Commercial Litigation Archives - NC Business Lawyer https://nc-businesslawyer.com/category/commercial-litigation North Carolina Business & Construction Lawyers Wed, 06 May 2020 01:06:52 +0000 en-US hourly 1 https://wordpress.org/?v=6.6.5 https://nc-businesslawyer.com/wp-content/uploads/2020/03/cropped-Meynardie-Nanney_favicon2-32x32.png Commercial Litigation Archives - NC Business Lawyer https://nc-businesslawyer.com/category/commercial-litigation 32 32 Contract Performance in a Pandemic https://nc-businesslawyer.com/contract-performance-in-a-pandemic Tue, 05 May 2020 13:50:00 +0000 https://nc-businesslawyer.com/?p=49809 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 […]

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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.

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]]> What are the different types of restrictive covenants? https://nc-businesslawyer.com/what-are-the-different-types-of-restrictive-covenants Sat, 08 Feb 2020 01:20:08 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49441 “Restrictive covenants” is the collective term for contract provisions that prevent employees from competing with former employers after leaving the company or making use of confidential information obtained there.  According to the American Bar Association, there are many different types of restrictive covenants. Many may already be familiar to you, while others are more uncommon, at […]

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]]> “Restrictive covenants” is the collective term for contract provisions that prevent employees from competing with former employers after leaving the company or making use of confidential information obtained there. 

According to the American Bar Association, there are many different types of restrictive covenants. Many may already be familiar to you, while others are more uncommon, at least in the United States. 

Non-solicitation 

If your employees sign a non-solicitation agreement, it means that they agree not to try to lure away your customers to do business with them instead. Non-solicitation agreements are usually only effective for a limited amount of time, but they apply to past, present and prospective customers. 

Anti-raiding 

An anti-raiding agreement is somewhat similar to a non-solicitation agreement. Where a non-solicitation agreement ensures that former employees will not poach your customers, an anti-raiding agreement prevents them from hiring away their co-workers upon leaving the company. 

Non-competition 

This type is very common but also the most restrictive. Upon leaving the company, your former employees agree not to compete with you for a specified period of time within a particular geographic area. Enforcing non-compete agreements can be challenging because of their restrictiveness, but it is possible to create one that should hold up. 

Confidentiality/Non-disclosure 

An employee may gain confidential or proprietary information about you, your company or your clients. A confidentiality agreement prevents him or her from disclosing or using that information. This applies to any information that is not publicly available even if it is not technically a trade secret. Some people use the terms “confidentiality agreement” and “non-disclosure agreement” interchangeably, but there may be a difference depending on the jurisdiction. 

Restrictive covenants can be controversial, and some jurisdictions make them difficult to enforce. However, if they are not injurious to the public interest, impose no undue hardship and protect your legitimate business interests, they should meet the necessary standard of reasonableness. 

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]]> How can you write an enforceable non-compete agreement? https://nc-businesslawyer.com/how-can-you-write-an-enforceable-non-compete-agreement Tue, 28 Jan 2020 18:14:19 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49438 Non-compete agreements are simply a fact of life in the world of business. When it comes to protecting your legitimate interests, they are an important and valuable tool. However, if you need to file a lawsuit to enforce a non-compete agreement, you may find that the court tries to either invalidate it entirely or place […]

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]]> Non-compete agreements are simply a fact of life in the world of business. When it comes to protecting your legitimate interests, they are an important and valuable tool. However, if you need to file a lawsuit to enforce a non-compete agreement, you may find that the court tries to either invalidate it entirely or place limitations on it. 

Nevertheless, it is possible to write an agreement that the court is likely to uphold. The American Bar Association offers the following best practices for writing enforceable non-competes.

1. Acquire necessary signatures

A non-compete should be a binding contract between you and your workers. Therefore, you should not only obtain employee signatures, but you should also sign the agreement yourself.

2. Provide adequate consideration

When you impose restrictions or limitations on employees’ activities, you need to offer them something of value in return. The legal term for this is a consideration. If you are asking a new employee to sign a non-compete agreement, the job offer itself is sufficient consideration. However, you must offer existing workers something more, such as a special bonus, stock grant or promotion.

3. Limit the scope of the restrictions

The court will make a determination as to whether the restrictions that you have imposed on your employees are reasonable. The broader the terms of your non-compete agreement, the more likely the court will be to reject it. Limit its scope to a specific geographic area, such as a particular city or state, and impose a reasonable time limitation, such as one year.

4. Do not involve all employees

If you ask all employees to sign a non-compete agreement, the court may find that this unreasonably imposes an undue hardship on some of them. Only require it of employees with access to sensitive information. 

These tips will not guarantee that the court will uphold your non-compete agreement. However, they may improve your chances of enforcing it successfully. 

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]]> Do you need a shareholder agreement if you have corporate bylaws? https://nc-businesslawyer.com/do-you-need-a-shareholder-agreement-if-you-have-corporate-bylaws Fri, 24 Jan 2020 22:19:15 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49433 If you start a corporation, you must create corporate bylaws, but there is no obligation to create a shareholder agreement. However, it may be to your advantage to do so, especially if your company has more than one shareholder, which is usually the case even for small businesses. According to Chron.com, bylaws set forth the […]

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]]> If you start a corporation, you must create corporate bylaws, but there is no obligation to create a shareholder agreement. However, it may be to your advantage to do so, especially if your company has more than one shareholder, which is usually the case even for small businesses.

According to Chron.com, bylaws set forth the rules and regulations by which the corporation will operate. Not only are bylaws necessary, but they must comply with state corporate law. For example, the bylaws should set the time and date that the annual shareholder meeting, which state law requires, will take place. The board of directors holds an organizational meeting to write corporate bylaws shortly after filing the articles of incorporation with the state.

However, bylaws only go so far. They do not say anything about shareholders’ rights or their obligations to one another. Though not required by state corporate law, a shareholder agreement does address the relationships between shareholders.

For example, someday you may wish to withdraw from the company voluntarily, or unfortunate circumstances may arise that render you unable to continue your involvement in it. The shareholder agreement may include a buy-sell provision that would clearly describe what should happen in this situation. This may help to avoid business ownership disputes that could otherwise result.

If there is a dispute between the corporation’s bylaws and the shareholder agreement, the latter usually takes precedence. The shareholder agreement should include a provision for when a situation like this arises. Following the resolution of the conflict, the next step should be to amend the bylaws to reflect the change and revise the wording that caused the initial dispute.

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]]> Non-compete agreement basics https://nc-businesslawyer.com/non-compete-agreement-basics Wed, 01 Jan 2020 19:15:36 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49430 Business owners and executives in North Carolina logically need and want to protect their confidential information and competitive advantages to ensure their companies have the best opportunities to succeed and thrive. Many tools and strategies offer ways to do this and one is the non-compete agreement. As explained by Young Upstarts, a non-compete agreement is a contract […]

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]]> Business owners and executives in North Carolina logically need and want to protect their confidential information and competitive advantages to ensure their companies have the best opportunities to succeed and thrive. Many tools and strategies offer ways to do this and one is the non-compete agreement. As explained by Young Upstarts, a non-compete agreement is a contract commonly used by companies to prevent employees from defecting to a competitive company and using sensitive information against the original employer. 

The concept of non-compete agreements makes a lot of sense from the business perspective. A person’s employment after leaving a specific company may be restricted in order to protect the interests of the first company. The restrictions placed on employees generally include a geographical range, a time duration and potentially even a scope of work. 

According to Forbes, a good non-compete agreement includes some elements similar to that of a nondisclosure agreement in that the contract should safeguard company sensitive information from being shared externally. Such information subject to protection may include sales and marketing strategies, product development or design information, financial data and more. 

The ability to enforce a non-compete agreement may be influenced by a variety of factors, including the level of reasonableness attributed to the original agreement. An agreement designed to last five years, for example, may not be considered reasonable whereas a contract spanning 12 months may be. Companies should be judicious about which employees they require to sign non-compete agreements as well. Persons working in capacities where they have regular access to critical information should be the target for these types of contracts. 

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]]> Protecting trade secrets with nondisclosure agreements https://nc-businesslawyer.com/protecting-trade-secrets-with-nondisclosure-agreements Wed, 18 Dec 2019 19:21:44 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49422 As a North Carolina business owner, your business’s trade secrets, or the confidential information it has that gives it a competitive edge, may be among its most valuable assets. At Meynardie & Nanney, PLLC, we understand that anytime you make new hires and share these secrets, you run the risk of exposing them to the outside world, […]

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]]> As a North Carolina business owner, your business’s trade secrets, or the confidential information it has that gives it a competitive edge, may be among its most valuable assets. At Meynardie & Nanney, PLLC, we understand that anytime you make new hires and share these secrets, you run the risk of exposing them to the outside world, and we have helped many small business owners pursue solutions that protect their business’s intellectual property while keeping it from falling into the wrong hands. 

According to QuickBooks, many small business owners who are hoping to protect confidential information that helps their businesses succeed do so by making all new hires sign what is known as a nondisclosure agreement. In simple terms, a nondisclosure agreement is a signed, legally binding document that prevents your hires and employees from revealing confidential information about your entity. 

Often, the strongest nondisclosure agreements are those that are relatively brief and clear. Avoid using complicated language or otherwise making your agreement so complex that someone could potentially argue the validity or intent of it. While keeping it relatively brief, there are some key matters you may find it beneficial to address in yours. 

For example, make sure you are very specific in your nondisclosure agreement about exactly what information it protects. If, for example, you want any oral communications made by employees to fall under it, make sure to note this. Similarly, you may want to discuss what information the agreement does not explicitly cover. It may, too, serve you well in the long run to have a notary present when your employees sign the nondisclosure agreement to help prevent potential litigation down the line. Learn more about business litigation and related issues on our webpage. 

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]]> What happens when an NDA is broken? https://nc-businesslawyer.com/what-happens-when-an-nda-is-broken Thu, 14 Nov 2019 23:29:17 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49407 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 […]

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]]> 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.

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]]> Understanding unfair trade practices https://nc-businesslawyer.com/understanding-unfair-trade-practices Fri, 08 Nov 2019 06:35:59 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49402 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 […]

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]]> 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.

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]]> Why is giving equity to early employees a mistake? https://nc-businesslawyer.com/why-is-giving-equity-to-early-employees-a-mistake Wed, 30 Oct 2019 17:59:40 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49397 It is a common practice in startup companies to offer equity in the company as a way to entice people to work for you. This may seem like an easy and cost-effective way to get good employees for a North Carolina business that has yet to prove itself. It can allow you to secure the […]

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]]> It is a common practice in startup companies to offer equity in the company as a way to entice people to work for you. This may seem like an easy and cost-effective way to get good employees for a North Carolina business that has yet to prove itself. It can allow you to secure the labor you need with little upfront cost, but the long-term cost should be what worries you.

MarketWatch explains that when you give equity, you give a share of your ownership in the business, which is not something to take lightly. You should always protect yourself with an agreement on what happens to the ownership of the equity if the employee leaves the company.

In granting him or her ownership in your company, you give that employee some control. The employee has certain rights as an owner and access to documents that he or she would not usually have as an employee. It gives the employee a lot of leverage that could be bad if he or she leaves the company, especially if you fire him or her.

Your employee will have voting rights and could have an impact on the running of your company. It is possible for him or her to cause issues even when he or she is leaving the company, so you need to protect yourself, other owners, employees and the business.

A better alternative to providing equity is to offer some other type of benefit that is highly sought after, such as excellent medical insurance or a stellar vacation/time-off policy. These options do not affect your business as much as giving away equity can. This information is for education and is not legal advice.

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]]> What happens when a person breaks an NDA? https://nc-businesslawyer.com/what-happens-when-a-person-breaks-an-nda Wed, 23 Oct 2019 06:22:21 +0000 https://duplicate-3222474.findlaw1.flsitebuilder.com/?p=49392 Nondisclosure agreements (NDAs) prevent employees from taking valuable trade secrets and giving them to competing businesses. They can also be used to prevent former workers from speaking disparagingly about an employer’s reputation, which could have financial ramifications. When signing an NDA, it’s important to understand just what could happen if the document is broken, according […]

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]]> Nondisclosure agreements (NDAs) prevent employees from taking valuable trade secrets and giving them to competing businesses. They can also be used to prevent former workers from speaking disparagingly about an employer’s reputation, which could have financial ramifications. When signing an NDA, it’s important to understand just what could happen if the document is broken, according to Marketwatch.

Typically, the terms of the NDA include what happens if the agreement is later breached. This can result in a lawsuit, during which the employer would sue you for breach of contract and pursue financial damages to remedy the issue. if you’re currently still employed by the company, it’s likely that you’ll be fired for disclosing the information. You may also be subject to liquidated damages. These are fines that must be paid for each individual breach cited within the lawsuit. In the event your NDA was part of a settlement agreement, you may be ordered to repay the settlement for the unlawful disclosure.

In some cases, employees may want to expose confidential information for the greater good. This can occur if a company is making dangerous violations in the workplace or mistreating its employees. Keep in mind that any clauses that go against the letter of the law will probably not be enforceable in the first place. For instance, if employees are obligated to withhold information about illegal activities, chances are that NDA won’t be considered valid.

No matter the reason, it’s best to consult an attorney before breaking an NDA. It may be possible to have the document thrown out of court. You’ll also be able to understand exactly what is obligated of you from the agreement and if there are any issues with enforceability. If you have concerns about an NDA before signing, it’s best to hold off until you get answers. However, this can be difficult since employment may be contingent on you signing the NDA.

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