Law is sometimes complicated. Sometimes, the things that appear simple to one person confound others. In a recent dispute, the argument hinged on whether or not there was a dispute. Can you imagine a fight about whether there is a fight? It’s all very circular.

The dispute might be of value to the people who peruse this site. Many real estate investors use one- or two-page contracts that either they wrote or downloaded off the internet. Few have reviewed the contracts to determine if they match the investor’s intent.

One of the amazing things about using forms, which I only appreciated once I had completed my formal education, is that the form contracts are often so heavily litigated that they include word choices that handle common scenarios. Later in this article, we will see how the standardized residential purchase agreement penalizes people who fail to mediate. (I admit that I am also guilty of having drafted many of my contracts, and my contracts also suffered the kinds of faults that I see in routine real estate deals.)

The facts and laws regarding a business investment are set forth below. The parties’ names are omitted for their privacy, and (as always) the information provided herein is only information. Other than to say, “Please consult an attorney,” I do not provide the readers of this article with any advice about what they should or should not do in similar situations, and the facts of your situation may be materially different.

So, the takeaway: When drafting contracts, make sure that you consult an attorney before signing them. Ensure that the contract terms reflect your intent because you will be stuck with the words on the page after your signature has been applied.

Statement of Facts

The business seller transferred assets to a buyer under the terms of an installment contract. He claims to have completed his obligations under the contract. The buyer has provided the seller with specific receipts for the items he transferred, but the buyer has left open claims to undiscovered items and refused to sign a general release.

The seller asserts that under California law, he has a right to compel the buyer to sign a full release. The buyer alleges that they may have four years (or more) to assert claims to undelivered property.

The seller insists that language in the contract stating that the Seller will sign a release of a lien against the business assets at the end of the agreement either obligates the Buyer to draft the release or obligates the Buyer to release him. Buyer contends that the contract’s plain language has no implied or explicit implications.

The Seller now threatens to invoke the mediation clause to impose costs upon the Buyer where the Buyer says there are no disputes.

Among the terms that are relevant in the contract are the following:

Assets transferred: The seller transfers “all Business-related assets . . . .” (capitalization in original.) The contract specifies a list of known items that “are included in the Business asset list . . . .” None of the sentences in the contract appear to restrict the identity of the assets to only those that are listed. As the Seller transferred each asset, the Buyer sent a receipt confirmation and was careful to describe precisely what was received to avoid making the receipt too broad.

Liens: The contract creates a lien in favor of the seller at its creation. Based on context, it can be inferred that the lien is intended to ensure that the total price of the business is paid.

There is some ambiguity about the lien provision: According to the contract, the assets don’t transfer from seller to buyer until the final payment. Upon final payment, the lien is released “automatically.” Therefore, the seller only holds a lien on the property while the property is still his property, and the lien never attaches to the property while it is titled to the buyer. The Seller effectively takes a lien against his property.

For this blog article, we will assume that the merger doctrine does not apply (although it likely does) and that the debt did not merge into the title because both the debt and the secured object were owned by the same person: the Seller.

Lien release: Per the contract, the lien is “automatically released” when the Buyer makes the final payment. The seller sent an email acknowledging the buyer’s final payment. Despite the clear language that states that the lien is “automatically released” upon final payment and the Seller’s written acknowledgment that the Buyer made the final payment, the Seller contends that the Seller’s participation in the contract is not complete because he has not signed the lien release. (discussed next.)

Seller’s obligation to sign a written release: The contract additionally states that the seller will give the buyer additional security by guaranteeing a written release from the lease. Specifically, it states in the section on Liens: “The Seller shall sign a release upon receipt of final payment.” This sentence immediately follows the sentence that states that upon final payment, the lien is “automatically released.”

As noted above, the seller received the final payment and acknowledged it. Within 30 days of that payment, he sent a letter to the buyer with the signed title to a Business asset in which he wrote, “I certify that the lien has been paid in full . . .” and “Enclosed with this letter is the Lien Satisfied/Legal Owner/Title Holder Release (REG 166) form, as well as the signed vehicle title, as required for release of the lien.” The seller both signed and notarized the letter. He contends that he must sign additional lien releases and that the buyer is required to draft them, but no language in the contract states that the buyer will draft a further lien release, and, since the lien against the business is “automatically released,” upon final payment, the buyer contends that the signed statements that payment has been made in full also constitute evidence of released claims by the Seller. The buyer is not seeking additional documents from the Seller.

Dispute resolution: Regarding dispute resolution, the parties first agree to attempt resolution “directly between them.” Nothing in the language prevents the use of agents. Buyer contends that the context suggests that this term means that resolution will be attempted without involving mediators, arbitrators, or courts. After attempting direct resolution, parties agree to mediate. The parties may proceed to court.

In addition to the terms of the contract described above, the contract’s language leans heavily toward the Seller and suggests that the Seller likely drafted the contract.

Legal Standards/Rules

What are the applicable statute of limitations?

The statute of limitations differ between a seller’s right to enforce an installment contract and the buyer’s right to enforce it. In most situations, sales contracts are not governed by Code of Civil Procedure section 337, but are instead governed by the California Commercial Code section 2725. (Mysel v. Gross (1977) 70 Cal.App.3d Supp. 10, 14-16.) Although both provide a four-year statute of limitations, the measure of time from which the statute of limitations begins is different. (Ibid.) Under the Commercial Code, “[a] cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach.” (Com. Code, § 2725.) Although the Mysel court clarified that the statute of limitations in sales contracts is governed by Commercial Code section 2725, Carrier Corp. v. Detrex Corp. (1992) 4 Cal.App.4th 1522, 1527-1529, identified that this rule is limited to the sales transaction itself and not the breach of the warranties within the transaction. The buyer’s claims with respect to express and implied warranties are governed by Code of Civil Procedure section 337, which timeline does not start until discovery should have occurred. (Ibid.) In the case of a breach of warranty, it is not often possible to discover the breach at the delivery of the product. (Ibid.)

In the present contract, there is an express list of assets. Some assets are digital (Wix account, Adwords account, domain name, etc.). Others are physical. The statute of limitations is reviewed for each.

Received assets. It’s possible but unlikely that the seller retained control over a transferred asset. The buyer has done due diligence and attempted to verify that the seller’s access has been terminated to all assets, but mistakes happen and it was the Seller’s obligation to ensure full and complete transfer of assets. For each of the assets that have been transferred, it is likely that the 4-year statute of limitations based upon date-of-delivery applies. This statute of limitations is the one identified in Commercial Code section 2725. The Buyer does not wish to release the Seller from claims related to these items.

Unknown assets. Because the contract is vague about what assets are covered, it is possible that the Buyer may not discover an untransferred asset until five years or more after the date of transfer. The Buyer has no knowledge and no way to discover those assets that were not disclosed. If the Seller forgot about a physical or intangible asset of the business, it is still governed by the terms of their agreement and rightfully belongs to the buyer. Although the Buyer may believe that it they have what they need to operate the business, the contract did not promise to transfer only what the Buyer needs. The contract promised that the seller would transfer all Business assets. The Buyer wishes to retain their claim upon those unknown assets if they exist.

If the Buyers claims were governed by Civil Code section 337 (claims based upon a written instrument), then the statute of limitations would not begin until the missing asset were discovered. This means that the Buyer would have an unlimited window in which a new discovery could give rise to a new claim. However, because this is an installment contract for goods, the UCC applies and the date-of-delivery is the beginning of the statute of limitations for transfer of unknown items as well as the known items. (Mysel v. Gross, supra, 70 Cal.App.3d Supp. 10, 14-16.)

This means that the Buyer’s right to assert claims against undiscovered items will end four years after the Seller performs his final act under the contract, which the Seller maintains has not yet happened. Thus, the four-year statute of limitations continues to accrue with each passing day that the seller waits to complete his obligations under the contract.

Warranties. Carrier Corp. v. Detrex Corp., supra, 4 Cal.App.4th 1522, 1527-1529, gives the buyer the largest window. Carrier Corp determined that even in installment contracts, the four-year statute of limitations does not begin to accrue for breaches of express and implied warranties until the buyer discovers that a breach in the warranty has occurred. Breach of warranty is not the kind of thing that can be forced, therefore the Buyer is not able to reasonably determine that a breach has occurred until the breach occurs. For that reason, the four-years is governed by Civil Code section 337, and the buyer may have claims years into the future. The Buyer wishes to retain these claims.

Conclusion, Statute of limitations. The Seller wants a blanket release, and the Buyer wants to retain their rights under the contract. Under California law, the buyer’s rights under the contract continue at least four years after the seller transfers each item. For the undiscovered items, the four years will begin on the final date of transfer. For the causes of action related to breached warranties, the buyer’s rights will extend beyond four years and will be based upon the moment the buyer first discovers that a breach of warranty occurred. From that point, the buyer has four years to assert a claim.

The contractual rights . . .

“The principal job of a court in interpreting a contract ‘is to find out what the parties meant’— no principle in contract law is more settled or fundamental.” (1 Corbin on California Contracts § 24.04.)

Contracts must be interpreted to give effect to the “mutual intention of the parties as it existed at the time of contracting” so long as the court can determine their mutual intent and their mutual intent is lawful. (Civ. Code, s. 1636.) Intent is first inferred from the language of the contract. (Civ. Code, s. 1638.) The contract’s language shall control “if the language is clear and explicit, and does not involve an absurdity.” (Civ. Code, s. 1638.) When the contract is in writing, the court will endeavor to interpret the intent from the writing alone and will exclude extraneous evidence of what the parties meant to say. (Civ. Code, s. 1639.) The contract may be disregarded if “the real intention of the parties” is not reflected, and the error was caused by “fraud, mistake, or accident.” (Civ. Code, s. 1640.) Words are given their usual meaning and must be interpreted in a manner that promotes preserving the contract, thus giving it a presumption that the terms were intended to be lawful, operative, definite, reasonable, and possible. (Civ. Code, ss. 1643 & 1644.) When the contract language is ambiguous, it must be interpreted against the party who introduced the confusion into the contract’s language. (Civ. Code, s. 1632.)

Extrinsic evidence may not be admitted to understand the contract’s language. However, and perhaps counterintuitively, in California, extrinsic evidence is always permitted to determine if the contract’s language is ambiguous. (1 Corbin on California Contracts § 24.04.)

Regardless, even when the terms are clear, a contract may never be enforced if the interpretation is an absurdity. (1 Corbin on California Contracts § 24.08.) As example, one court rejected a contract that set the price per kilowatt hour at 60 cents per kilowatt hour. (1 Corbin on California Contracts § 24.08.) The price of 60 cents per kilowatt hour was considered by the court to be an abusrdity. (1 Corbin on California Contracts § 24.08.)

In all the situations that follow, the contract may have been “negotiated,” but the Seller held all the power in the negotiation, and the language of the contract suggests that he introduced any language that was ambiguous. Therefore, the terms will all be construed in favor of the buyer.

To the best of my current knowledge, neither side had an attorney drafting language for them in the version of the contract that was ultimately signed.

Does the contract require the buyer to execute a general release upon completion?

The court first would look to the plain language of the contract, and because this contract is written, no evidence other than the words on the page would be permitted to determine whether or not the buyer is required to execute new documents or releases at any point in the transaction. Nowhere in the contract is the buyer required to execute documents. This is contrary to the contract’s terms regarding the seller, who “shall” execute a release upon the final payment. This is mandatory language upon the seller and not the buyer.

Nothing in the contract requires the buyer to execute a general release, therefore the intent of the parties, as determined by the writing on the contract, is that the buyer may retain their rights as provided under California law governing contracts.

The contract does not require the buyer to execute a general release.

Does the contract require the buyer to draft the seller’s release?

Again, the court looks to the plain meaning of the words on the page. The buyer’s obligation was to make timely payments and to indemnify the Seller from harm during the buyer’s operation of the business. Nothing in the language of the contract suggests that the buyer will some day have to draft contracts, releases, letters, or even receipts for the seller. According to the plain language of the contract, the buyer’s obligations were clearly defined and neither party contemplated the buyer drafting any documents.

The contract does not require the buyer to draft documents for the seller.

Specific performance. . . .

Specific performance is the method by which one party to a contract obtains a court order to compel the other party of a contract to perform the terms of the contract. It is not always available as a remedy.

Specific enforcement of a release clause is only available if the terms of the agreement are sufficiently certain to make the precise act to be done ascertainable. (Civ. Code, s. 3390.) Additionally, a contract cannot be enforced if it is not just and reasonable as to the party. (Civ. Code, s. 3391.)

Could the Seller compel the buyer through court action to execute a general release of the Seller’s liability?

It’s unlikely that a seller could compel the buyer to execute a general release when the contract does not require it. The contract could have required a general release as a condition of the agreement. In that event, it would have been the intent of the parties that the buyer waive their legal rights. Absent that intent, the court cannot compel a person to waive that which can only be voluntarily released.

Without a contractual basis for the claim, the seller’s suit for specific performance of a release will fail.

Can the Seller compel mediation based upon the language of the contract?

The seller will be unlikely to succeed at compelling mediation. Unlike the issue of the general release (above), the contract does have terms governing dispute resolution. Although the contract does “require” mediation before taking the matter to the court, the mediation provisions cannot be compelled.

Where a contract states that parties will mediate before proceeding to court, it is generally understood that the parties will attempt to initiate mediation. A party who fails to initiate mediation will be prohibited from taking his matter to the court. However, mediation continues to be voluntary, and where only one party sees a reason for dispute, then participation in mediation is not merited. A party arriving at a mediation table without seeing an actual cause for dispute would be acting in bad faith because they would knowingly be wasting both the other party’s time and the mediators: not perceiving a dispute, there is no possible “agreement” that can be mediated that would resolve in the disputes resolution.

A court lacks statutory authority to compel mediation. (Kirschenman v. Superior Court (1994) 30 Cal.App.4th 832, 833 & 835.) In Kirschenman, the defendants refused to participate in mediation of a contract dispute. (Kirschenman v. Superior Court (1994) 30 Cal.App.4th 832, 833.) The trial court issued sanctions against the defendants for their refusal and an order stating that they must attend a mediation session. (Ibid.) On appeal, the court held that court did not have authority to mandate mediation. (Ibid.) Mediation, by its very nature must be voluntary, and “we note that even in the legislation to which plaintiffs refer, the parties are specifically not prohibited from revoking consent to participate in voluntary dispute resolution. (Id. at  835.)

While a court cannot compel mediation, the court can, in certain circumstances, incentivize a person’s presence at mediation. (Breslin v. Breslin (2021) 62 Cal.App.5th 801, 806.) Under a Breslin notice, parties are ordered to either appear at the mediation or waive their rights to object to the settled outcome. Any party wishing to ensure their own protection need only appear at the mediation to have their rights protected. They cannot be compelled to participate or agree with the proposed settlements. After appearing at the mediation table, the unwilling participant may decline continued participation. The mediation would then fail to resolve the issue and the unwilling participant would not be bound by any other settlement agreements made by other parties.

This situation is contrasted from the result occuring where an unwilling participant boycotts the mediation. Where a person fails to appear after proper notice and court order (by a Probate court), the persons who have received Breslin notice from the court will waive their objections to settlements and be bound to them. Naturally, this result requires more than one participant in the mediation, because it takes at least two disputing parties to come to an agreement by which the third party would be bound. They Breslin notice only forfeits rights of non-participants if an agreement is reached. (Breslin v. Breslin, supra, 62 Cal.App.5th 801, 805-806.) Put another way:

In Smith v. Szeyller [(2019}] 31 Cal.App.5th 450, 458, we held that a party who chooses not to participate in the trial of a probate matter cannot thereafter complain about a settlement reached by the participating parties.

(Breslin v. Breslin (2021) 62 Cal.App.5th 801, 806, emphasis added.)

Although a party cannot be compelled to mediate, contracts can be drafted to strongly encourage mediation, even when it is not deemed appropriate. For example, the standard real estate sales contract referenced in Cullen v. Corwin (2012) 206 Cal.App.4th 1074, contained the following language:

If, for any dispute . . . to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after [the making of] a request . . . , then that party shall not be entitled to recover attorney[] fees. . . .”

(Id. at 1077, emphasis and modifications in the original.) In Cullen, the buyer of a house sued the seller. The seller had refused to mediate. When the buyer filed the lawsuit, the seller filed for summary judgment because the statute of limitations had passed. The seller won on summary judgment and received an award for $16,500 in attorney fees. However, the court determined that the language of the contract was controlling. Because the seller refused to mediate first, they forfeited their right to attorney fees because of the contract language. (See also Frei v. Davey (2004) 124 Cal.App.4th 1506 [similar facts, contract based on standard residential purchase agreement that made attorney fees contingent upon participation in mediation.].)

The same outcome is not likely here. The disputed contract separates the dispute resolution and attorney fee clauses. They are not in any way interdependent as they were in Cullen. Because they operate separately, if the present contract were used in Cullen, the seller would have been able to avoid mediation (as they did) and still collect the $16,500 in awarded attorney fees. That is the likely outcome if the Seller tries to move forward with litigation in the present matter to seek specific performance of a non-existing contract term.

A petition for specific performance compelling mediation would fail, and if the seller proceed to a trial court, the buyer would be entitled to reimbursement of attorney fees because the contract does not make attorney fees contingent upon participation in mediation.

Does the seller have a right to a general release upon completion?

The question itself seems to provides the answer. Asked another way, the question is: can a person be compelled to give up the rights given to them by law absent a specific and voluntary agreement to waive those rights?

No. Such a power would render the law meaningless. All statutes of limitation would be without purpose in contract disputes because all contract participants could compel the other side to release them at will. This is, by definition, an absurd result, and the law abhors absurdity.

The mere existence of Civil Code sections 337 and Commercial Code section 2725 demonstrates that the California legislature has given all persons in written contracts a free “out” when the other side will not voluntarily release them. Over time, the parties to the contracts all release their claims based upon the statutes of limitation.

If the seller wishes to be released when the buyer refuses to release him, he only needs to wait for the required time. Any other act by the buyer to release the seller would either be a courtesy, which cannot be compelled, or a bargained-for exchange requiring the seller to purchase the buyer’s act by giving the buyer something of value.

Perhaps interestingly, in the present situation, the buyer had offered a general release in exchange for something of value, but the seller declined. The offer was then rescinded. The seller now believes he can compel a release without the buyer’s consent. He will not likely succeed.

Contract Review and Final Thoughts

The Seller is likely going to continue being frustrated in the above situation. Based on his claims, I do not see any cause of action for him. By his language in his contract, he will be forced to pay attorney fees if he proceeds with litigation and fails to prove that the intent of his contract at the time of execution, as both parties understood it, was that the buyer would relinquish all legal rights provided by law upon the seller’s claim to have completed performance. The language of the contract does not support such an interpretation.

This brings me back to my initial point. If the Seller intended to effect a general release for himself, he could have done so before the agreement was finalized. Communicating his desires to an attorney would have likely helped. The attorney could have reviewed the contract language and made suggestions that would effect his wishes.