Business & Commercial Litigation Archives - NC Business Lawyer

Contract Performance in a Pandemic

Bob Meynardie — Tue, 05 May 2020 13:50:00 +0000

Introduction

Although the best drafted contracts anticipate risks and attempt to allocate them among the contracting parties, it is unlikely any contract fully anticipated the economic and commercial impact of the novel coronavirus pandemic. But how is a retail store able to meet its lease obligations with no revenue coming in? How can a construction supplier meet its obligations if the product or raw materials are simply not available? We are not experiencing the economy slowing to a trickle, in many sectors the faucet went from wide open to completely closed in a matter of weeks.

If the current commercial slowdown and/or governmental directives are impacting your ability to perform contractual obligations, can you be relieved of those obligations. The very unsatisfying answer is, it depends. Unfortunately, there are no definitive answers but there is some interesting case law from North Carolina and elsewhere. Click here for an interesting article describing several cases that came out of the 1918 flu pandemic.

For our analysis, the starting point, as always when analyzing contractual rights and obligations, is the contract itself. Absent a contract provision that anticipates and addresses the specific circumstances, either a government shutdown or more specifically a “pandemic” provision, the most likely place to find relief is in a force majeure clause. Without contract relief, there are several legal doctrines that may provide excused performance in specific circumstances.

Force Majeure

The first question is whether your contract contains a force majeure clause. The term literally means “superior force” in French. If your contract contains such a clause. it is designed to excuse performance in the event that some superior force prevents performance but whether you can expect relief from this clause depends upon the language used. A very broad clause will read something like this:

Party A shall not be liable for any failure or delay in the performance of its duties to the extent the failure or delay is caused by a force majeure or event beyond its reasonable control, including, but not limited to, any fire, act of God, war, government action, act of terrorism, epidemic, pandemic, natural disaster or other major upheaval. If such an event occurs, Party A’s duties and obligations will be suspended immediately and without notice, until such time as Party A, in its sole discretion, may safely perform its duties. If performance is not possible due to such event, performance of duties is excused.

If your contract excuses performance under terms like these you do not need to read any further. Your contract is very unlikely to contain this broad a clause but more narrowly tailored clauses may also provide relief.

Frustration of Purpose

The doctrine of frustration of purpose may be available as a defense to performance in some cases as a result of the pandemic. For instance, assume you rented an AirBnb in Augusta, Georgia because you miraculously obtained tickets to the Masters tournament this year. In all likelihood, the doctrine of frustration of purpose would allow you to back out of the rental when the Masters was cancelled as a result of the pandemic.

In North Carolina, the doctrine of frustration of purpose requires “an implied condition to the contract” such that a change in that condition could excuse performance. Faulconer v. Wysong & Miles Co., 155 N.C. App. 598, 602, 574 S.E.2d 688, 691 (2002). However, “[i]f the frustrating event was reasonably foreseeable, the doctrine of frustration is not a defense. In addition, if the parties have contracted in reference to the allocation of the risk involved in the frustrating event, they may not invoke the doctrine of frustration to escape their obligations. Brenner v. Little Red Sch. House, Ltd., 302 N.C. 207, 211, 274 S.E.2d 206, 209 (1981).

Impossibility and Impracticability

Contractual performance may be excused where the otherwise breaching party could not perform because performance was impossible. For instance, in UNCC v. Greene, 111 N.C. App. 391, 397, 432 S.E.2d 699, 702 (1993), the court excused the failure to convey an easement as contracted after the property in question was condemned by the government.

Impossibility of performance and commercial impracticability are similar and under North Carolina law difficult if not impossible (pun intended) standards to meet. For instance, in Knowles v. Carolina Coach Co., 41 N.C. App. 709, 714, 255 S.E.2d 576, 579 (1979), the hour rejected impracticability in a lease dispute even when the landlord was partially responsible for the tenant’s inability to meet rent obligations. A distinction can be made for the current circumstances based upon the inability to anticipate these circumstances. However, the Knowles court cited with approval a California decision rejecting the defense for a car dealership that could not sell cars after all manufacturers switched to wartime production during World War II.

Illegal Contracts

A basic premise of contract law is that an agreement to perform an illegal act is null. On March 27, 2020, Governor Cooper issued a “Stay at Home” Executive Order that restricted “mass” public gatherings. A contract for the use of a wedding hall for 100’s of guests, which was legal on March 1st, became an illegal contract. Either party should be able to terminate the contract under the illegal contract doctrine. This example might also fit the frustration of purpose doctrine.

The doctrine makes a contract the performance of which would be illegal non-enforceable. A through review of the contract and the various restrictions imposed during the pandemic is necessary, however.

Relief in Construction and Sale of Goods Contracts

In addition to these general legal doctrines, there is potential relief in specific types of contracts. For instance, many construction contracts contain force majeure clauses, which may provide relief but may also indicate that the basis for non-contract based relief was anticipated and therefore unavailable. Construction contracts also contain specific provisions for delayed performance and some may have provisions related to unexpected cost escalation. We have addressed cost escalation in a webinar, which can be found here and are currently preparing a webinar on delays, which will be posted on this site when available.

The Sale of Goods is governed by the Uniform Commercial Code and the answer to whether relief is available may be different in that context. We have addressed the issue of performance relief in that context in a separate post, which can be found here.

Disclaimer

This post is an overview of certain contract law principles and is not to be considered legal advice. Contract law varies from state to state and contracts governed by the laws of other states may be subject to different interpretations. Likewise the principles described above may be interpreted differently under different circumstances. You should contact your attorney who will analyze the applicable facts, the contract, and applicable law.

Bob Meynardie

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What happens when an NDA is broken?

Meynardie & Nanney — Thu, 14 Nov 2019 23:29:17 +0000

Non-disclosure agreements (NDAs) are contracts that prohibit employees from disclosing certain information about their place of work. These agreements are often put in place to protect essential trade secrets and other intellectual property. They can also include disparagement clauses, which entail legal reprisal if a former employee badmouths his or her former boss.

Not all NDAs are considered enforceable in the eyes of the court. For example, employers are not permitted to prevent employees from talking about wrongdoing in the workplace or any crimes committed. In this case, an employee can request that the court throw out the NDA for its lack of validity. Doing so would allow a person to go against the terms of the agreement without fear of reprisal, such as when reporting a workplace for violations that endanger workers.

When NDAs are breached, the person disclosing information may be subject to a number of punishments and penalties. Punishments can include terminated employment if the person is still working for the employer. A person may also be fined for their disclosure, and this sum of money is usually agreed upon in the original NDA. A lawsuit may also result from the breach, depending on its nature.

When an NDA is linked to a settlement, such as money provided after a work injury or other issue, breaking the contract could result in an employee being asked to return the full sum of the settlement. Workers may also be asked to pay liquidated damages for each separate breach, which can become quite expensive depending on how many breaches are cited within a given case. If you believe a current or former worker has breached your company’s NDA, the next step is to contact an attorney with experience in this area of the law.

Meynardie & Nanney

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Understanding unfair trade practices

Meynardie & Nanney — Fri, 08 Nov 2019 06:35:59 +0000

North Carolina law about unfair trade practices is dense, complex and changing. However, if you or your business suffered financial damages because of a third party’s unfair practices, you may be eligible for financial compensation.

Learn more about what type of actions the state considers unfair trade, which requires a three-part test to determine whether the injured party can receive legal damages.

Was the action unfair or deceptive?

You must show that the business actions in question were either deceptive or unfair. Deceptive actions are those that are unethical, immoral and/or run contrary to established law or policy. The defendant must assert his or her power in a way that injures a consumer with the potential to deceive, though the deception need not be successful or intentional for a lawsuit to succeed. However, the defendant may argue that he or she acted in good faith.

Proving unfairness requires the plaintiff to show that the business’s practices negatively impact consumers. The court will consider whether the actions violate policy and/or review the policy’s effects on clients and the public.

Were you and the defendant in commerce with one another?

If you purchased a product or service from the defendant, an act of commerce occurred. Any type of trade or business activity can result in an unfair practices claim, even if no contractual obligation existed. In fact, breach of contract cases fall under a separate North Carolina statute. Examples of unfair practices include:

False representation of a product or service
Failure to inspect a product for sale
Knowingly or intentionally making false statements about a product or service
Refusal to honor a warranty in bad faith
Lying to the client

Did the unfair or deceptive actions cause actual damage?

The court defines actual damage as:

Loss of distinctive, specific property
Loss of an asset’s appreciated value
Any other elements of damage displayed by the evidence in the case

In some cases, plaintiffs can receive treble damages. This award equals three times your actual related damages.

Meynardie & Nanney

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The Elusive Happy Ending

Meynardie & Nanney — Mon, 25 Mar 2019 10:05:09 +0000

by Joe Nanney
February 9, 2018
Business & Commercial Litigation, Construction Litigation, Joe Nanney

Mediation is a remarkable tool for resolving disputes. Very few cases in North Carolina are tried to juries anymore, in large part because the mediation process is so effective.

I was recently in a restaurant that prominently displayed this sign: “NO we don’t have WiFi. Talk to each other.” Many times disputes erupt or are exacerbated because folks refuse to talk to each other. Mediation forces a conversation – often a difficult conversation, but it has the ability to lay bare feelings and positions that the parties often prefer to remain hidden for a variety of reasons.

Parties often begin a mediation more interested in “winning” or inflicting pain on the other side than finding a resolution. When I mediate a case, I often tell litigants at the outset that if they expect to leave the building happy, they are probably going to be disappointed. My goal as a mediator is not to make anyone happy. It is to find a solution to a problem that the parties can live with – and that almost always means they won’t be particularly happy at the end of the day.

Compromise seems to be a dirty word these days, but it is fundamentally important in almost every business context. Mediation is a communal process. An effective mediator can open up communication between and among people who might not want to communicate, but it is the only path towards any compromise. Indeed, in cases where long-standing relationships have been disrupted through a disagreement, the mediation process can sometimes help start the process of mending those relationships, but I digress.

If the parties in a mediation obtain a result they can live with, and we can put an end to the time, money, and stress of an ongoing lawsuit, that is a win – even though it may not feel like it to the litigants at the time. As litigators, we should make sure our clients see that big picture, and don’t get lost in the emotional jungle of anger, hurt, or insult. Those emotions create obstacles to resolution. We can help our clients move beyond those obstacles to achieve the bigger goal of resolving their disputes, so they can get on with their lives, and one way of doing that is making sure their expectations are realistic. One of my favorite mediators tells folks that his job is to help folks have difficult conversations. He’s exactly right. Those conversations probably won’t bring them happiness, but by ending the litigation, we give them the opportunity to go find it on their own.

Meynardie & Nanney

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