose a general duty of good faith and fair dealing in contracts, including oil and gas leases.  Had the draft or the lease contractually imposed such a good faith or reasonable efforts requirement, the outcome of this case might be different. 
    We do not read Arabella to stand for the proposition that “reasonable efforts” “equates to a covenant of good faith and fair dealing.” Arabella's statement that “[h]ad the draft or the lease contractually imposed such a good faith or reasonable efforts requirement, the outcome of this case might be different” is, at best, dicta. 
    
The prior case relied upon by one of the parties and discussed by this Court is Court of Appeals of Texas, San Antonio. ARABELLA PETROLEUM COMPANY, LLC, Appellant/Cross–Appellee v. J.H. BALDWIN, Jr., Appellee/Cross–Appellant.  That court made these legal observations:
    "Finally, it is important to note that in the absence of a contractual requirement that a party make a reasonable effort to perform, Texas law will not imply such a requirement because Texas law does not impose a general duty of good faith and fair dealing in contracts, including oil and gas leases. Had the draft or the lease contractually imposed such a good faith or reasonable efforts requirement, the outcome of this case might be different.  (noting exculpatory clauses conditioned on “good faith” or “reasonable efforts” do not fail for want of mutuality).
    
Construing the draft and the lease together as instructed by the Texas Supreme Court, we conclude the “no liability” clause is an exculpatory clause that causes the parties' agreement to fail for lack of mutuality. We note that if Arabella had paid the draft, lack of mutuality would no longer be a defense to the enforceability of the lease. As the Texas Supreme Court has long recognized: “The test for mutuality is to be applied, not as of the time when the promises are made, but as of the time when one or the other is sought to be enforced.”     As further explained: 
     "Though a contract be void for lack of mutuality at the time it is made, and while it remains wholly executory, yet, when there has been even a part performance by the party seeking to enforce the same, and in such part performance such party has rendered services or incurred expense contemplated by the parties at the time such contract was made, which confers even a remote benefit on the other party thereto, such benefit will constitute an equitable consideration, and render the entire contract valid and enforceable. (holding that agreement did not fail for lack of mutuality where parties performed pursuant to the agreement). Thus, “[a] promise may be unenforceable for want of mutuality when made, and yet the promisee may render it valid and binding by supplying a consideration on his part before the promise is withdrawn.” citations omitted
    Bottom line:  The exculpatory clause in your Standard Form Alarm Agreement is enforceable.  Arguably, a subscriber may be able to cite the above case to claim that it can withdraw from the contract before you perform in any way, but once you have even partial performance there is no issue of lack of consideration.  The exculpatory clause is perhaps the foundation of your defensive provisions in the alarm agreement.  It is likely to get great scrutiny when you seek to enforce it [when you need it the most].  Make sure you use the Standard Form Agreements; you'll have a better chance of enforcing your contract.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
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