Are Waivers Enforceable?

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Are waivers enforceable? It depends. How unsatisfying is that answer? Generally speaking, absent duress or coercion, parties can waive what would otherwise be their right. How does one know if there is (was) coercion? Well, some situations, such as an actual gun to the head, are easy to identify. Others are not so simple. When it comes to agreements between commercial parties, there is a presumption that they are grown-ups, able to protect their own interests. The “bigger” they are, the less likely a cry of “coercion” will rule the day. Representation by an attorney will dull a party’s claim that it was improperly forced to agree to a waiver (or other contract terms). When courts reject a party’s plea that it was coerced, you’ll often see the “deal” as having been between “sophisticated parties that negotiated at arm’s length with apparent care and specificity, and represented by competent counsel.” All of those factors concern themselves with the character of the parties and how they arrived at their agreement.

There is another important factor, tangentially related to the characteristics of being “sophisticated” or being represented by counsel. It is that a waiver, to be enforceable, must be “knowing.” Failure to read waiver language in an agreement is no excuse. Sophisticated parties, especially ones represented by competent counsel, also are expected to understand the implications of a provision waiving what would otherwise be their rights. It might be possible that facts, not readily discoverable, were not disclosed and had those facts been known, a waiver would not have been given. Such cases, however, are uncommon. And, we don’t learn a lot reading about such situations – they are fact-specific.

So, what are we left with? Are there any situations where there was no duress or coercion and all of the relevant facts were known, but a party’s waiver will not be enforced? This is the time where loyal Ruminations readers shout out, together: “Public Policy.” Yes, even though contracts are enforceable agreements between private parties and rarely affect the public at large, enforcing them drags the public into their dispute. You can’t ask the public, represented by its courts, to do things that are repugnant to the public.

Can Ruminations give an example? Of course, but this time, though our example will involve real estate, it won’t be about an issue any of us is likely to see. Remarkably (to us), it wasn’t until 1948 that the following issue reached its final, binding resolution. The Shelley family, African-Americans, bought a house in St. Louis. Their property was encumbered by a 1911 restrictive covenant barring “people of the Negro or Mongolian Race” from owning their property. A not-so-nearby neighbor (10 blocks away), Louis Kramer, sued to block the Shelley family’s occupying the house they had bought. The Missouri Supreme Court backed Mr. Kramer, holding that the covenant was a purely private matter that “ran with the land” and was of the particular legal character that allowed enforcement by third parties such as Louis Kramer. A parallel case heard by the Supreme Court of Michigan yielded the same result.

Each ruling was challenged in the United States Supreme Court on the grounds that such restrictive covenants violated the U.S. Constitution’s 14th Amendment. Basically, the 14th Amendment guarantees all citizens “equal protection of the laws.” In effect, the Supreme Court reversed the state court decisions, allowing each family to own the property it had purchased and to live in their home, but it did so in what we see as a peculiar way. It held “that the [racially] restrictive agreements, standing alone, cannot be regarded as violative of any rights guaranteed to petitioners by the Fourteenth Amendment.” But, this right to exclude African-Americans from owning the properties was a hollow right because the Court also ruled that the government was prohibited from enforcing that right to exclude. The Constitution bars the government (federal and state) from denying persons the equal protection of the law. It doesn’t affect the relationship between private parties. Nonetheless, the Court’s decision left the complaining, private parties with no means to enforce what was otherwise held to be a valid agreement.

Public policy takes form in many ways. Some public policies nebulous; some are “gut,” some is expressed in statutes or case law; and some (such as in the Shelley case) is expressed in the U.S. Constitution. In the restrictive covenant cases, the public policy was not to enforce a private agreement to bar people of the Negro or Mongolian Race from owning a property.

We just read a decision from the highest court in New York, its Court of Appeals. The May 7, 2019 decision [which can be seen by clicking: HERE] deals with a unique New York issue and probably is of no interest to anyone outside of New York. Well, that’s not exactly true because it includes an interesting discussion about what constitutes “public policy,” especially in the dissent written on behalf of the three judges who disagreed with the prevailing four judges.

New York has what we think to be a unique judicial procedure for the handing of commercial evictions arising out of a tenant’s (alleged) default. It is abundantly common for New York leases to include a “conditional limitation” provision. Such a provision, reviled by Ruminations, allows a landlord to terminate a lease by notice to its tenant if the tenant hasn’t cured an alleged default within the time allotted in the lease. That means a tenant who denies that it is in default is in jeopardy of losing its lease if it turns out the landlord was correct. Here’s an example. A landlord alleges that the tenant is responsible for replacing a million dollar roof, but the tenant’s interpretation of the lease is that the landlord is responsible. The landlord gives proper notice that if the tenant doesn’t replace the roof in the next 30 days, the lease is terminated.

In New York, this tenant would apply for what has come to be called a “Yellowstone” injunction. When granted, and these are almost always granted, the “cure” period is tolled while the court entertains the tenant’s request for a judicial determination as to which party is obligated to replace the roof. That way, the tenant doesn’t take the risk that its landlord’s position is correct and, therefore, doesn’t have to “protect” against that possibility by spending a million dollars and suing its landlord for reimbursement.

In the lease in question, however, the tenant agreed to the following provision:

Tenant waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease . . . [I]t is the intention of the parties hereto that their disputes be adjudicated via summary proceedings. (emphasis added)

If enforceable, the tenant in our example would face the choice of spending a million dollars and then suing for recovery, if the tenant was correct, or losing its lease if the landlord was correct. It could not (effectively) get a time extension to replace the roof if a court ruled, in a “declaratory judgment” action, that the tenant, not the landlord, was responsible.

The question before the New York Court of Appeals was whether the right to seek a Yellowstone injunction was one protected by a “public policy,” i.e., the right to get court protection. The “Yellowstone” relief came out of a 1968 court ruling and, as the court describes it, Yellowstone relief:

is not an end in itself but merely a means of maintaining the status quo by tolling a contractual cure period during a pending action, permitting a tenant who loses on the merits of the lease dispute to cure the defect and retain the tenancy.

Courts strive to enforce the agreement of the parties. They revere “freedom of contract.” The Court of Appeals in the Yellowstone injunction case offered a bunch of reasons for this, including:

[A]bsent some violation of law or transgression of strong public policy, the parties to a contract are basically free to make whatever agreement they wish, no matter how unwise it may appear to a third-party.

In keeping with New York’s status as the preeminent commercial center in the United States, if not the world, our courts have long deemed the enforcement of commercial contracts according to the terms adopted by the parties to be a pillar of the common law.

Thus, “[f]reedom of contract prevails in an arm’s length transaction between sophisticated parties . . . , and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain.”

By disfavoring judicial upending of the balance struck at the conclusion of the parties’ negotiations, our public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements.

Sharply observant readers will have noted that the words, “public policy” appears in the last quoted material immediately above. That’s where the rubber hit the road in this New York case and that is what other courts throughout the United States struggle with whenever a party claims that there is a “public policy” invalidating an otherwise valid, freely and knowingly given waiver. It turns out that freedom of contract is also a public policy.

So, our “it depends” answer given about 1,500 words above has become a little clearer. A court asked to invalidate a waiver on public policy grounds needs to make two determinations. The first is whether there is such a public policy. Then, if it finds such a policy, it needs to balance that public policy against the ever-present one: Freedom of Contract. Frankly, Ruminations never thought of it that way. We have always accepted the principle of Freedom of Contract but never thought of it as a matter of public policy. We’re thinking that we haven’t been alone in that omission. Now, no reader of Ruminations can claim she or he hasn’t been warned.

What’s the implication on this newly-discovered “truth”? Well, when we succumb to pressure to accept a waiver with the lingering sense that it won’t be enforced (and who hasn’t been there), we’ll be a little less certain of an eventual outcome. This “balancing” test makes any outcome even more uncertain.

Though New York’s unique Yellowstone injunction process won’t be of interest to many readers, we highly recommend that law “geeks,” read the dissent in the cited court decision. It is a pretty good exposition of the way public policy balancing is done. Ruminations grants that judges, by that title alone, are given the duty to exercise judgment and that the Court’s majority did just that. We might have struck a different balance, but that’s why the judges get the big bucks and we don’t.

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Comments

  1. Jeremy Deeken says:

    The dissent in 159 MP Corp makes some good points about the limits of freedom on contract and how unbridled contractual freedom may invade valid public policy considerations. However, I think the court was correct to uphold the waiver. Freedom of contract is a background principle deeply rooted in both the Constitution and common law. Public policy exceptions seeking to limit that freedom should endure the scrutiny of a legislative debate among the elected representatives of the people. The proper role for the clerisy on the judiciary is to weigh in on the constitutionality of those enactments – not to enact them itself.

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