Written by Henry Glick (reviewed for accuracy by Amber Sheppard)
Today we are reviewing a 25-cent phrase called “cognovit clauses” written by our paralegal and current Loyola University School of Law 3L Henry Glick. This Sheppard Law Louisiana business law blog details if a Louisiana cognovit clause is valid, when can it be enforced, and how this affects Louisiana small businesses and consumers.
Take it away, Henry!
-Amber, a Louisiana and Mississippi lawyer, and Tubbs, a service dog
A ‘cognovit’ clause, or ‘confession of judgment,’ is a clause within a contractor an addition to a contract that allows one party to unilaterally obtain a judgment against the other in case of a breach of contract. For the most part, these terms can be used interchangeably – but the difference is that a confession of judgment might be contained in an entirely separate document. A cognovit clause will be embedded in the original contract.
These are most common in business-to-business contracts. Courts will typically deem them automatically unfair if a contracting party is a person (or consumer). Often, these are in loan contracts where the party signing for the confession of judgment is a debtor. You will see these most often in foreclosure proceedings.
In some cases, cognovit clauses can be beneficial to both parties. For the creditor, it can streamline the process in case of a breach of contract. For the debtor, they can argue for more favorable loan terms in exchange for the confession of judgment. Still, in doing so the debtor waives their right to due process.
Yes and no.
Generally, cognovit clauses are unenforceable when the party to whom judgment is made against is a person--not a business or other entity. They are usually enforceable against companies or entities that specifically consent to the presence of a cognovit or confession of judgment. There must be additional consideration for application in executory proceedings (i.e., a foreclosure event).
It’s important to remember that contracts are like little pieces of law in and of themselves. With a ‘Choice of Law’ clause in a contract, the laws that govern what is or is not allowed change. It depends on what State Law governs the contract.
For example: Party A is a creditor in Ohio. They want to enter into a business deal with Party B. Party B is a debtor in Louisiana. If there is a section of the contract that states “This contract is governed by the laws in the State of Ohio”, then the prohibitions that Louisiana has in place don't affect the contract. This means Ohio’s Cognovit Clause prevails.
So, a contracting party that exists in a state that generally favors confessions of judgment may have their state law apply.
Enforceable cognovit clauses cannot be put into a contract without both parties specifically intending for it. Make sure you read your contract before signing and when in doubt, talk to a Louisiana business lawyer.
In Louisiana, a confession of judgment must be accompanied by an ‘authentic act’ in order for the confession to be enforceable. An authentic act is a notarized statement witnessed by at least two folx.
In all cases, however, it is important to consult an attorney before entering into a contract that contemplates a confession of judgment.
Cognovit clauses or confessions of judgment are complex to understand. Amber is a Slidell, LA lawyer and she still had to double check she wasn’t reading a different language when we first started working on them (that’s a joke). Whether you need another opinion on a Louisiana business law agreement with a vendor or defending yourself against a Louisiana cognovit clause, this business law firm may be able to help protect you either way.
Contact Amber and Tubbs for a paid consultation to review your contract or create one for you. You can reach out using our contact form online or by texting our client relations specialist at 985-326-1656.
Also, if you own a small business, don’t forget to check when your Louisiana annual report is due. Failure to stay in good standing could void your contracts.
This blog was originally published on 08/19/2024. © Sheppard Law PLLC, 2024- present.
