Can You Seek Damages if You Lose Business Based on an Opponent’s Conduct During Litigation?

Ordinarily, if someone acts in bad faith, or with malice, and interferes with a contract causing lost profits, a party can potentially bring a claim in court for tortious interference with contractual relations. However, the claim is likely unavailable if the basis for the claim arises from a pending litigation case. For example, assume you have a valuable business contract, and the contract gets cancelled because of something an opponent claimed during a litigation proceeding?  A recent appellate court case case confirms that immunity applies to bar claims of interference with contractual relations when the actionable conduct arises out of a litigation case.  Litigation can be very disruptive to ongoing business relationships.  There could be situations where a party in a litigation case loses business because of something someone does or says during a proceeding in litigation, such as a court hearing.  Unfortunately, some litigants might do this intentionally as a way to gain advantage in a case.   In contrast, some other litigants might seek to raise a claim of interference or infliction of emotional distress even if the conduct in question was fair game in the course of the case.  The courts in Connecticut essentially come down on the side of barring subsequent claims of this type that are based on conduct during a litigation proceeding.  The reason is policy based, in part, because the courts do not want witnesses and litigants to fear reprisals for raising legitimate facts and arguments in court. Essentially, although there is a risk of litigants unfairly seeking to harm an opponent through deliberate efforts, the risk is outweighed by the importance of candor and truth seeking in court proceedings. There are other ways to address improper, baseless or unethical conduct by opponents during a litigation proceeding.  However, if an opponent resorts to filing a separate lawsuit for interfering with a business relationship or for infliction of emotion distress, the case likely will be opposed by a motion to dismiss based on immunity.

 

You Must Prove Damages With Reasonable Certainty In Business Lawsuits

Determining if you have provable damages is often the first step in analyzing whether to pursue a business lawsuit as a shareholder, partner, or member of a limited liability company.  Likewise, if you have been sued as a result of a partnership or shareholder dispute, reviewing the exposure or possible damages you face is an important part of determining an appropriate litigation strategy.  The question that must be answered is, how will the plaintiff prove to a judge or jury that the damages allegedly sustained are real, quantifiable, and reasonably certain.

In Connecticut, the party that brings the lawsuit has to prove damages with reasonable certainty.  A plaintiff must put forth evidence to afford a judge or jury a sufficient basis for estimating the alleged damages with reasonable certainty.  In other words, there must be evidence for the court or jury to calculate damages.  You cannot simply state “I have lost money” or “I have damages.”  There must be proof beyond speculation or your own subjective belief.

On the other hand, Connecticut law does not require exactitude or precision.  There are no hard and fast rules as to the level of proof required, but it must rise to the level of reasonable certainty or a reasonable estimate.  The level of proof may differ depending on the case facts, and that type of damages at issue.

For example, lost business opportunities may be harder to prove for business attorneys than other types of damages.  A recent appellate court case highlighted some of the evidentiary issues with lost profits.  In System Pros, Inc v Kasica, two equal shareholders of a company went through a lawsuit involving dissolution of their corporation and a trial on other tortious conduct.  At the trial level, the plaintiff shareholder convinced a trial court that he had damages for lost earning opportunities due to wrongful conduct of the other shareholder defendant.  To support his case, he admitted in evidence a series of documents and calculations as to wages he would have earned as a consultant if he was not locked out of the business.  The trial judge was persuaded and awarded damages.

However, the appellate court reversed on the issue and found that the plaintiff did not prove that he would have been hired as a consultant for any specific opportunities.  The appellate court decided:

Although the plaintiff presented ample evidence regarding the nature of the opportunities for employment that were not communicated to him, his testimony as to whether he would in fact have secured such employment resorted to conjecture and subjective opinion, which cannot constitute the basis for an award of damages

The appellate court decided that plaintiff left the trial court to speculate as to the lost opportunities based on plaintiff’s own opinion and assumptions.   The appellate court determined there were too many unknowns as to whether plaintiff would have profited from the opportunities he claimed he was denied by the defendant. The court highlighted that plaintiff needed to establish not only that there were opportunities, but that he was qualified for the positions and would have obtained the positions.

The Systems Pros case serves to highlight the various levels of proof that may be required to recover damages in a shareholder lawsuit.  To summarize, to establish damages for a shareholder in a business lawsuit, an attorney will need to offer evidence at trial showing a reasonable estimate of damages beyond speculation and personal opinion.

Lost Profit Damages in Connecticut for New Business Ventures

When business lawyers evaluate the merits of bringing a lawsuit, one of the first questions to ask a client should be “what are the damages?”  Many times, in business litigation cases, business owners want to seek recovery of lost profits with a very optimistic view of what is recoverable in a case.  In such cases, the next question to the client should be  “how do we prove the damages.”

When I consult with a new client that wants to bring a claim in court for lost profits, I will often ask the client to articulate how he or she would go about proving the lost profits.  There are no clear, bright line tests in Connecticut for what is or is not recoverable for lost profits.  Instead, attorneys are guided by the general law on lost profit damages and case precedents.

In Connecticut, the plaintiff bringing the case bears the burden of proving lost profit damages by a preponderance of the evidence.  When lost profit damages are available, the general standard is that a plaintiff must prove the damages with reasonable certainty.  Difficulty in establishing damages is not necessarily a bar to recovery and mathematical exactitude is not required.  Nevertheless, the facts and evidence must permit the trier of fact to form an objective basis to award damages, not merely speculation or subjective belief.  Basically, this means that the plaintiff has to provide evidence to support the claim for damages, not merely a subjective belief or speculative theory.

In the case of a new business venture, lost profit damages are available if a plaintiff can prove the damages with reasonable certainty.  Of course, proof of lost profits damages for a new business likely will require some creativity and perhaps an expert to provide the necessary proof.  The reason is that there is a lack of history of profits in the business so it may be difficult to project what would have happened in the future.  As a result, courts typically will look for more evidence from the new business plaintiff than an established business.

A recent appellate court case in Connecticut pointed out that the evidence in the case of a new business will often have to focus on the likelihood of whether the new business would have succeeded including an evaluation of factors such as business climate, business planning, experience of the business owners, and the success of similar businesses.  An expert may be necessary to help with proof of lost profit damages.  Simply providing a subjective belief without documentation or statistical analysis may fall short of the required proof.

Here are some instances where a new business satisfied the required proof for lost profit damages: (1) statistical analysis of future profits deemed reliable by the court; (2) expert testimony including an analysis based on similar new businesses; and (3) expert testimony based on relevant industry models for profits.  It is important to note that expert testimony alone will not necessarily suffice to prove damages.  A damages expert likely will face a reliability challenge from an opponent.  Once challenged in court, an expert’s methodology on determining lost profits must be deemed reliable before the testimony is permitted.  An expert’s subjective opinion alone, or opinion based on speculation, will not satisfy the standards for admissibility.

The take away here is that lost profit damages are available to a new business venture.  However, the level of proof required to recover such damages likely will be more difficult than for an established business.  Subject belief and speculation by the business owner as to the probable success of the business will likely fall short of the required proof.   A plaintiff considering a claim for lost profit damages for a new business venture may want to bring in an expert to evaluate the case and remove the damages from the realm of speculation.

 

 

 

Lost Profits Must Be Reasonably Certain for Breach of Contract Claims

The burden to prove damages is always on the Plaintiff, or the party that brings the lawsuit.  Many times I receive calls from prospective clients who believe they have significant amount of damages.  However, under Connecticut law damages are only recoverable to the extent that the evidence affords a sufficient basis for estimating their amount in money with “reasonable certainty.”  Proving damages in a business lawsuit does not require exactitude but a litigant cannot base a claim solely on subjective opinion.

Although there is no precise formula to prove the amount of damages, a court will not permit an award of damages based on speculation or conjecture.  In certain cases, assumptions are permitted, but the assumptions must be reasonable and relate to the facts of the case.  As a result, before proceeding with a breach of contract case, an attorney will want to explore if the prospective client can prove damages.  Without provable damages, there is likely no case worthy to pursue if money damages are at issue.

The damages also must relate to the specific cause of action in the case.  There are different elements of recoverable damages for different types of cases.  Some cases carry with it statutory damages, and other cases are governed by Connecticut’s common law or history of court decisions.

One category of frequently claimed damage for breach of contract is loss of future profits or loss of anticipated profits.  Generally, in a breach of contract case, you seek to put the injured party in the same financial position they would have been but for the breach.  In a lost profit case, a party in litigation will claim that “but for” the breach of contract, the party would have earned a projected amount of money.

Connecticut case law clearly provides for the availability of an award of lost profits in general breach of contract cases.  Courts construe lost profits as an element of available compensatory damages.  The mere fact, however, that lost profit damages are available generally, does not mean lost profit damages are recoverable in all cases. To determine whether lost profits are available, the parties will need to look to the terms of the contract and whether lost profits were reasonably contemplated by the parties.  Contracts also frequently contain disclaimers or exclusions of lost profit damages even if the parties contemplated that such damages might occur.

Additionally, although lost profit damages are potentially available, it does not necessarily follow that sufficient evidence exists to reliably prove anticipated profits from a business deal gone bad.  Courts will sometimes permit owners of a business to testify as to anticipated profits, but usually only when the owner has knowledge and familiarity with an established history of profits sufficient to project anticipated future profits.  In most cases, the parties need to retain experts to review relevant financial data and to provide an opinion on lost profits.

Litigants and their attorneys typically use economists or accountants as experts to prove lost profits in business cases.  Expert fees can add considerable expense to a case as the expert will likely have to review significant amounts of financial data and the factual details concerning the business deal.  The expert expense may be necessary to incur in many cases to successfully prove damages.  An expert’s opinion on lost profits must also pass a reliability test.  If challenged by an opponent, the expert will have to establish that the method of establishing a damages figure was reliable.  Courts will use a series of factors to consider the reliability of methods and the arguments raised by lawyers to exclude such opinions from trial.

In conclusion, readers should understand that lost profits are available as a potential element of damages in most breach of contract cases in Connecticut.  However, the fact that such damages are potentially available does not establish a right to recover.  The burden to prove lost profit damages remains with the Plaintiff, and must be shown with reasonable certainty and not subjective opinion, conjecture or surmise.

Are Breach of Contract Disputes Governed by Terms of Contract Alone?

You might think so, but generally whether the terms alone govern a dispute depends on the language in the contract.  When a contractual relationship breaks down, parties that previously agreed to terms of a contract suddenly no longer agree on the meaning of key terms. Many times parties to a contract have evidence that supports one meaning versus another.  The question becomes whether any of the evidence is relevant or if the court will simply interpret the terms as written.

I have posted before on the implications of the parol evidence rule in Connecticut.  A recent Appellate Court case serves to highlight some important aspects of the rule.  The case is Sullo Investments LLC v Marci Moreau and will be released for official publication on July 1, 2014.  In Sullo, the defendant signed a guaranty agreement for a commercial note.  The defendant lost at trial.  On appeal, the defendant claimed that the trial court erred because the court went beyond the four corners of the guaranty agreement and considered extrinsic evidence in violation of the parole evidence rule.

The Appellate Court disagreed and pointed out that the parole evidence rule is only implicated where the evidence serves to contradict or vary terms that are actually in the contract.  The rule:

“does not of itself, therefore, forbid the presentation of parol evidence, that is, evidence outside the four corners of the contract concerning matters governed by an integrated contract, but forbids on the use of such evidence to vary or contradict the terms of such a contract.”

The rule of evidence that applies to bar the evidence is relevance.   If the court cannot use the evidence to alter the terms of a complete and clear contract, then the evidence becomes irrelevant.  However, the evidence may be relevant for another purpose or the rule may not apply to the terms of the contract.  For example, extrinsic evidence may be admissible:

  • To explain an ambiguity in the contract
  • To prove a collateral agreement that does not vary the terms of the written
  • To add missing terms to a contract that does not state it is complete
  • To show mistake or fraud

These are all examples where the evidence would not alter the terms of a complete, written contract in clear terms.  As such, to determine whether evidence outside the contract is relevant, you have to consider the nature of the evidence, its purpose, and whether it contradicts the clear terms of a complete contract.  The parol evidence rule also highlights the need to draft clear contracts with clauses that make it clear the contract alone will govern the dispute.  Otherwise, the court will permit each party to introduce evidence outside the four corners of the contract.  This could include conversations, emails, and other documents.

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.  Yellow Book decisionThe case is Yellow Book Sales v. Valle.  images(3)[1]

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.  

Parol Evidence Rule Can Sting In Court

 Parties to contracts frequently argue over contract terms and the intent behind certain provisions ofbee-sting 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. 

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.   

4. Be mindful of confidential information.   The idea here is to minimize your exposure to a lawsuit for theft of confidential information or misappropriation of trade secrets.  Determining whether information is protected as confidential or a trade secret might be a complex analysis.  The same can be said for improper use of such information.  Further, there could be valuable information that an employee is entitled to use but it depends on many factors. 

 

5. A written contract is not the only issue.  In the context of leaving an employment position or partnership, Connecticut recognizes causes of action that do not require a contract.  These include breach of the duty of loyalty, breach of fiduciary duty, misappropriation of trade secrets, computer crime, civil theft, and unfair trade practices.  Your exit strategy needs to consider all of these factors, and not only the contractual agreement.  

Deciding to Enforce A Non-Compete Agreement in Connecticut – 5 Tips

Many Connecticut business owners have agreements (so called "non-compete agreements") in place with their employees concerning competition or solicitation. When an employee leaves a company, business owners have to decide if they should try to enforce the non-compete agreement by filing a lawsuit or engaging an attorney. Here are 5 factors to consider:

 

1. Is the contract reasonable? I have reviewed hundreds of these agreements, and they are all different (even the agreements I draft). There are various legal and factual requirements that you will need to satisfy for enforcement of non-compete or non-solicitation contracts. However, in general, the first question you have to ask is whether the contract is reasonable in light of the business you are in and purpose behind the specific contractual terms.

For this reason, it is always a good idea to have an attorney draft your agreement specifically tailored for your legitimate business concerns. Getting a form template online and applying it to your business may seem like a cost effective approach, but what happens when you really need to enforce your agreement?

2. What are you trying to protect? Generally speaking, it is easier to convince a court to stop a departing employee from taking your customers or manufacturing process than it is to stop the employee from working for a competitor. For example, the chances of successful enforcement increases if your contract was drafted to protect customers the employee was working with as opposed to trying to stop the employee from working in any type of role for a competitor. Additionally, courts are much more likely to entertain an injunction for protection of legitimate confidential information.

3. Are you worried about creating a standard for other employees? Employees that leave always talk to the employees that stay behind. It is a fact of life. In addition, word gets around about the details of any settlement involving non-competes. Why? Well, for one, everyone wants to know whether a business will actually seek to enforce their contracts. If a company continually declines to enforce their non-compete agreements, other employees may get the idea that the same rule will apply. 

4. What are the risks involved?  It may be difficult to know the full extent of the risk posed by a departing employee. However, it is important not to underestimate the risks. I have seen circumstances where a business loses only one small client at first, but suffering major loses many months down the road. Some questions to consider: (1) have you lost clients or are you in danger of losing clients; (2) is there a danger of the employee disclosing or using legitimate confidential information; (3) what did the employee have access to while at work (i.e. client lists, trade secrets, and financial information); and (4) was there an exit interview conducted and return of confidential information verified.

 

5. Litigation costs v benefits. I ask clients to make a business decision by weighing the risks (see # 4) versus the costs involved. Litigation costs are dependent on a number of factors. Some examples of factors that impact litigation costs include (1) the nature of the dispute; (2) the strength of the contract; (3) the ability of the departing employee to defend the case; (4) the lawyer defending the case; and (5) the type of action you decide to bring.

These are only some of the many factors a business should consider when confronting a decision on enforcement of a non-compete.