Articles Posted in Contracts

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 Pipeline.jpgStates 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.

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.jpgordering 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.

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 scissors2.jpg(“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.

Those who personally guarantee repayment of a loan need to understand that a personal guarantee means what it says: if the primary obligor fails to pay, expect the noteholder to come after you. In City National Bank v. Tress (from the Western District of Virginia), the court considered various defenses raised by the guarantor and rejected them all, granting summary judgment to the bank.

Imperial Capital Bank loaned $3.2 million to Roanoke Holdings, LLC. Moishe Tress and Yehuda Dachs signed a promissory note on behalf of Roanoke Holdings and personally guaranteed the loan. Roanoke Holdings defaulted on the loan and Tress and Dachs failed to make payments as personal guarantors. Imperial Capital went into receivership, however, and the receiver sold the note and guaranty to City National Bank. City National sued the guarantors and promptly moved for summary judgment. The summary judgment motion against Dachs was unopposed and granted. Tress opposed the motion and sought summary judgment himself.

Under Virginia law, a guaranty is a contract in which a guarantor agrees to be answerable for the debt of another in case of that person’s failure to pay. To recover on a guaranty, a party must show (1) the existence and ownership of the guaranty contract; (2) the terms of the primary obligation; (3) default; (4) and nonpayment of the amount due from the guarantor.

A plaintiff must prove his damages claim with reasonable certainty by providing sufficient facts and circumstances to allow the fact finder to make an intelligent and probable estimate of the damages sustained. In Crum v. Anonymizer, the Fairfax Circuit Court refused to modify a jury verdict awarding the plaintiff less than he contended he was owed when the court found he failed to present sufficient evidence of his damages.

In Crum, the jury found that Anonymizer, Inc. had breached its Sales Incentive Plan when it capped Daniel Crum’s total commissions and cut his commission percentage from 6% to 3%. The jury awarded Crum $139,458.17 in damages, but it determined that Crum had not proven his breach of contract claim with regard to post-termination commissions.

Crum made a Motion for Judgment Notwithstanding the Verdict, asserting that the Sales Incentive Plan contained the only conditions he had to satisfy to earn commissions and that no evidence had been presented that he had failed to satisfy those conditions. Crum contended that the only evidence shown was that Anonymizer stopped payments once it no longer employed Crum. Anonymizer produced evidence that corporate practice was to stop paying sales commissions after termination, but crumbs.jpgthere was no evidence that continued employment was a condition of the Sales Incentive Plan. Accordingly, Crum argued that the jury had no basis to conclude that continued employment was a condition and should have awarded him damages on his post-termination claim.

One common problem when negotiating contracts is keeping track of all the revisions the other side makes without having to re-read the entire contract again and again. Microsoft Word’s “track changes” feature is helpful but can still lead to confusion when not used properly. Even when the other contracting party tells you that the only changes are to the language on a particular page, can you really trust that person? A recent opinion from the Western District of Virginia suggests that you can, to a certain extent, because if the other party tries to slip in a material change without alerting you to it, the other party may be liable for fraudulent inducement.

A party can be fraudulently induced to enter a contract when a false representation or omission of a material fact is made knowingly with the intent to mislead and the party signs the contract in reliance on the representation. Concealment of a material fact can constitute a false representation where evidence shows a knowing and deliberate decision not to disclose a material fact.

In Whalen v. Rutherford, Jacqueline Whalen and James Rutherford maintained a romantic and business relationship for over twenty years. In 1985, they formed W&R Partnership to manage a horse farm and breeding operation. According to the editing.jpgPartnership Agreement, Whalen was the managing partner and would receive a salary to be determined by both parties commensurate with her time and effort. Rutherford agreed to move in with Whalen and finance the construction of a new house on the property, so Whalen granted Rutherford a joint tenancy interest in the property.

Although parties can sometimes demonstrate both breach of contract and a tortious breach of duty, the duty in such cases must arise separate from the contractual duty, and negligent performance of a contract cannot form the basis for a tort claim. The United States District Court for the Western District of Virginia emphasized this point in American Legion John Radcliff Post 164 v. BB&T Corporation.

Debra Horn was president of the American Legion Ladies Auxiliary Unit 164. Her husband, Mack Horn, was a member of American Legion John Ratcliff Post 164. Over the course of a year, the Horns made several transactions, including writing checks, making expenditures and withdrawals and closing accounts that Post 164 did not authorize. Specifically, Post 164 had a Certificate of Deposit with BB&T Bank. Without the Post’s permission, BB&T allowed Mr. Horn to withdraw $15,447.15 from the CD and Mrs. Horn to withdraw $29,975 and to close the CD by withdrawing $49,975. BB&T processed a deposit of $49,975 to a checking account in Post 164’s name and a check in the amount of $35,000 from Post 164’s checking account into an account that the Horns controlled. The Horns used the funds for their own personal benefit.

Post 164 sued BB&T for breach of contract, negligence, and breach of fiduciary duties. The complaint also contained a claim entitled “Statutory Claim” and asked for punitive damages. BB&T argued that the action was essentially a breach of contract claim and asked that all the other claims be dismissed. BB&T also asked the court to strike Post 164’s claim for punitive AmericanLegion.JPGdamages.

Musical artist Cameron Jibril Thomaz, better known as “Wiz Khalifa,” recently saw his breach of contract case against It’s My Party get dismissed. Mr. Thomaz had hired The Agency Group as his booking agent for a new tour which would have included a concert at The Patriot Center in Northern Virginia. The Agency Group asked It’s My Party Inc. (I.M.P.) to promote the concert, and it represented to I.M.P. that Mr. Thomaz would soon release a new album. The Agency Group emailed a contract to I.M.P. and asked I.M.P. to sign and return it to The Agency Group for approval and signature by Mr. Thomaz. The contract provided that it would not be binding unless signed by all parties. The contract was never signed.

Mr. Thomaz’ release of a new album was crucial to I.M.P.’s interest in promoting the concert because it did not believe he could attract a sufficient number of fans to warrant his appearance at the venue without the support of a new album. I.M.P. asserted that the parties tentatively agreed upon a date for the concert and the terms of I.M.P.’s promotion of the concert, but it denied having committed to promote the concert.

Mr. Thomaz argued that the parties entered into a contract for him to perform a live concert and that he relied on I.M.P.’s representations in turning down an opportunity to perform on the same date at a different venue using a different promoter. According to Mr. Thomaz, I.M.P. partially performed the contract by advertising, promoting and marketing the concert. He also contends that he partially performed the contract but that I.M.P. refused to pay him any money and canceled the concert after fans already had purchased tickets. I.M.P. asserted that it declined to execute the contract but agreed to reschedule the concert because Mr. Thomaz’s album release was delayed. The Agency Group and I.M.P. agreed to sell tickets to the concert before finalizing the agreement, but as I.M.P. had predicted, sales tanked in the absence of the album release. The parties were unable to come to mutually agreeable terms, and I.M.P. ultimately cancelled the concert and withdrew its offer to promote it. Mr. Thomaz sued I.M.P. for breach of contract and I.M.P. moved to dismiss the complaint.

When analyzing personal jurisdiction, the Fourth Circuit (which includes both Virginia and South Carolina) had held that it is proper to consider the location where the effects of the alleged wrongdoing are felt. The so-called “effects test” is applied narrowly, however, and cannot be used to supplant the minimum contacts analysis required by the United States Constitution. The United States District Court for the District of South Carolina recently had occasion to apply the test in Power Beverages v. Side Pocket Foods.

Power Beverages, a South Carolina company, contracted with Side Pocket, an Oregon distillery, to manufacture and sell Ying Yang vodka and ship the product where directed. Power Beverages wired money to Side Pocket in Oregon to pay for materials, and Side Pocket delivered the vodka to a South Carolina licensed distributor.

A dispute arose between the founders of Power Beverages, and one of the founders demanded that Power Beverages cease operations. Side Pocket informed Power Beverages that the contract between them would terminate in thirty days, and it sent Power Beverages a final invoice which Power Beverages contested. Upon direction from one of the founders, Side Pocket released the remaining inventory to a distributor in California. Power Beverages then sued Side Pocket in South Carolina for breach of contract, fraud, conversion, unfair trade practices and conspiracy. Side Pocket argued that the South Carolina court lacked personal jurisdiction over it.

Earlier this year I noted the case of Precision Franchising, LLC v. Catalin Gatej, a breach of contract case filed by the Leesburg-based franchisor of the Precision Tune Auto Care system against a Massachusetts resident. The Eastern District of Virginia had denied the defendant’s motion to dismiss the case and had issued a detailed written opinion explaining the grounds therefor. What happened next? Mr. Gatej promptly fired his lawyers, then proceeded to ignore Precision’s discovery requests until several weeks after responses were due. The predictable result was another written opinion, this time granting summary judgment in favor of Precision Franchising.

Requests for admissions are deemed admitted if not timely answered. Gatej failed to respond timely to Precision’s requests for admissions, resulting in certain key facts being deemed established. Precision, relying on those admissions, moved for Judge Cacheris.jpgsummary judgment. Late responses, however, are generally treated as motions to withdraw or amend the admissions, which courts can allow if allowing the late or amended responses would promote “the presentation of the merits of the action” and “would not prejudice the party that obtained the admission.” (See Federal Rule of Civil Procedure 36). Gatej filed late responses.

Judge Cacheris found that although allowing Gatej to amend his responses would certainly promote presentation on the merits, it would cause prejudice to Precision. Precision reasonably relied on the deemed admissions in preparing its motion. Allowing Gatej to amend his responses so late in the process would force Precision to expend more time and money to prove what the deemed admissions already conclusively established. Perhaps most importantly, Gatej filed his responses over two months beyond an extended deadline as part of a pattern of “general unresponsiveness and repeated delinquency.” The looming discovery deadline left no room for Precision to complete more discovery. And the Court had already warned Gatej that his repeated noncompliance could result in sanctions, including the entry of a default judgment. Though the result was perhaps harsh, Judge Cacheris concluded that litigants must be able to rely on the rules of procedure or there is no point to having them.

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