Corporate & Securities Law

Arising Out of What?

By Ken Adams

Here’s yet another cautionary tale.

This article on Lexology by Doug Batey of Stoel Rives LLP considers a recent Idaho Supreme Court opinion addressing a dispute over a fee-shifting provision in a limited-liability-company operating agreement. Here’s the contract provision at issue:

In any action or proceeding brought to enforce any provision of this Agreement, or where any provision is validly asserted as a defense, the successful party is entitled to recover reasonable attorneys? fees in addition to any other available remedy.

The Idaho Supreme Court reversed the trial court?s award of $21,552 in attorneys? fees fees because it found that the plaintiff did not seek ?to enforce any provision of the Agreement,? as required by the provision in question. The plaintiff instead sought dissolution, which is a statutory remedy.

In his article, Doug explores alternative ways of phrasing the provision. This relates to something I explored in my recent article in the AAA standard arbitration clause (click here to go to a pdf copy). Certain provisions refer to disputes among the parties?arbitration provisions, jurisdiction provisions, and, yes, fee-shifting provisions. In each case, you’d be best off wording the provision so that it encompasses all disputes that the parties might get into as a result of their having entered into the contract. In that regard, whoever drafted the provision at issue in the Idaho litigation suffered from a failure of imagination.

The mainstream-drafting solution would be to throw in arising out of and relating to. But that just piles vagueness upon vagueness. Instead, in this case I might have said something along the following lines: “any dispute arising out of this agreement, ownership of [defined term for ownership interest in the LLC], or management or operations of the Company.” Refer broadly to the activities that the contract is meant to govern, so that the provision in question applies not just to contract claims but also other kinds of claims, including tort claims and, as in this case, statutory claims.

Full post as published by AdamsDrafting on March 30, 2010 (boomark / email).