Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

The Koncise Drafter Blog has an interesting post concerning the interpretation of certain disclaimer contract language. The aggrieved party - a lessee, claimed fraud when the landlord failed to disclose that there was a bad odor in the premises where the lessee planned to operate a restaurant. Clearly this problem would have defeated the objective of using the space for a restaurant. To make things worse, the property manager knew about the problem, but had naturally failed to disclose this issue to the new lessee. (This sounds a lot like a Seinfeld episode.)

The lease language provided that:

14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.

14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party. …

Not surprisingly, the lessee sued the landlord for fraud, among other things. The Landlord took the predictable position that the lessee had waived any claims for fraud.

The trial court found for the lessee, the Texas Court of Appeals reversed, and the Texas Supreme Court reversed the Court of Appeals. The question that the court was grappling with is whether the parties effectively disclaimed reliance on the representations by the lessor, thereby negating any claim of fraud. I am sure that when the lease was drafted that was likely the intent, this is very standard language (or some version of this language). The Blog correctly points out that when a drafter clearly states that the other party waives any claims for fraud, it is unlikely that the parties will sign the contract. So the language by necessity needs to be a little more subtle.

I think it is also the case when reviewing commercial lease contracts, most reviewers will probably skim the standard boilerplate language such as the term at issue in this case. After all, what owner wants to pay a lawyer to analyze and research language that is considered standard boilerplate language that has, in one form or another, been around for a long time.

In my career I've only once been presented with a lease for a client where the other party wanted my client to disclaim any claim for fraud. We did not agree to that language.

Another issue is whether the lessor had a duty to inform the lessee of the problem knowing that it would interfere with the lessee's intended use of the building. The lesson is clear, if you want the other party to waive any an all rights against your client, you had better say so.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It is very unusual for a third party to a contract to be able to enforce the terms of a contract. The first hurdle is that the parties must have specifically intended that the third party benefit from the contract. Usually claims of a third-party beneficiary are defeated at this point because there is no language in the contract to show specific intent to benefit the third party.

Claims against the Government are equally as difficult, if not more so. So the recent case of FloorPro Inc. v. United States is unusual. The facts of the case are simple enough. GM&W was awarded a government contract install new floor coatings in some warehouse bays. GM&W sub-contracted with FloorPro and the latter was to be paid about ninety percent of the contract price -- $37,500 out of $42,000. FloorPro completed the work but was not paid. FloorPro complained to the Government contracting officer.

The Government then made an agreement with the parties that provided that a joint check was to be issued to both FloorPro and GM&W. In consideration for the amendment GM&W released the government from any claims. So far so good for FloorPro.

However, the government being the government made a mistake and issued the check to GM&W, who presumable cashed it promptly and of course did not pay FloorPro. FloorPro brought an action against the Government claiming that it was aThird-Party Beneficiary of the contract modification.

The court agreed. The contract modification was specifically intended to benefit FloorPro. While it is unusual to find a successful third party claimant to contract funds, in this case the result is certainly fair and predictable. The parties clearly intended to benefit FloorPro. Since the the law is clear on when a 3rd party can succeed with a claim, and the facts clearly show that FloorPro was the intended beneficiary, why would the government fight the claim instead of negotiating a settlement. This was not a large claim, and the government made the mistake.
 

Thanks to the Contracts Prof Blog for reporting this unusual case. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Minnesota Labor and Employment law Blog has an interesting article on another large company failing to pay it’s employees for overtime work as required by the law. The company in this instance was Levi Strauss and Company. The end result cost them well over a million dollars and of course their incurred attorney fees. Most of these cases are arguments over classifications – is an employee exempt, or not. Companies have been found to classify employees as managers, even though they don’t manage much, to avoid the overtime requirement.

Several years ago a contractor approached me and asked if he could make all of his employees independent contractors, thereby avoiding the requirement to pay the employers portion of social security. His competitors, he told me, were all doing it. This is another bad idea that will eventually subject a company, and owners, to significant costs and penalties.

Companies are sometimes operating under significant cost pressures, and they are looking for ways to reduce costs. However, ignoring the law is not the solution to a cost problem. While a company ignoring the law might gain a slight cost advantage in the short run, the cost in the end is bound to be much higher.

In the Levi Strauss case, since the employer failed to pay the required overtime (at least they agreed to make payment to the tune of over a million dollars,) the employer will also have a significant payment due the government for their portion of the social security payment.

While I have not seen this case yet, I am sure that there are companies that are treating employees as independent contractors and failing to pay the employees the required overtime wages, and the employer is also failing to pay the employers portion of the social security payments. These employers are just as likely to be caught by the government as by an unhappy employee or ex-employee.

Follow the law, and life is easier in the long run. When in doubt, ask an attorney to review the situation and provide advise. It’s far less expensive to get good legal advice than to defend these charges in court. Thanks to the Minnesota Labor and Employment Law Blog for their article on Levi Strauss.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

When preparing contract documents for clients I am occasionally asked if we should include a clause to award attorney fees in case the other party breaches the agreement. When a client brings me a contract and wants to bring an action against the other side, that is one of the first things I look for.  That provision change the analysis of the case.
 

In considering this issue, I think there are two things to remember:

First: A provision allowing only one party to recover attorney fees is not usually a good idea since some courts will read these as giving the prevailing party, whichever side this is, the award; and Secondly: Prevailing party attorney fee provisions are an incentive to sue, since the plaintiff always believes that they are right.

One way attorney fee agreements essentially provide that if “Joe,” brings an action to enforce this agreement, the other side must pay his attorney fees. If Joe wants to enforce the agreement because of some perceived breach of contract, he will assume that he will recover all of his attorney fees. So Joe wants to sue without regard to the cost, or in some cases without regard to the actual merits of the case.

California has a statutory scheme in contract actions that in many cases awards fees and costs to the prevailing party.  You only need to read some of the cases to see the significant number of cases and appeals over who was the prevailing party and what the reasonable fees were.

I confess that at one time I thought the opposite was probably true, because of the additional risk an attorney fee provision brought to any action. However, on the positive side I believe that once an action is brought, the risk of attorney fees sometimes bring the parties together for a settlement.

Joe may or may not be able to recover his fees. Most courts will make a determination based on success in the action. Many courts will read the attorney fee provision as a prevailing party attorney fee provision. However, most cases settle, and I have yet to see a settlement that included an agreement to pay the other parties attorney fees. (I am sure it happens, but usually both parties cover their own fees.)

Some cases start out and the possibility of an award of attorney fees keeps a case from settling. If a substantial amount of money has been spent on attorney fees, will parties settle at a price that covers all of the contract damages only?

A provision that provides that each party is responsible for their own attorney fees and costs in the event of a dispute might very well be a better way to go. It is worth considering.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

This is a fairly common question, but it raises a lot of concerns. Each state has slightly different wire taping laws - by which I mean recording telephone conversations. TheWork Place Privacy Counsel Blog has a very interesting article concerning wiretapping and the Federal Wiretap Act. This act effects interception of telephone calls and e-mails.

The article covers the effect of diverting or intercepting e-mails, and what it means to intercept a communication. Employers beware. Employees beware!

After reading this article, how would you advise an employer that wanted to read all of their employees e-mails.  One thing is that you would not want the act to be an interception of the e-mails. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As the commentator in the Contracts Professor noted, the Supreme Court hears a contract case about as often as the Cincinnati Bengals reach the Superbowl. So in an unusual case - the Supreme Court heard arguments in a case that challenged a provision in an arbitration clause in a consumer contract, that waived rights to any class action. California had previously found such waivers unconscionable.

The courts in California had invalidated the provision. Generally, the only time a court can invalidate an arbitration provision is when the basis for the invalidation would be equally applicable to any contract. In other words, if state law would invalidate a contract, then the same rule would apply to an arbitration agreement. You normally don't get to make special rules to invalidate arbitration agreements, although the court in the recent past has made a number or rulings that arguably leave that question open. The petitioner in this case argued that the states don't get to make special rules for arbitration agreements in order to invalidate them. Petitioner argues that, this is exactly what the court did: it applied a lesser standard than it would apply to any other contract. Respondent argued that this was a universal rule and state gets to decide what is unconscionable.

The oral argument is worth reading to just appreciate how the Supreme Court conducts oral arguments. It will be interesting to see the final opinion of the Court.

However, I wonder why the court took this case in the first place. Five justices must have agreed to hear the case, but why? Is the court going to go into the business of reviewing state decisions regarding the enforceability of arbitration agreement provisions? This seems unlikely. I'm just wondering.

Another take on this case comes from Class Action Countermeasures.  I do like the question: (Paraphrased) Is the Supreme Court ging to Tell California what is or is not Unconscionable?  In the end I think the answer will be, "No!" 
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Rush Nigut has published an interesting comment on a recent case involving a non-compete agreement. Companies often ask new employees to enter into non-compete agreements to help the employer protect it's intellectual property. In the case at issue, the employee signed a non-solicitation agreement, stating that the employee could not solicit the customers of the employer. These types of agreements are very common.

The issue in the case was whether answering an employment ad and going to work for the customer constituted solicitation. The court said, "No," responding to an employment advertisement is not soliciting. In other words, the agreement did not prohibit customer initiated contacts with the former employee.

This is an odd case, since whatever damage was incurred by the former employer was limited to a single ex-customer. Also, if the customer was advertising to hire someone to do the work, you would assume that the ex-employer had already lost the customer. It was just a matter of time. So why spend the money to sue, which surely would not bring back the customer.

Non-compete agreements are tricky, and one year non-competes really don't do much to stop ex-employees, because by the time the ex-employer finds our about the breach, the year is usually almost over.  The case described by Rush is an example (probably) of an employer cutting and pasting a non-compete agreement without consulting an attorney. I am guessing on this, but it seems logical that an attorney would also includ a provisdion restricting the right of the ex-employee to go to work for a customer an provide the same services that the Ex-employer was providing. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In the interest of fairness, when an injured party doesn't know about the claim, should the statute of limitations bar the action? That is an interesting question and the answer, as in most legal questions, is that, "It depends."

In a recent case, a blogger allegedly defamed Arthur Alan Wolk, who brought an action in Federal Court. Wolk argued that the statute of limitations did not apply because he had no way of knowing about the defamation. He didn't discover the alleged defamation within the time required.  As he argued, he couldn't pick up a newspaper and discover the alleged defamation. The statute of limitations for defamation is one year.

The court said that the statute barred the claim. Max Kennerly, in an interesting blog about the case, notes that you can find a lot on Google, and that is where the plaintiff found the reference. He just didn't look within the time required. Max notes that the effect of the rule is that everyone has constructive knowledge of everything on the internet.  I'm not sure I would go that far, but it isn't hard to Google yourself. 

Sometimes the statute of limitations doesn't start until the person injured has or should have knowledge. In other words, if a reasonable person would have discovered the claim by a certain date, then the statute starts to run at that time. Sometimes the statute runs regardless of knowledge, as in this case.

Bring claims based on some action in the distant past is a problem; witnesses are gone, records destroyed and memories are changed. So having a limitation of action is a good thing. You can't usually sit on your claim. Sometimes claims are never discovered until long after the statute has barred any action.

Is this fair? Maybe not of the claimant, but for the legal system it is probably the only fair thing to do. I think this is a case of the greater good, the efficient operation of a legal system, at the expense of some individuals with old claims.

The one thing I like about this case is that the court made the ruling at the motion stage of the proceedings. It is very frustrating to have a court deny a motion to dismiss based on the statute of limitations, have the trial, and then have the court rule that you proved your case but the claim is barred by the statute of limitations.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

This is a really a great story. Sad for the family, but a great contracts story. The Connecticut Law Tribune reports the following story about a contract gone bad. Also see the report in the Contracts Professor.

This is the case of Dana Soderberg, who went to court to force her father to live up to his agreement to pay her tuition at Southern Connecticut State University.

The court agreed that the father had entered into a contract to make the payments. When Howard and Deborah Soderberg divorced, they agreed that Howard would pay all of the education costs of the children.  Dana, a daughter, was smart enough to get a written agreement with her father since, as she knew, her father was not a person to follow through and actually pay for things as promised.

The article in the Tribune reads in part:

As part of the agreement, Dana would make an effort to apply for student loans and Howard Soderberg would pay off those loans. Co-signing the agreement was Howard's sister, Patricia.

Howard delivered on his word through March 24, 2007. But when it came time for Dana to begin her senior year at Southern Connecticut, Howard Soderberg refused to pay the bills. And so Dana got a $20,000 loan to pay for her last year of college, with her mother co-signing.

Dana graduated and sued her father.

The father argued that Dana breached their agreement by not making reasonable efforts to apply for student loans, by failing to attend classes full time and by not providing him with receipts for tuition and other school-related expenses.

Howard Soderberg also filed a counterclaim alleging that his daughter dropped courses and pocketed the refunds. He also said she spent money that was supposed to go toward textbooks on personal items.

Judge Trial Referee William L. Hadden Jr. issued a written opinion earlier this month, ruling that father and daughter had a legitimate contract, that Dana proved to be the more credible party in the lawsuit, and that the father had breached the agreement.

"The plaintiff has proven that she has performed all of her obligations as set forth …" wrote Hadden. "The defendants have failed to prove the claims set forth in their special defenses and in Howard's counterclaim."

Berman said damages totaled around $47,000, including the loan, interest, attorney fees and missed car insurance payments. Berman did not anticipate an appeal.

As I read this report I was wondering what the consideration was, since Dad already had the obligation to pay for the education costs. Perhaps it was the obligation to apply for student loans.

Even without a contract you clearly have what appears to be a good case of promissory estoppel.
The daughters instinct to get a written agreement with her father is probably unusual, but very smart in the circumstances. Good for her. 

This a good lesson in all business arrangements.  Write down your agreements.  Most contracts are preformed without any problem.  But when there is an issue, and the parties have written down their agreement, it is much easier to resolve than it is when the agreements are verbal.  Once there is a dispute over a verbal agreement, the parties will disagree on what the agreement was, or even if there was an agreement.  This case is a good lesson for all.  

Gavin Craig 
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link