Legal-ease
In the petrified forest
By Howard Darmstadter
Reading a form guaranty recently, I encountered the following
sentence:
The guarantor waives protest, presentment and notice of
dishonor.
That led me to speculate about how such a sentence found its way into
the form. Imagine the time is 1980. Crack commercial lawyer Dolly
Discomonium sits down to draft a lock-tight guaranty. Her problem is
how to negate the "suretyship defenses." These are a
congeries of defenses that enable a guarantor to evade its obligations
because of behavior of the obligee — the party receiving the
guaranty — that increases the guarantor's risk. (You can find my
earlier Business Law Today columns on this subject at
www.abanet.org/buslaw/blt/8-5ease.html and buslaw/blt/8-
6legalease.html.)
Guaranty law, then as now, is largely judge-made, with the cases and
the rules varying from state to state. As a result, there is no
generally accepted list of suretyship defenses. So Dolly tries to
cover every base. Being a good commercial lawyer, she knows that an
indorser of a negotiable instrument is a surety — "... every
indorser engages that upon dishonor ... he will pay the instrument
according to its tenor ...." (That from Section 3-414 of the pre-
1990 Article 3 of the Uniform Commercial Code; there's a similar
sentiment in Section 3-415 of post-1990 Article 3.) What's more, Dolly
knows that Article 3 of the UCC gives a specific statutory instruction
as to how to negate one particular form of suretyship defense.
Under Article 3, if Ignatz endorses a promissory note that calls for
payment to be made on July 1, and Dolly's client, as holder of the
note, does not present the note for payment on July 1 (thus extending
the time for payment of the note) or delays notifying Ignatz Indorser
that the note has been dishonored, then Iggy will have a defense to
his suretyship obligation.
Such a result can make a note holder unhappy, but luckily for Dolly,
the 1990 and the pre-1990 versions of Article 3 provide specific words
that Dolly can incorporate into the note that will make the defense
unavailable to Iggy. Pre-1990, the magic words were "Each party
to this instrument waives protest"; post-1990, you waive
"presentment." (Section 3-511 of pre-1990 and Section 3-504
of post-1990 Article 3.)
Dolly knows, of course, that a guaranty isn't a negotiable instrument,
and that extension of time is only one defense. Moreover, under old
Article 3, "when words of guaranty are used presentment, notice
of dishonor and protest are not necessary to charge the user."
(§ 3-416(5)).
But here, as virtually nowhere else, she has a statutory mandate that
says certain words are adequate to waive certain suretyship defenses.
Whoopee! So, along with many other words purporting to waive
suretyship defenses (including a waiver of any defense based on
"extension of time"), Dolly drops in the provision that so
piqued my interest. And while the pre-1990 statute says that waiving
protest also waives presentment and notice of dishonor, the statute
doesn't literally apply, so Dolly expressly waives presentment and
notice of dishonor as well. In a difficult legal environment, Dolly
does the best she can, which isn't all that bad.
Decades pass, and Mort Millennium, crack associate but negligible
commercial lawyer, also has to write a guaranty. In the form file he
finds scores of guaranties based on Dolly's trail-blazing effort. He
changes the names and dates, and the guaranty ends up on my
desk.
One thing is clear — Mort has no idea what the provision means.
Most likely, he thinks that it means that (1) the obligee doesn't have
to present the guaranty when it demands payment ("Hey, it says
'waives presentment,' dude!"), and (2) the guarantor will have no
right to object to the demand for payment ("waives
protest"). A natural reading, but legally incorrect.
How can I be so sure of Mort's inadequacies? Well, there have been a
few developments in commercial law since 1980, and if Mort had been
aware of them, the results of that learning would have shown up in the
guaranty.
First, UCC Article 3 was substantially revised in 1990. In particular,
old Section 3-606, which described the actions of the holder that
would discharge a guarantor (that is, the "suretyship
defenses") was replaced by new Section 3-605, which among other
things, added the following helpful provision:
(i) A [guarantor] is not discharged under this section
if ... the instrument or a separate agreement provides for waiver of
discharge under this section either specifically or by general
language indicating that the parties waive defenses based on
suretyship or impairment of collateral.
So under post-1990 Article 3, you can waive all suretyship defenses
with "I waive defenses based on suretyship or impairment of
collateral." But those magic words don't appear in Mort's
millennial guaranty.
The point is not that associates are often ignorant of commercial law
principles (they are), or that they are too prone to defer to ancient
forms (are they ever!). Article 3 suretyship principles are not
central to most lawyers' concerns, and no one asked Mort to update the
form. My point is that the phrase that caught my attention is another
example — not that another example is desperately needed —
of the tendency of forms to contain ossified bits of what was formerly
vibrant legal practice.
Dolly and Mort are, of course, merely fictive, and my story of how the
waiver of presentment and protest found its way into the guaranty on
my desk is just a story. Lately, as I puzzle over why standard bits of
legal boilerplate seem to be spinning like toothless gears in
documents, I find myself indulging in a kind of speculative legal
archaeology. What else can I do? Most bits of legal boilerplate grow
up in legal practice, and there are seldom any buried tools or pottery
shards, let alone written explanations, left lying around for later
investigators. Not surprisingly, our predecessor lawyers were
interested in solving problems, not leaving artifacts for
antiquarians. The result is that much standard legal boilerplate
frequently seems unmotivated, and occasionally
incomprehensible.
What's to be done? People often publish forms of commercial law
documents, with commentary, but these seldom have the institutional
backing to ensure that they are kept up to date. There's a Permanent
Editorial Board for the UCC, but not for commercial law forms. And
even if you publish a useful form, it's not clear that a legal journal
will want to publish annual updates that make minor changes. (I
recently worked on updating a published form to take account of the
recent revisions to UCC Article 9, although it wasn't clear that
anyone would want to publish it.)
And there's another problem: Even if there were a reliable source for
up-to-date forms, it's unclear that they would be used. Law firms tend
to like their own forms, because they want to offer a product that
differs from the product offered by other firms, or because they don't
want to tell the client that they cribbed a document from a publicly
available source.
Darmstadter is an assistant general counsel with Citigroup in New
York City. His e-mail is
darmstadte@citi.com.
|
