Legal Terror: A Look at Infamous In Terrorem Clauses
In this day, it seems just wrong to even write a word incorporating “terror.” It seems as if terrorism is everywhere and one place we could hope to elude it would be in contract drafting. Yet, as we shall see, these clauses have both a history and a place in contract drafting. But, they are threatening to the parties who are asked to consider them and their concerns are quite reasonable.
Distilled to their basics, in terrorem clauses are contract terms wrapped with a threat. The principle involved comes from contract law but then got picked up by the law of estates. If you must know the details or prefer to not medicate when sleepless we commend you to the 1915 Harvard Law Review providing a history. . For the rest of us, we will move the topic along by saying that the law does not like agreements that impose unjust or unrealistic penalties for failure to conform to a contract or a decedent’s last will.
The basics of in terrorem clauses come from the estate world. You are drafting your estate plan. You know your second wife and your kid from the first marriage hate each other. You have decided 1/3 of your “bounty” (property) goes to Wife No.2 and 2/3 to the kid. You also know that they dislike each other enough that they could spend years and an unhealthy portion of your estate fighting over whether your will was subject to undue influence by either of them. You don’t want this, and your estate lawyer says she has a solution. Prepare a will that says what you want but should either beneficiary contest your will, their share will be forfeited and paid to the Red Cross or the Daisy Hill Puppy Farm. When your will is read, your heirs will want to contest it but they will instantly see that it may cost them any right to a piece of your estate. Ouch!
Estate lawyers often dabble in the world of prenuptial agreements. This comes about when their affluent elderly clients call them to report: “My son is betrothed to a woman half his age who was until a month ago whom I intensely dislike. I don’t want her getting her hands on my kid’s money once they are married. The kid is my only heir and you, counsel, tell me that while my bequest is safe, she could still get a cut of the increase in value once I croak.”
The problem with prenuptials, much as with last wills, is that there is typically no penalty for contesting them and putting the divorce into years of conflict and making lawyers wealthy in the process. So, crafty lawyers borrowed from their own work and began drafting threatening clauses in prenuptial contracts. Daddy Warbucks tells his kid that should he and his wife divorce, the prenuptial must says she waives all rights to the Warbucks Estate under any circumstances. If she agrees she will get $100,000 when Daddy dies. If she contests such an agreement she gets nothing and if kid doesn’t get a prenup with her, his inheritance will go to charities or be held in trust. The lawyer drafts a prenup for Sonny that says Ms. Nogood agrees to never make any claim on the Warbucks money in any form or any way and when Daddy dies she will get $100,000.
Not all states are cool with this approach, but many are because it’s all found money anyway, right? In Pennsylvania, lawyers might warn you that an in terrorem clause might be held invalid but chances are small.
So, how far can in terrorem clauses go? A colleague recently forward a custody agreement that said what the parties agreed to in terms of legal and physical custody of their minor kids. It contained a clause I had never seen before. Any party who filed to modify the agreement within the first three years would have to pay a contribution toward the defending party’s legal fees in resisting the modification. There was an “outlet” clause if the modification was premised upon confirmed findings the kids were being harmed by one of their parents. But the purpose of the clause was to try to assure a 3 year custodial truce. Often, parties will hesitantly agree to 50/50 custody while harboring deep concerns about whether it will work out, especially in worlds where one parent had historically done most of the parenting. When there are glitches like missed medical or school related appointments, it is common to see an instant petition alleging that 50/50 is a failure. The clause requiring one party to contribute to the defending party’s legal fees if a modification was filed sought to avoid that litigation.
Is such a penalty enforceable? Not clear. Longstanding precedent in Pennsylvania holds that the “state” has a role in deciding any custody case and the courts can ignore any agreement deemed not in the best interest of the child involved. The “keep the peace” purpose behind the agreement was laudable but do courts really want to discourage people from seeking what they perceive as the child’s best interests? Meanwhile, all too often custody litigants underestimate the damage inflicted on children whenever parents fight over those interests while seeking “best.”
Another area where a bit of “terrorem” should be considered is discovery in divorce. In recent decades we are finding that as divorce becomes accepted as a reality, clients are less interested in investing in significant litigation. That can be a good thing but in an age where we seem to be creating new forms of assets and liabilities every year, life is complicated. The means of paying compensation and dividing property ownership and control has morphed in many ways. We have clients who now own cryptocurrencies and non fungible tokens (NFTs). We have worked in cases where a minority shareholder has absolute control of the business and others who own 5% of the business but will see cash only after the private equity investors recoup their $10 million investment.
The lawyer’s mission in divorce discovery is to start broadly and narrow the focus quickly. There are times when new information requires the lawyer to “reboot” and re-trace steps because new evidence has arisen. But then there are times when clients just aren’t “ready” to accept the process and the need to narrow inquiries or conclude the case. This often comes in the form of wanting to revisit transactions and investments from long ago “in case” something might turn up. Particularly when there is evidence of one or more extramarital relationships, clients often ask that every financial transaction be viewed through the microscope.
There is no right answer here. But clients need to realize that in their quest to discover everything, they often tax not just their own litigation budgets but the patience of their spouse and the judiciary as well. It might be wise to form an agreement at the outset of the process of discovery that provides for one party to pay the “costs” of revisiting discovery or insisting on new discovery forays premised upon thin evidence or whim. That would include the cost of defending or simply watching the process head in untargeted directions because of undocumented fears. Obviously, if there is gold in the gopher hole, the question of who pays for the foray may need to be revisited as well.
These concepts may sound inherently radical. But, we should recall that in most of the English speaking world, a party who fails in litigation pays at least a substantial portion of the winner’s costs including legal fees. Borrowing from today’s extraterrestrial news, our discussion is directed towards “eclipsing” inefficient legal expenses as often occur in estate, custody and divorce litigation. Smart litigation should be efficient. Not many of us look forward to a day when 10,20 or $50,000 is consumed exploring whether one high school produces better outcomes than another or whether 50/50 custody should become 40/60. Nor is it worth spending like amounts of money exploring whether your spouse left bank accounts in Switzerland when he was assigned by his employer to work there in 2017. Americans love litigation but loathe its costs. Yes, you can litigate your way to complete victory. And last week you could have won the $1.3 billion powerball ticket. It’s all a question of percentages.
