Contracts Category Archives — Page 2 of 7 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

July 30, 2014

Optional Liquidated Damages Clause Held Unenforceable

Liquidated damages are damages the amount of which has been agreed upon in advance by the contracting parties. When a contract contains a liquidated-damages provision, the amount of damages in the event of a breach is either specified, or a precise method for determining the sum of damages is laid out. This is often done in situations where the parties agree that the harm likely to be caused by a breach would be difficult or impossible to measure with any precision, so they agree on a figure in advance and dispense with the time and effort that would otherwise be involved in proving compensatory damages at trial. Another benefit often cited is the ability to control exposure to risk that normally is inherent in business litigation.

Fairfax Circuit Court judge Charles J. Maxfield was recently presented with the interesting question of whether to enforce an optional liquidated damages clause, an issue not yet decided by the Virginia Supreme Court. Sagatov Builders LLC v. Hunt involved a sale of real estate. The seller alleged the buyer was supposed to pay a $50,000 deposit but didn’t. The parties’ contract contained the following provision:

If the Purchaser is in default, the Seller shall have all legal and equitable remedies, retaining the Deposit until such time as those damages are ascertained, or the Seller may elect to terminate the contract and declare the Deposit forfeited as liquidated damages and not as a penalty …. If the Seller does not elect to accept the Deposit as liquidated damages, the Deposit may not be the limit of the Purchaser’s liability in the event of a default.

June 10, 2014

Virginia’s Economic Loss Rule

by Lee E. Berlik

A plaintiff filing a lawsuit usually wants to demand as much money as possible, both for the intimidation value and because in Virginia state court, you cannot recover damages in an amount greater than what you asked for in the complaint, even if the jury awards it. Plaintiffs are thus often tempted to include demands for punitive damages, which can add as much as $350,000 to a recovery. (Punitives are capped at $350,000 in Virginia). Punitive damages, however, are not available in contract disputes. This creates a situation where the plaintiff’s attorney often tries to craft the complaint in such a way as to make it appear that the defendant not only breached a contract but committed one or more related torts as well, such as fraud, tortious interference with contract, or business conspiracy. Enter the “economic loss rule.”

Designed to maintain the distinctions between contract claims and tort claims, the economic loss rule provides that where the plaintiff is a party to a contract and has suffered only disappointed economic expectations, such as damages for inadequate value, the cost to repair a defective product, or lost profits (as opposed to damage to persons or property), his remedy sounds in contract and not tort. In other words, if the plaintiff did not receive the benefit that he bargained for, his losses will be deemed merely economic and he will not be permitted to recover on a tort theory. An exception would apply if the contract itself was fraudulently induced.
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May 12, 2014

No Tortious Interference Claim Without Actual Interference

by Lee E. Berlik

One of your top executives puts in his notice that he is leaving to join your fiercest competitor. Fortunately, he signed a noncompete that restricts him from doing just that. Your lawyer sends him a letter reminding him of his contractual obligations to your company, of course, but also recommends that you put the new employer on notice of the noncompete and threaten a tortious interference action against the company should it proceed to hire your employee. After all, he advises, the company has deeper pockets than the executive, and if the competitor hires him with knowledge of his contractual obligations to his existing employer, they are automatically on the hook for tortious interference. Right? Wrong, says the Fourth Circuit.

Similar facts were presented in Discovery Communications, LLC v. Computer Sciences Corporation. Discovery had an employment agreement with its chief accounting officer, Thomas Colan, which required Colan to remain with Discovery for a specific term. Discovery alleged that Colan breached his agreement by quitting his job prior to the expiration of the term to go work for CSC. Discovery alleged that it put CSC on notice of the employment agreement after CSC offered Colan employment but before the effective date of Colan’s resignation. Discovery argued that CSC tortiously interfered with the contract by hiring Colan after being put on notice of the employment agreement. The district court held that was not enough, and the Fourth Circuit agreed, affirming the dismissal of the case.
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April 9, 2014

West Virginia Bank Wins Dismissal of Contract Claim for Lack of Personal Jurisdiction

by Lee E. Berlik

Virginia’s long-arm statute extends personal jurisdiction to the fullest extent permitted by due process. A Virginia court may exercise specific jurisdiction over a defendant when the defendant has sufficient minimum contracts with Virginia such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. To establish “minimum contacts,” a plaintiff must show that the defendant purposefully directed activities at Virginia residents and that the litigation results from alleged injuries arising out of those activities. A court may exercise general jurisdiction over a defendant whose activities in Virginia have been continuous and systematic. A court with general jurisdiction over a defendant may adjudicate claims entirely distinct from the defendant’s in-state activities. To survive a motion to dismiss for lack of personal jurisdiction under Federal Rule of Civil Procedure Rule 12(b)(2), a plaintiff must demonstrate personal jurisdiction by a preponderance of the evidence. In Hunt v. Calhoun County Bank, the United States District Court for the Eastern District of Virginia analyzed whether it could exercise personal jurisdiction over non-residents in a contract dispute.

James L. Bennett (“Bennett”) is the president and a board member of Calhoun County Bank (the “Bank”), a West Virginia corporation. In June 2007, William H.G. Hunt, Sr. (“Hunt”), a Virginia resident, entered a contract with the Bank in which the Bank agreed to sell Hunt royalty interests for $40,000. Hunt sued the Bank and Bennett for breach of contract and fraud alleging that he transferred $40,000 to an agent of the Bank but that the Bank refused to transfer the royalty interests. He asserts that he suffered over $180,000 in damages as a result of the Bank’s breach and he seeks specific performance or compensatory damages. Hunt also alleges that Bennett fraudulently misrepresented his intention to transfer the royalty interests. The Bank and Bennett moved to dismiss for lack of personal jurisdiction and also for failure to state a claim upon which relief can be granted.
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March 17, 2014

Business Conspiracy Can Be Based On Tortious Interference

by Lee E. Berlik

Last September, I noted the case of Dunlap v. Cottman Transmissions Systems, LLC, in which the Fourth Circuit certified two questions to the Virginia Supreme Court seeking clarification with respect to Virginia’s business conspiracy statute and the applicable statute of limitations for tortious interference claims. The Virginia Supreme Court has now answered those questions, holding that causes of action for tortious interference with contract and tortious interference business expectancy qualify as the requisite “unlawful act” to proceed on a business conspiracy claim under Va. Code §§ 18.2-499 and -500 because both claims are predicated on an independent common law duty arising outside of contract. The court also held that claims for tortious interference are governed by § 8.01-243(B)’s five-year statute of limitations because such claims involve injury to property rights.

James Dunlap sued Cottman Transmission Systems, LLC, and Todd Leff for tortious interference with contract, tortious interference with business expectancy, and business conspiracy in violation of Virginia Code § 18.2-499 and § 18.2-500. The claims arose from Dunlap’s franchise agreements with AAMCO Transmissions, Inc. When a new owner of AAMCO (who already owned a controlling interest in Cottman) sought to convert Cottman Franchises into AAMCO franchises, Dunlap’s franchises were closed, and Dunlap claimed that the closings were due to a conspiracy between Cottman and others.
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March 10, 2014

White House Crasher’s Tortious Interference Claim Reinstated on Appeal

by Lee E. Berlik

Readers may remember Tareq and Michaele Salahi from the national attention they gained in November 2009 when they crashed a White House state dinner in honor of India’s Prime Minister Manmohan Singh or from their run on the reality show “The Real Housewives of D.C.” The Salahis are no stranger to litigation, having gone through a messy divorce in 2012. Most recently, the Supreme Court of Virginia heard Mr. Salahi’s appeal from a decision of the Circuit Court of Warren County regarding claims against the couple’s former agent, DD Entertainment, LLC.

According to Mr. Salahi, he and his then wife had a verbal agreement to appear on reality T.V. shows, talk programs and other media outlets to promote their entertainment partnership, “The Salahis,” and they were to use the profits from the partnership for their mutual benefit. DD Entertainment acted as the Salahis’ agent and procured additional projects for them. Mr. Salahi alleged that DD Entertainment was aware of the couple’s business partnership and used improper means to interfere with the partnership by encouraging Mrs. Salahi to leave the enterprise and become the adulterous mistress of Journey guitarist Neal Schon in violation of Virginia’s adultery statute, Virginia Code § 18.2-365.
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February 17, 2014

Are Purchase Orders Enforceable Contracts?

by Lee E. Berlik

They can be. The Uniform Commercial Code provides that a contract for the sale of goods may be made in any manner sufficient to show agreement, and that “an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods.” In MidAtlantic International Inc. v. AGC Flat Glass North America Inc., a federal court in Norfolk examined whether purchase orders reflected an enforceable contract between the parties and concluded that they did.

MidAtlantic supplied Spanish dolomite to AGC under a contractual relationship that their predecessors began in the late 1990s. At the end of each calendar year, AGC sent MidAtlantic a purchase order providing a rough estimate of its needs for the coming year. AGC supplemented the annual purchase order with monthly orders that were more exact. Each purchase order set forth requirements and conditions for the delivery of the product and contained the price and quantity of the product, details regarding how the agreement could be cancelled, shipment requirements and other details necessary for both sides to understand how the transactions were to occur. The quantity of dolomite was occasionally altered via email and phone between the parties. Additionally, the purchase orders provided requirements for the chemical composition and physical properties of the product. For example, the maximum allowable levels of iron, silicon dioxide and acid insoluble particles were specified, and no acid insoluble particle was to be coarser than 30 mesh.
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November 18, 2013

Failure to Mediate Prior to Litigation Held Grounds for Dismissal

by Lee E. Berlik

A court will not substitute a judicial resolution for a contractually agreed-upon remedy when two sophisticated parties negotiate a contract at arm’s length. In Dominion Transmission, Inc. v. Precision Pipeline, the United States District Court for the Eastern District of Virginia dismissed a complaint where the two corporations had agreed to submit any disputes to mediation before commencing litigation and failed to do that. The basis for the dismissal, however, relied on the court’s inherent authority to control its docket, not on any lack of subject matter jurisdiction.

Utility company Dominion Transmission contracted with Precision Pipeline to construct a portion of the Appalachian Gateway pipelines. The parties’ contract provided that the parties would abide by a multi-tiered, progressive alternative dispute resolution (“ADR”) process before commencing litigation. In the event of a dispute, (1) the aggrieved party was to notify the other party of the dispute; if the parties could not resolve the dispute, they were required to (2) meet and discuss the issue among the project managers; then (3) proceed to a meeting of senior officers; and finally (4) proceed to mediation governed by the American Arbitration Association standards.

After Precision completed the pipelines, the parties met to close out the contract but could not reach agreement. Precision presented change order requests and filed mechanics’ liens and foreclosure actions. The parties communicated for several months, Dominion invoked its audit rights, and the parties disagreed over the amount, format and content of Precision’s required production of information. Both parties referred to the ADR provision of the contract in their communications, and counsel for the parties met at least once, but neither party initiated a meeting of senior executives or submitted the dispute to formal mediation as steps (3) and (4) of the contractual ADR provision required. Instead, Dominion filed suit in the United States Court for the Eastern District of Virginia, and Precision moved to dismiss for lack of subject matter jurisdiction, arguing that the court lacked power to hear the case because a contractual condition precedent (submission to mediation) was not met.

October 21, 2013

Oral Profit Sharing Agreement Held Enforceable

by Lee E. Berlik

Virginia’s statute of frauds provides that “[u]nless a …contract…is in writing and signed by the party to be charged or his agent, no action shall be brought…[u]pon any agreement that is not to be performed within a year.” Va. Code Ann. § 11-2(8). A party wishing to assert the statute of frauds as an affirmative defense to a breach of contract action must show that the parties’ oral agreement was within the statute of frauds. The issue is whether the contract as a whole can be fully performed on one side within a year, even through the occurrence of some improbable event. If a court can conjure up some contingency, no matter how unlikely, that would allow either party to completely perform all of its contractual obligations within one year, the statute of frauds will not apply. The United States District Court for the Eastern District of Virginia recently examined this issue in Blue Sky Travel v. Al Tayyar.

Blue Sky purchased airline tickets that Al Tayyar Group (“ATG”) then resold to the Saudi Arabian Ministry of Higher Education (the “Ministry”). The parties orally agreed to share the profits that ATG realized from the re-sales. When Blue Sky sued ATG for breach of contract, ATG asserted the statute of frauds as an affirmative defense arguing that since Blue Sky’s share of the profits could not be calculated until after the end of the calendar year, an oral contract for profit sharing could not have been performed within a year and therefore fell within the statute of frauds.

The court found that the parties’ agreement was premised on ATG receiving orders for tickets from the Ministry and that without an order, Blue Sky would not purchase tickets and the parties would not share any profits. The contract did not obligate the Ministry to order tickets, so it was possible that the Ministry could have decided not to order any tickets in a year or stopped split money.jpg ordering tickets at any time such that neither Blue Sky nor ATG would be required to perform. Also, the Ministry contract could have been terminated within a year of the parties’ agreement. Therefore, either or both parties could have completed their performance under the oral agreement within a year without breaching or terminating the agreement. The court held that ATG failed to carry its burden of establishing that the parties’ oral agreement could not have been fully performed by either party within a year, and that the oral contract was therefore outside the statute of frauds.

September 25, 2013

Arbitrator Designation Deemed Severable from Contract

by Lee E. Berlik

Virginia Code § 8.01-581.01 et seq. evidences a public policy favoring arbitration. Virginia’s statutory scheme provides that arbitration agreements between parties are valid and enforceable, and courts uphold the parties’ designated method of appointing an arbitrator. Where the parties’ appointed arbitrator is unable to act and the parties have not provided a method of appointing a successor, the court can make an appointment. Contracting parties are presumed to know the statutory scheme, and they may alter it, but they must do so with clear and unambiguous language. In Schuiling v. Harris, the Virginia Supreme Court considered whether a clause appointing a specific arbitrator was severable from the rest of the contract or integral to the contract rendering the whole agreement unenforceable if the appointed arbitrator was unavailable.

William Schuiling hired Samantha Harris as his housekeeper. The parties signed an arbitration agreement providing that any and all disputes arising out of the employment would be resolved “exclusively by arbitration administered by the National Arbitration Forum…” The agreement also contained a severability clause stating that if any provision of the agreement was found to be invalid or unenforceable, it would be severable from the rest of the agreement and not affect any other provision. The agreement did not contain any other terms relating to non-competition, salary, wages or term of employment. The sole subject of the agreement was arbitration.

Harris filed a complaint against Schuiling alleging multiple torts, statutory violations and breach of contract. Schuiling filed a motion to compel arbitration under Virginia Code § 8.01-581.02(A). Schuiling asserted that the National Arbitration Forum (“NAF”) was no longer available to arbitrate the dispute and requested the circuit court to appoint a substitute arbitrator pursuant to Virginia Code § 8.01-581.03. Harris opposed the motion, arguing that NAF’s exclusive designation was an integral part of the contract and that because NAF was unavailable, the whole agreement was unenforceable. The circuit court denied Schuiling’s motion to arbitrate, finding that the parties’ designation of NAF was an integral part of the contract and that NAF’s unavailability rendered the whole agreement unenforceable. Schuiling appealed.