Avoiding Plot Twists: The Importance of Pre-Enforcement Review of Your Contracts

Written by Attorney Cassie Rodgers

Published: New Hampshire Union Leader

It goes without saying: before you sign, review your contract. Yet whether in a personal or business context, we all suffer from contract overload. Clicking “I agree to the terms and conditions” has become almost as automatic as refreshing our inboxes. However, even when a contract has received careful attention at execution, time passes and circumstances change. Recent First Circuit decisions underscore the importance of not only revisiting the contract before taking any enforcement action but also considering current external legal factors that may affect the agreement’s terms.

For example, the United States District Court for the District of Rhode Island’s Peltier v. Lepage Bakeries Park St. LLC decision from earlier this year offers two key reminders: (1) if  you have multiple agreements, it is important to identify which agreement’s terms govern your dispute; and (2) the law’s constant evolution can directly and significantly affect the enforcement of your rights.

In Peltier, the central issue before the Court was whether the parties were contractually bound to arbitrate—rather than litigate—the dispute. Notably, the plaintiff seeking to avoid arbitrating the matter did not dispute that he entered into a valid arbitration agreement that governed his claims against the defendants. However, the Court’s analysis did not end there—providing important guidance to consider when analyzing your own agreements.

First, the Court’s analysis highlighted the significance of identifying the operative agreement. In commencing its review, the Court began by sifting through several agreements (including multiple distribution agreements, as well as a personal guarantee). Ultimately, the Court identified a distribution agreement between two business entities as the relevant agreement governing the dispute.

After identifying the critical agreement, the Court considered an area of unsettled law in the First Circuit: whether the distribution agreement at issue qualified as a “contract of employment,” thereby exempting the dispute from mandatory arbitration under Section 1 of the Federal Arbitration Act (“FAA”)  (which exempts certain “contracts of employment” from the FAA’s general mandate to enforce a valid arbitration agreement).  After examining relevant decisions in other circuits, the Court concluded that the distribution agreement was not a “contract of employment” and, therefore, the parties were required to arbitrate the dispute. The issue now remains on appeal, pending further review by the First Circuit Court of Appeals. In short, although the terms of an agreement—such as the valid arbitration agreement in Peltier—may appear to dictate one outcome, subsequent developments in case law may produce an entirely different result.

As another example, in Rumsey v. IBM, the United States District Court for the District of Massachusetts addressed competing arguments about the enforceability of yet another arbitration agreement. Although the parties agreed that they had entered into a mandatory arbitration agreement, the Court had to decide whether the agreement’s terms amounted to an impermissible alteration or waiver of a substantive right.  The provision at issue shortened the statutorily prescribed period for bringing a claim under the Age Discrimination in Employment Act (“ADEA”).

Confronting another unsettled issue in the First Circuit, the Court concluded that the ADEA’s prescribed time period is a substantive—not procedural—right.  Because substantive rights, such as the right to work free from discrimination, cannot be contracted away, the Court held the provision unenforceable.

Peltier and Rumsey are just two examples illustrating the evolving nature of contract law and how it can impact what might otherwise seem like settled contractual terms. These cases highlight the importance of carefully reviewing your agreements and checking for any shifts in the law that might affect your ability to enforce a set of agreements or your rights stemming therefrom.  If you or your business face a dispute, do not rely solely on memory or your interpretation of prior agreements. Conduct thorough due diligence, and if that process feels overwhelming, consult counsel to guide you.