Monday, September 18, 2006

Contracts, the Rule Against Perpetuities, and Legal Malpractice

An interesting opinion handed down by the Maryland Court of Special Appeals on Friday raises questions concerning the parameters of an attorney's duty of care in drafting a contract.

The case, Cattail Associates, Inc. v. Sass, involved a contract to purchase two undeveloped parcels of real estate that the purchaser intended to develop. The contract specifically provided that closing was to occur after governmental approval of a subdivision of the properties.

Standing alone, the provision with respect to closing constitutes a violation of the Rule Against Perpetuities under Maryland law. That is, because the contract contained no time limit within which subdivision approval must be granted, there was no assurance that the purchaser's interest in the properties "must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest." As a consequence, without more, the contract would not be enforceable.

However, the contract at issue had an addendum that contained a "savings provision." That is, one section of the addendum provided that:
The parties to this contract intend that it will be binding and legally valid upon them. In order to preclude any application of the Rule Against Perpetuities which would otherwise invalidate and nullify this contract, the parties agree that this contract shall expire, unless otherwise previously terminated, on the last day of the time period legally permitted by the Rule Against Perpetuities in the State of Maryland, in which case all deposits shall be promptly returned to the Buyer.
Of course, even this provision was somewhat problematical since it was unclear who the measuring life or lives were intended to be. The Court interpreted the provision broadly, however, and stated that "the clear implication is that the sellers as a class should be considered the measuring lives."

I suppose that all's well that ends well, but I have a further question: Should all sales contracts have Rule Against Perpetuities savings provisions? If so, is it now malpractice in Maryland to draft a contract without such a provision? And, if it's not now malpractice in Maryland to draft a contract without a savings provision, when, if ever, does the requisite standard crystalize sufficiently that, if the savings provision is missing, the attorney's duty of due care has been breached?

This afternoon, right after reading Cattail Associates, I was reviewing a contract for the sale of a restaurant. Closing was to occur within a certain period after approval of the transfer of the liquor license. One of the changes that I suggested be made to the contract was to add a Rule Against Perpetuities savings provision.


David Keim said...

Query: did you use a broad, problematic savings clause like the one mentioned in the case or did you actually name the measuring class?

Stuart Levine said...

I actually named as the measuring class the two individual principals of the buyer and seller. Today, I will be modifying my standard "miscellaneous provisions" to include a Rule Against Perpetuities savings provision. After all, if it clearly doesn't apply to a particular transaction, I can always delete it.

Anonymous said...

Around 1993, as an associate in the home office of a large regional firm, I was delegated the task of researching a similar issue in a buy-sell agreement context for a litigation partner in a satellite office. That partner was representing a party who was trying to exercise low-ball purchase rights under a 50-year old buy-sell agreement.

Among other things, the other side claimed that the agreement was void because exercise of the purchase rights could violate the rule against perpetuities (RAP). Applicable state law was very sketchy at the time, but I found cases in and out of the state that discussed the issue. The litigator thought I was a heretic when I concluded that the argument could hold weight. My supervising partner agreed that there was a theoretical argument. Of course, the litigator reamed me in my review for the time I spent addressing a specious argument.

Two years later, while attending an LL.M. program, I was looking at a partnership agreement distributed in a pass-through entities course. I shook my head when I say a RAP savings provision in the agreement's miscellaneous provisions. I asked the instructor, and he immediately identified a 1993 case involving a similar agreement--buy-sell or partnership agreement--drafted by his firm, another large regional firm. Evidently, one of his firm's client had lost in litigation involving purchase rights when the other side argued invalidity based on RAP. After losing the initial litigation, the client sued the firm. I don't recall who prevailed in the malpractice litigation, but the lawyer said RAP savings provisions were standard miscellaneous provisions in agreements drafted by his firm after that.