Prevention of Performance and Breach of Contract

 A recent Connecticut Supreme Court case (Blumberg Associates Worldwide, Inc. v Brown & Brown of CT)  addressed the prevention doctrine in breach of contract cases.  Under the prevention doctrine if a party to a contract

prevents, hinders, or renders impossible the occurrence of a condition precedent to his or her promise to perform, or to the performance of a return promise, that party is not relieved of the obligation to perform, and may not legally terminate the contract for nonperformance.

In addition, if one party hinders, the other party's performance will be excused.  The other party will not be permitted to recover damages for breach of contract.  In sum, when one party causes the failure of performance under a contract, the party cannot take advantage of it legally in court. 

The prevention doctrine is part of the application of the implied covenant of good faith and fair dealing that is part of every contract.  Essentially, it is part of an obligation to proceed under a contract in good faith.  The issue in the Blumberg case was whether the prevention doctrine could apply to conduct that occurred before the contract was executed by the parties.  

The court held that it could not.  So, the prevention doctrine only applies if a contract already exists.  The reason is because the duty not to prevent or hinder arises only from implied contractual duties.  Therefore, if there is no contract, there is no duty.

Whether particular conduct constitutes wrongful prevention is decided by a jury or judge.  In Connecticut, prevention can be raised by the attorney in the breach of contract case in defense or prosecution of a claim.

Can You Be Personally Responsible When You Sign A Contract As President Of A Corporation?

Ordinarily, the answer is no.  However, you must carefully read contract terms before assuming you will not be personally liable for company debts.  The Connecticut Supreme Court recently addressed an example where the terms of the contract created personally liability for the president of a company.  The case is Yellow Book Sales v. Valle.  

When a corporation is the primary party to and signer of a contract, and the signature is by an officer of the corporation, the generally held rule is that the corporation is responsible and not the individual officer.  This is a rule of construction or interpretation for contracts.  Generally, this rule will apply if the contract is between a corporation and another party, and there is no indication of personal liability in the terms of the contract or on the signature line.  

However, there are circumstances where the general rule does not apply.  In Yellow Book, the Supreme Court of Connecticut found that there were terms in the contract clearly indicating an intent to bind the individual signer as well as the company.  In this particular case, the president of the company signed his name and added the terms "president" to his signature.  Adding the term "president" did not prevent personal liability in this case because the contract terms were clear that there was a personal obligation.

The language in the contract read "[t]he signer of this agreement does, by his execution personally and individually undertake and assume full performance . . ."  As such, it was not ambiguous to the court when the signer added the term "president."  Instead, the court found that the contract, by its clear terms, bound the the signer as an individual and the company.  When the company ceased operations, the president was stuck with the obligation.  

If you want to avoid personal liability for corporate debts, make sure you  read the contract terms closely and not only the signature line.  The signature line may not govern the outcome. The terms of the contract, the party to the contract, and the signature should only be on behalf of the corporate entity.   If there is any confusion based on the terms of the contract, seek legal counsel.  

Are You Covered? CT Businesses Should Double Check Insurance Coverage for Data Loss

The Connecticut Appellate Court recently decided a case involving damages from loss of data related to 500,000 IBM employees.  The case is entitled Recall Total Information Management v. Federal Insurance Company.  The loss of data included social security numbers and birth dates. The data was lost in the process of transport for storage.  Some 4 years later after the loss, there has been no reported identity theft. 

As I have mentioned on this blog many times, data loss events can cause significant damages to a business.  In this case, IBM incurred 6 million in expenses to provide identify protection to its employees and to address the breach.  The data storage company paid IBM the full amount of its loss.  The storage company, and its subcontractor, tried to get insurance coverage for the IBM claim under a commercial general liability policy.  Obtaining coverage for a data loss breach under the terms of a commercial general liability could pose several challenges and the results have been inconsistent across difference courts and cases.  In this case, the insured party tried the most likely arguments to obtain coverage, but the insurance company denied it.

The litigation that ensured concerned whether the insurance company properly denied coverage.  The trial court agreed that it was proper to deny coverage. On appeal, one of the issues concerned the nature of data loss and whether it triggered coverage under the policy for a personal injury.  The Appellate Court found that the policy did not provide coverage under the personal injury provisions of the policy.  One of the reasons related to the fact that the data was never published to or accessed by anyone. This suggests that the results might have been different had there been dissemination of the data by a thief.  

 

The take away here is that businesses need an annual review of their insurance policies to specifically address the types of exposure they face.  A commercial general liability policy may not cover every circumstance.  In the case of data loss, security breaches, or technology errors, there are specific policies designed to cover these risks.  Seeking coverage for data loss claims under a standard commercial liability policy likely will be problematic, and may result in no coverage as highlighted by this recent case. 

Member Rights For Connecticut Limited Liability Company

Generally, there are two sources to determine the rights and duties of members of a Connecticut limited liability company (“LLC”).  The first source is an operating agreement.  The ability to form a limited liability company (“LLC”) as a legal entity in Connecticut derives from legislative enactment.  Title 34 of Connecticut General Statutes covers LLC’s.  Title 34 gives great deference to the members of an LLC in forming an agreement on governance of the LLC.  Statutory deference creates flexibility and is one of the biggest advantages when choosing a LLC as an entity for a business. 

The members’ agreements on governance of the LLC are typically documented in a written agreement known as an operating agreement.  These agreements are typically drafting by a business attorney.  The operating agreement for a LLC will typically document the rights and duties of members and managers for LLC’s.  An operating agreement is similar to a partnership agreement.    An operating agreement can be simple or complex depending on the needs of the members. 

Operating agreements can alter or change the statutory rights of members or managers.  Members by agreement can define the voting rights of members, the number of votes required to decide matters, and the manner in which managers can be appointed or removed.  Members can also agree upon limitations on ownership interests such as transfer of ownership or withdrawal of members.  Members further can agree upon duties of managers and members.

Unexpected problems sometimes arise when an operating agreement is silent on rights and duties. When an operating agreement is silent, the second source to determine rights and duties of members is Title 34.  You might consider Title 34 to govern by default unless otherwise agreed upon by the members.

Connecticut General Statutes 34-140 to 34-144 covers the rights and duties of members and managers.  If the operating agreement of a Connecticut LLC is silent on the issue, the following is an example of governance rules:

·         If the LLC is governed by managers, the vote of more than one-half the number of managers will decide most matters with the LLC

·         If the LLC is governed by members, the majority vote of the members in interest will decide most matters with the LLC

·         Majority of members in interest can vote and designate a manager

·         Any and all managers may be removed with or without cause by vote of a majority of the members in interest

·         Absent proper consent, every member and manager must account to the LLC and hold as trustee for it any profit or benefit derived by that person from transactions connected with the LLC or through use of confidential or proprietary information of the LLC

·         The vote of two-thirds of the members in interest is sufficient to amend the operating agreement

The take away here is to use the operating agreement to document how you want to run the LLC.  Consult an attorney to help draft the operating agreement.   If you fail to do it, the Connecticut legislature will decide how to run the business for you.  This may have unintended consequences.

 

Parol Evidence Rule Can Sting In Court

 Parties to contracts frequently argue over contract terms and the intent behind certain provisions of a contract.  However, if the matter goes to court, these arguments can become meaningless if the contract is clear because of the parol evidence rule.  A recent appellate court case, Connecticut Bank and Trust Co. v. Munsill-Borden Mansion, LLC, serves to highlight how the rule could impact the evidence in a breach of contract case at trial in Connecticut.

In the CT Bank and Trust case, the parties were arguing over whether an individual had personally guaranteed a promissory note.  The individual's attorney wanted to ask a witness questions concerning the intent behind signing the note.  However, the trial judge sustained objections to all of the questions that strayed from the actual note. The reason cited was the parol evidence rule.

In summary, the parol evidence rule prohibits the use of extrinsic evidence (off the contract) to vary or contradict the terms of an integrated (complete) contract.  There are exceptions.  Exceptions include evidence to explain ambiguity, prove a collateral oral agreement that does not vary the contract, add a missing term that does not set forth the complete agreement, or to show mistake or fraud. 

In this case, application of the rule barred all of the questions that were not related to the note itself.  Therefore, any arguments over terms or intent were irrelevant.  Simply put, the parties were confined to the contract itself.

The take away here is to make sure any specific terms you want in a contract are reduced to writing in the contract, and not in a separate document or conversation.  For example, emails or verbal agreements that alter the terms of a clear and integrated contract may become irrelevant and unenforceable in court. 

Old Judgments Can Come Back to Bite You - Hazards of Defaulting on Promissory Notes

A recent case from the Connecticut Supreme Court serves as a reminder that civil judgments are good for 20 or 25 years in Connecticut depending on how you seek to enforce the judgment.  The decision was in the case of Investment Associates v. Summit Associates, et al.  In this case, a debtor failed to pay on a promissory note and left a balance of about $272,000.00. The note holder sued in state court to collect on the note.  The debtor defended the case but moved to another state.  However, the plaintiff note holder ultimately prevailed obtaining a judgment in the outstanding amount.

The plaintiff brought the lawsuit in 1991 and obtained judgment in 1994.  The defendant left the state in 1992.  15 years after obtaining the judgment, the plaintiff moved to revive the old judgment in Connecticut.  Under Connecticut General Statutes 52-598 (c), the judgment remained valid.  The Court noted that the Connecticut legislature wanted to address situations where a defendant could avoid a Connecticut judgment by moving to a state that had a shorter time period for enforcing judgments.  In this case, the defendant left to South Carolina which had a ten year statute. 

Many business owners believe that if they have no assets and no cash they are "judgment proof." This means that even if they lose a lawsuit, there will be no cash or assets available to pay the judgment.   The old saying goes that you cannot get blood from a stone.  However, this case serves as a reminder that to remain judgment proof in Connecticut, your stone cannot have blood for 20 to 25 years.  

Trade Secret Theft on the Cloud: Concerns For Both Employers and Employees

Max Taves authored an article posted by Law Technology News  entitled "Trade Secret Spats Center on Cloud."  The article highlights the increasing difficulty employers face when trying to avoid theft of confidential information when employees have access to third party storage providers such as DropBox, Googe Docs, SugarSync, and SkyDrive.  Third party data storage providers enable users to either locally sync or upload documents at work which can be accessed from another computer.  I have posted on tips for employers to reduce the risk of this kind of theft. Essentially, to mitigate risks and have evidence of theft, businesses need a robust and frequently updated fraud management plan.  

What I also found blogworthy in this article was how use of cloud based document storage posses a risk for employees as well.  One attorney in a high profile case pointed out that an employee's use of DropBox, or similar provider, could generate the appearance that the employee may have stolen data even if they did not intend to do so.  I have seen this happen several times and it can be a big problem.

An employee may use DropBox to store personal information (family photos, resume, etc) but also mix in company documents to work from home.  The employee may leave for another job and forget that he or she still has documents from the former employer.  The employee could end up in a lawsuit because the employer may believe documents were stolen by use of DropBox.  Having already used DropBox at work, it may be even more problematic to show evidence of returning such documents or deleting them.  

The take away here is that use of cloud storage creates a risk for both employers and employees when it comes to confidential information.  While employers should develop a fraud management plan, employees would be well advised to have clear permission to use cloud storage providers. To avoid or reduce the risk of a lawsuit, employees should also seek to address cloud storage as part of an exit strategy.  Even if an employee has no desire to use confidential information after leaving, ignoring the issue is a big risk that may create the wrong impression. 

Non-Compete Agreement Tips for Partners, Executives, and Employees

In this post, I continue the discussion about non-compete agreements in Connecticut.  This time, I focus on the employee side.  Here are 5 things to think about when leaving employment if you have a non-compete agreement.

  1. Do not believe water cooler experts.  Many employees come to believe what they hear at the water cooler about non-compete agreements.  The typical comments include: “Those things are thrown out of court,”  “John Smith had one of those, and he beat it in court.”  The reality is, some non-competes will be upheld in court in Connecticut, and others will not.  There is no bright line test.  Every case is unique and there are too many factors to cover in one blog post. 
  2. Get help sooner rather than later.  The biggest mistake employees make is failing to get an experienced attorney’s review of an employment contact BEFORE planning to leave.  Examples of these agreements include non-competition agreement, non-solicitation agreement, or confidentiality agreement.  I emphasize “experienced” because the law surrounding non-compete agreements and unfair competition is constantly changing.
  3. Develop an exit strategy.  Leaving without a plan is not a good idea. Employees need a plan that includes understanding the parameters of the agreement and mitigating the risks of breaching it.  I have seen clients lose sleep, jobs, and thousands of dollars because there was no plan in place.  I will offer more on exit strategies in a later post, but some ideas include negotiation with your existing employer, finding holes in the contract, modifying employment decisions to mitigate risks, and taking a wait and see approach.   
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Supreme Court Offers Another Reminder on Personal Liability for Corporate Officers

 Can an officer of a corporation face personal liability in a business transaction?  The Connecticut Supreme Court clearly stated that personal liability exists for corporate officers in certain circumstances.  The case is Coppola Construction Company, Inc. v. Hoffman Enterprises Limited Partnership. The sole issue on appeal was "whether a corporate principal or officer may be held personally liable for the tort of negligent misrepresentation in connection with statements made by that principal or officer that, under the apparent authority doctrine, also created binding contractual liabilities for the corporate entity."

 In the Hoffman case, the lower court had stricken a complaint alleging that the Defendant Jeffrey Hoffman was personally liable.  However, the Appellate Court overruled the decision and the Supreme Court affirmed finding that the plaintiff's complaint properly alleged personal liability against Hoffman.

The decision included significant issues surrounding the doctrine of apparent authority, and pleading matters in the alternative in the complaint. However, for purposes of this post, the focus is confirming once again that officers of a corporation can be found personally liable for torts, such as misrepresentation and fraud.  To properly allege an action for negligent misrepresentation, a plaintiff must allege that:

  • the defendant made a misrepresentation of fact
  • the defendant knew or should have known that is was false
  • the plaintiff reasonably relied on the misrepresentation
  • some pecuniary harm resulted to the plaintiff

The Court in the Hoffman case went on to state that in Connecticut it is "black letter law that an officer of a corporation who commits a tort is personally liable to the victim regardless of whether the corporation itself is liable."  The Court then listed a whole series of other cases where courts have found that the officer could be liable for torts regardless of whether there was a contractual remedy that also existed against the company.

I posted about this case because many people believe that a corporation or limited liability company will shield them from all types of lawsuits.  This is a common misunderstanding of the law.  I have posted about this same issue in the context of limited liability companies.  The bottom line is that a business entity will not always protect an officer or owner in all situations.  Two situations include torts and circumstances where the protective veil afforded by the entity is pierced. The Hoffman case serves as an another example of an officer facing personal liability despite the corporate entity.   

Tips On How To Reduce The Risk Of Intellectual Property Theft

 In my last post, I wrote about the risks facing businesses when there is a departing employee.  It can be fairly argued that in the next 3 years your average business will have to deal with a disgruntled, departing employee.  The employee will have had access to confidential information in digital form.  Studies have shown that greater than 50% of disgruntled employees and 90% of IT employees will take something.  So what can a business do to protect itself from theft of clients, confidential information, and trade secrets?  Here are a few tips:

1.Strong Contracts.  I often say that Legal Zoom = courtroom doom.  Many folks go to online websites to get cheap, low cost non-compete or confidentiality agreements.  There are circumstances where you can get a decent contract that will help your business from these online sites.  However, too many times I have reviewed the low cost, canned contract of a client and found significant problems with the contract.  If you want to have a contract that will have a better chance of standing up in court, you are best served by hiring an attorney well versed in these areas.  Relying on a form contract from a website is not recommended.

2.Strong Policies.  Any workplace policy should include strong electronic monitoring policies prominently posted in break rooms and in the employee handbook.  Ideally, the policy will spell out that the company can and will monitor the company owned computers and all communications and information stored on them.  You also want to have strong password policies, auditing of file access, and guards against deletion. You also should seek to have visibility by your IT department for all activities on work networks.

3. Intake Checklists.  Upon employee intake, your business will want to have a checklist that documents all the necessary items covering confidential information.  You will want to document all the devices issued to the employee, review the details of the contract (non-compete or non disclosure), and review all policies of electronic monitoring.

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