In construction contracts, the parties often create their contracts using templates offered by the American Institute of Architects. The AIA documents are widely recognized forms and contracts that define the relationships and terms involved in design and construction projects. This article is going to review the standard Terms and Conditions that are part of construction contracts, and analyze what could happen during the pandemic caused by COVID-19.
Note, though, that owners and contractors often make changes to the various AIA templates. Any analysis of a specific situation must begin, and end, with the actual contract language.
General Conditions of the Contract for Construction, A201-2017. In most construction contracts using the AIA documents, the key document of the Conventional family of documents (A201) is the General Conditions providing terms and conditions between the Owner, Contractor, and the Architect.
Force Majeure Clause Not a Standard Clause. In general, a force majeure clause assigns the risk of nonperformance for certain events that are unforeseeable, and outside the contractor’s control. The General Conditions of an AIA contract does not typically contain a force majeure clause.
Section 8.3: Delays and Extensions of Time. The standard clause grants the contractor a reasonable time extension, but does not excuse performance. The standard clause provides that a delay “in the commencement or progress of the Work” caused by, e.g., labor disputes, fire, unusual delay in delivery, unavoidable casualties, “other causes beyond the Contractor’s control…”, or “other causes that the Contractor asserts, and the Architect determines, justify delay….”
This clause could be used by a contractor to obtain an extension of time if, for example, the various government directives makes delivery of supplies impossible, or makes labor unavailable. The clause also grants a catch-all that allows the Contractor to assert these, or other causes, which convinces the Architect that delay is justified.
Section 18.104.22.168: Termination by the Contractor. When work is delayed, or performance becomes unnecessarily difficult to complete, the AIA provides a method for the Contractor to terminate the Contract. The Contractor may terminate if Work is stopped for a period of 30 consecutive days through no act of fault of the Contractor, a Subcontractor, a sub-subcontractor, for any of the following reasons (among others likely not relevant):
(1) Issuance of an order of a court or other public authority requires all Work to be stopped; or
(2) An act of government (e.g., a declaration of a national emergency) requires all Work to be stopped.
Arguably, the stay-at-home orders could be considered an act of Government that requires Work to be stopped. However, many stay-at-home orders allows that Construction is an essential business and need not be stopped.
If a Contractor determines that it can terminate the Contract, the Contractor would be entitled to recover payment for Work already performed, and reasonable overhead and profit on Work not yet performed.
Section 14.3: Suspension by the Owner for Convenience. Section 14.4 Termination by the Owner for Convenience. The Owner may suspend, delay, interrupt, or terminate the Contract for its own convenience. The decision to suspend, delay, interrupt, or terminate must be done in writing.
If the Owner delays performance, the Contractor would be entitled to an adjustment of the contract sum, including profit, caused by the delay. If the Owner terminates the contract, the Contractor is entitled to payment for the work properly completed, costs incurred because of the termination (including costs to terminate subcontracts), and a termination fee (if required by contract).
Conclusion. Because many stay-at-home orders provide that construction is an essential service and, therefore, allowed to continue to work, the need for relief due to COVID-19 may not be a significant problem. However, there have been some reports that these stay-at-home orders have made it difficult to secure labor and to purchase materials. In such cases, the standard AIA contract will typically allow for the Contractor to obtain a reasonable extension of time for performance. As always, particular care should be paid to review the terms of the Contract.
If you would like to discuss issues regarding COVID-19s impact on construction contracts, please contact Bert Andia at 336.273.1600 or email@example.com
A number of lawsuits have been filed across the Country by businesses seeking to obtain insurance coverage for lost business through a “business interruption “policy. This article attempts to explain what is covered by these policies; and, the positions being taken by the insurer and the insured.
Business Interruption Insurance. Most commercial property insurance policies contain clauses that protect an insured against reduced earnings and increased expenses because of damage to the property they use to conduct business or damage to the property of others on whom they may depend.
The severity of the loss typically depends on the length of the interruption in normal business operations. The coverages include:
Business Income. This insurance covers actual loss sustained by the insured as a result of “direct physical loss or damage” from a covered cause of loss (i.e. by a cause not otherwise excluded from the policy). Business income includes net income (before taxes) that would have been earned by the insured and the continuing normal operating expenses incurred.
Extra Expense. This coverage is typically an additional coverage for many policies. Extra expense is defined as the expense needed for arranging for temporary quarters due to property damage at the insured’s location. This coverage also typically requires “physical damage” to the covered property.
Contingent Business Income. Coverage may be obtained for interruption of an insured’s business due to property damage suffered by a supplier or customer. This coverage typically requires direct property damage to the supplier/customer resulting from a covered cause of loss.
Civil Authority. Losses resulting from interruption of business caused by actions taken by governmental/civil authorities can be covered when access to the insured’s property is prohibited because of damage to other property.
State Legislatures Try to Respond. Pennsylvania, Louisiana, New York, Ohio, Massachusetts, and New Jersey lawmakers – and perhaps others — have introduced bills that would force insurers to retroactively cover business interruption claims due to COVID-19.
The bills generally attempt to require coverage for “loss or damage to property, which includes the loss of use and occupancy and business interruption [to include] coverage for business interruption due to global virus transmission or pandemic.” In many cases, insurers that pay out business interruption claims under these proposals would apply to their State’s insurance commissioner for reimbursement; the proposal would allow the insurance commissioner to collect a special assessment against all insurers doing business in the state.
Lawsuits Across the Country. Individual and class actions suits have been filed by businesses across the country seeking coverage for financial losses resulting from the pandemic. A New Orleans-based restaurant filed a petition in Louisiana state court seeking a declaratory judgment that their business interruption coverage would cover contamination by the coronavirus as a “direct physical loss” requiring remediation to clean the surfaces of the establishment; and, that a Civil Authority Order by the Louisiana Governor banning large gatherings in a single space and by the New Orleans Mayor restricting restaurants trigger the civil authority provision of the policy. Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al., No. 2020-02558 (La. Dist. Ct., Orleans Parish, Mar. 16, 2020).
Two Miami-based restaurants filed a putative national class action complaint, seeking a declaratory judgment and alleging an anticipatory breach of contract claim. The plaintiffs seek a declaration that “the COVID-19 pandemic and the corresponding response by civil authorities to stop the spread of the outbreak triggers coverage, has caused physical property loss and damage to the insured property, provides coverage for future civil authority orders that result in future suspensions or curtailments of business operations.” El Novillo Restaurant, et al. v. Certain Underwriters at Lloyd’s, London et al., No. 1:20-cv-21525-UU (S.D. Fla. Apr. 9, 2020).
Insurance Companies Worrying about Financial Resources. On May 8, 2020, the United States Treasury Department issued a letter to members of Congress which argued that the insurance industry’s ability to serve policyholders would be threatened if Congress were to pass any of the various proposals that seek to force insurers to retroactively change business interruption policies to pay losses arising from the COVID-19 pandemic. The letter is shown below:
In the letter, the Treasury Department official writes that the proposals “fundamentally conflict with the contractual nature of insurance obligations and could introduce stability risks to the industry.” The letter tells federal lawmakers that Treasury will collaborate with insurer groups on “addressing losses attributable to the current and potential future pandemics.”
North Carolina Department of Insurance. In North Carolina, the Insurance Commissioner sent a letter to “Business Owner[s]” that said in pertinent part:
Standard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses because of the magnitude of the potential losses. Insurability requires that loss events are due to chance and that potential losses are not too heavily concentrated or catastrophic….Consider the difference…between losses suffered from a hurricane and the losses resulting from COVID-19. The hurricane losses affect certain areas on the coast…but the losses from this pandemic cover the entire nation. Therefore, mandating coverage for this size and type of loss while canceling existing exclusions in the policies would end the very existence of the business interruption insurance market….We can’t legally force insurers to cover a risk which they didn’t intend to cover and which, in some instances, was specifically excluded in the policy.
Insurance Companies’ Position. The American Property Casualty Insurance Association has stated that most insurance policies – including those with business interruption coverage – do not cover shut downs caused by COVID-19 or other viruses. Some policies specifically exclude losses resulting from a virus or bacteria. Insurers also take the position that coverage requires “physical damage to adjacent or nearby property” and the pandemic did not physically damage any property.
Legal Basis for the Insured’s Claim.
Requirement for “Physical Loss.” Courts have been split as to whether this coverage may apply where buildings have become uninhabitable or nonoperational because of contamination, including from airborne contaminants. Coronavirus can physically affect property – it can survive for days on plastic and stainless steel.
Here is a sampling of cases addressing the question of “physical loss” (note that some interpret that phrase, but not in the context of business interruption insurance) include:
Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010) (intangible harms, such as pervasive odor, mold and bacterial contamination did not constitute physical loss), aff’d sub nom. Universal Image Prod. v. Federal Ins. Co., 475 Fed. Appx. 569 (6th Cir. 2012)
Great Northern Ins. v. Benjamin Franklin Fed. S & L, 793 F. Supp. 259 (D. Or. 1990) (finding no direct physical loss from discovery of asbestos insulating material because building “remained physically intact and undamaged”), aff’d, 953 F.2d 1387 (9th Cir. 1992)
Yale University v. Cigna Ins. Co., 224 F. Supp. 2d 402 (D. Conn. 2002) (citing cases and concluding that insured suffered physical loss of or damage to property by alleging presence of asbestos and lead contamination in buildings)
Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of America, Civ. No. 2:12-cv-04418 (WHW), 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014)(rejecting argument that physical loss or damage requires physical change or alteration to insured property, but can cover loss when ammonia spill incapacitated facility rendering it unfit for occupancy; the spill changed the facility’s condition to an unsatisfactory state needing repair)
In North Carolina, in the case of Harry’s Cadillac-Pontiac-GMC Truck Co. v. Motor Ins. Corp., 126 N.C. App. 698, 486 S.E.2d 249 (1997), plaintiff’s car dealership was insured by defendant-insurer for protection against loss of income resulting from the suspension of business due to property repairs. After a snowstorm struck the area, plaintiff filed a claim under its basic coverage for damage to its roof sustained as a result of the storm, and for lost profits because of the interruption of its business due to the snowstorm. The insurer paid for the damages to the roof but denied business interruption loss because the roof damage did not cause an interruption of the insured’s business. The business interruption clause provided coverage for loss of business income due to the “necessary suspension of your operations…caused by direct physical loss of or damage to property….” The period of restoration was defined to begin on the date of the direct physical loss, and ending on the date when the property is “repaired, rebuilt, or replaced….” The Court of Appeals pointed out that insurance policies are to be strictly construed against the insurance company. The Court of Appeals found for the insurance company; the insured-business did not allege that it lost business income was due to damage to the property, but instead only offered evidence that the business income was lost due to the inability to access the dealership due to the snowstorm. Under the language of the policy, coverage is only provided when loss results from damage to or destruction of business property.
A subsequent case involved a policy that provided coverage when a business loss occurred during a period of time when ingress to or egress from the property was prevented. Fountain Powerboat Indus. v. Reliance Ins. Co., 119 F. Supp. 2d 552, 556 (E.D.N.C. 2000). In this case, Hurricane Floyd caused a dramatic fall in production at Plaintiff’s manufacturing facility. The ingress-egress clause did not require physical damage, but required only the reduction of business operations caused by “loss, damage, or destruction….” Flooding made the property inaccessible, and the route to the facility was also inaccessible. The court concluded that physical loss to the insured property was not required to trigger coverage under the ingress-egress clause.
Looking for some guidance regarding other “airborne” pathogens, an insured may look at cases where mold or contamination losses resulted from an event covered by an insurance policy. In HoneyBaked Foods, Inc. v. Affiliated FM Ins. Co., 757 F. Supp. 2d 738 (N.D. Ohio 2010), the discovery of listeria caused the plaintiff to suspend production. The policy excluded coverage for “fungus, mold, or mildew” (defined to include bacteria), but an extension of coverage provided coverage for the “direct physical loss or damage to insured property caused by or resulting from fungus, mold, or mildew when fungus, mold, or mildew is the direct result of direct physical loss or damage….” The court found that the policy would only provide coverage when the bacteria resulted from property damage and therefore would not apply in this case since there was no property damage that caused the listeria. See, also, Liristis v. Am. Family Mut. Ins. Co., 204 Ariz. 140, 61 P.3d 22, 25 (Ariz. App. Ct. 2002) (“[M]old damage caused by a covered event is covered . . . . On the other hand, losses caused by mold may be excluded.”); Simonetti v. Selective Ins. Co., 372 N.J. Super. 421, 859 A.2d 694, 699 (N.J. 2004) (mold damage covered despite policy exclusion for “loss caused by mold” where plaintiff could prove mold resulted from rainstorm, a covered peril); Graff v. Allstate Ins. Co., 113 Wn. App. 799, 54 P.3d 1266, 1268-69 (Wash. App. Ct. 2002) (contamination exclusion did not bar coverage where vandalism, a covered peril, resulted in the contamination).
Civil Authority closure. A South Carolina case,Kelaher, Connell & Conner, P.C. v. Auto-Owners Ins. Co., No. 4:19-cv-00693-SAL, 2020 U.S. Dist. LEXIS 31081 (D.S.C. Feb. 24, 2020), involved a law firm that closed because of a mandatory evacuation ordered by the Governor of South Carolina because of the threat of Hurricane Florence and subsequently made a claim for business interruption loss for the days that it closed during the evacuation order. The policy contained an extension of coverage for actual loss sustained as a direct result of an interruption of business “because access to the … business premises is prohibited by order of civil authority because of damage or destruction of property adjacent to the … premises….” The court found that the policy unambiguously required a link between the civil authority order and property damage. Therefore, the policy would not cover this loss since there was no evidence that the civil authority issued the order because of the existence of property damage or destruction at the time of the order (but, instead, issued the evacuation order because of an expectation of property damage).
The court summarized other cases involving civil authority orders:
Dickie Brennan & Co., Inc. v. Lexington Insurance Co., 636 F.3d 683 (5th Cir. 2011)(noting the “general rule” that “[c]ivil authority coverage is intended to apply to situations where access to an insured’s property is prevented or prohibited by an order of civil authority issued as a direct result of physical damage to other premises in the proximity of the insured’s property”).
Jones, Walker, Waechter, Poitevent, Carrere & Denegre, LLP v. Chubb Corp., No. 09-6057, 2010 U.S. Dist. LEXIS 109055, 2010 WL 4026375 (E.D. La. Oct. 12, 2010)(provision allowed recovery of business income loss incurred “due to the actual impairment of [ ] operations, directly caused by the prohibition of access to [the] premises by a civil authority” and further provided that “prohibition of access by a civil authority must be the direct result of direct physical loss or damage to property away from such premises[.];court found that the provision “does not insure against impairment of operations that occurs simply because a civil authority prohibits access.”)
United Air Lines, Inc. v. Insurance Co. of Pa., 439 F.3d 128 (2d Cir. 2006)(denial of coverage to airline when civil authority order halted flights due to 9/11 terrorist attacks; concluding airport was not shut down “as a direct result of damage to” the Pentagon);
Allen Park Theatre Co., Inc. v. Michigan Millers Mutual Insurance Co., 48 Mich. App. 199, 210 N.W.2d 402 (Mich. Ct. App. 1973)(following the death of Dr. Martin Luther King, Jr., and several riots around Detroit, the Governor of Michigan issued an executive order, closing all “places of amusement” until further notice; theatre owner sought coverage under the civil authority order provision that allowed coverage of actual loss incurred, “[w]hen as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority”, the court affirmed the trial court’s award to plaintiff).
Conclusion. The question about coverage for a COVID-19 business interruption claim will primarily be based upon the language of the policy. If the policy is not clear, there is legal precedent and moral authority that appears to dictate that an insurer should be required to pay a claim.
If you would like to discuss issues regarding business interruption insurance coverage on your business, please contact Bert Andia at 336.273.1600 or firstname.lastname@example.org
In the last several months, there have been efforts across the globe designed to contain the spread of the coronavirus (COVID-19). Those efforts have resulted in cancellation of events, and the closure (temporarily or permanently) of businesses. As a result, questions have arisen about whether a person’s obligation under a contract – whether it’s a residential lease, a commercial lease, or a sales contract – can be excused because of the unique situation with which we are all dealing.
While there is no one-size-fits-all answer, the North Carolina cases described below have been selected in an attempt to provide information that might assist an analysis for those questions.
Force Majeure Clause – Commercial Lease. Crabtree Ave. Inv. Group, LLC v. Steak & Ale of N.C., Inc. 169 N.C.App. 825, 611 S.E.2d 442 (2005)
Steak & Ale operated a restaurant in Raleigh, and leased the building from Crabtree Ave. Inv. Group, LLC. Group (Crabtree). Crabtree filed suit to have Steak & Ale evicted, and was granted possession of the property. The Court of Appeals found that the decision to evict Steak & Ale was proper.
The property that Steak & Ale was leasing was sold to Crabtree Ave. Inv. Group, LLC. Crabtree informed Steak & Ale that its lease payments were to be sent to a new address. Steak & Ale sent a written request to the Crabtree at the new address requesting Crabtree to send them an IRS Form W-9 and a copy of the deed. Steak & Ale’s letter was returned unopened. Thereafter, Crabtree sent a letter to Steak & Ale requesting rent payments; Steak & Ale sent all past due rental payments to Crabtree. Crabtree returned the checks and filed to have Steak & Ale evicted. Crabtree was successful in evicting Steak & Ale.
On appeal, Steak & Ale argued, in part, that Crabtree’s failure to provide the W-9 should have extended Steak & Ale’s obligation to pay rent pursuant to the “force majeure” clause. The Court’s description of the force majeure clause describes the lease provision as providing an extension of time for a party’s performance under the lease when performance was delayed due to a “cause beyond the tenant’s control.” Steak & Ale argued that it could not pay the rent to Crabtree unless and until Crabtree sent the W-9.
The Court disagreed with Steak & Ale: there was no legal requirement for a W-9 before payments were made; the failure to pay rent was merely because of Steak & Ale’s internal company policy; and, therefore, the failure to pay rent was not due to an event beyond Steak & Ale’s control.
Application to COVID-19 Situations: With commercial leases, close attention must be paid to the language of the force majeure clause. The clause in this case appears to allow for an extension of time for the tenant’s performance if the tenant was unable to perform due to a “cause beyond the tenant’s control.” Stay-at-home orders and government orders that restaurants close down certainly makes payment of rent more difficult for certain business such as restaurants. However, whether performance under a contract is excused or not, this case would merely stand for the proposition that the language of the force majeure clause is a determining factor in the analysis.
Force Majeure Clause; Frustration of Performance – Commercial Lease. S. College St., LLC v. Charlotte Sch. Of Law, LLC, 2018 NCBC 80 (18 CVS 787, August 10, 2018)(Judge Michael L. Robinson)
Charlotte School of Law (CSL) was founded in 2006 as a for-profit law school. CSL signed an Office Building Lease Agreement for a 3 year term; the lease lists certain Permitted Uses on the property, including use as an educational institution as well as for general office use, uses ancillary to its business, and other legally permitted uses (with the Landlord’s permission). Plaintiff, S. College St. (Landlord), purchased the property, and the lease was assigned to it as part of the purchase.
CSL’s state license to conduct post-secondary degree activity expired, and CSL ceased operation of the law school. CSL failed to pay its monthly rent in October 1, 2017, and Landlord notified CSL that it was demanding payment of all sums due. CSL abandoned the property.
Landlord filed a Complaint seeking monetary damages for breach of the lease. CSL argued that the doctrine of frustration of purpose excused its obligations to pay rent once it could not use the premises for a law school.
The doctrine of frustration of purpose states that “changed conditions supervening during the term of a contract sometimes operate as a defense excusing further performance on the ground that there was an implied condition in the contract that such a subsequent development should excuse performance or be a defense….”
The Court explained that the doctrine is based upon the “fundamental premise of giving relief in a situation where the parties could not reasonably have protected themselves by the terms of the contract against contingencies which later arose.” The must be an (1) an implied condition that a change would excuse performance; (2) the changed condition caused a failure of consideration or the expected value of performance; and (3) the changed condition was not reasonably foreseeable.
CSL argued that its ability to operate a law school was an implied condition and, due to several regulatory and governmental actions, there was a failure of consideration and an elimination of the value of performance of the Lease. However, since the Lease specifically provided that the “Permitted Uses” for the property included “other legally permitted uses”, the Court determined that CSL’s position was not an implied condition that would excuse performance.
The Lease also included a force majeure clause
When a period of time is herein prescribed for any action, other than the payment of any monetary sums due hereunder, to be taken by [Landlord] or [CSL], [Landlord] or [CSL], as applicable, shall not be liable or responsible for and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, terrorism, acts of God, shortages of labor or materials, war, laws, regulations or restrictions, inability or delays in obtaining governmental permits, or any other causes of any kind whatsoever which are beyond the reasonable control of [Landlord] or [CSL.]
The language of the force majeure clause specifically allows for additional time to perform any of CSL’s obligations under the lease, except for its payment obligations. The Court found that the parties expressly agreed that a failure to pay sums due under the lease is a breach that is not excused by CSL’s inability to obtain the appropriate government permits to operate a law school.
Application to COVID-19 Situations: As with the above, close attention should be paid to the language of the force majeure clause. The clause in this case did not allow the tenant to avoid its payment obligations for certain force majeure events. The defense of frustration of purpose might provide relief if there is sufficient proof of an “implied condition” (i.e. ability to operate the business on the property), the changed condition caused the party to lose the benefit of its bargain (e.g., stay-at-home order prevented operation of the business), and the cause (the virus) was unforeseeable.
Force Majeure Clause; Contract for Sale of Goods. Certainteed Gypsum NC, Inc. v. Duke Energy Progress, LLC, 2018 NCBC LEXIS 91, 2018 NCBC 90 (August 28, 2018)
CertainTeed manufactured wallboard which, in part, required a supply of synthetic gypsum. Duke Energy’s plants produced gypsum as a byproduct of coal-fired electric power plants. The parties entered into a supply agreement in 2004, in 2008, and again in 2012.
Due to a drop in natural gas prices, Duke Energy decreased the utilization of its coal-fired plants, with a resulting decrease in production of synthetic gypsum. A dispute arose about the quantity term under the Supply Agreements – was Duke Energy required to provide a minimum quantity of gypsum; did Duke meet is contractual obligation to use commercially reasonable efforts to maintain a stockpile of gypsum; and, was Duke Energy excused from performing because performance would be inconsistent with its primary purpose as a regulated public utility.
The supply agreements contained a clause that Duke Energy’s obligations are subject to Duke Energy’s “primary duty to produce economical and reliable electric power for public consumption…” and that the agreement should not be interpreted to obligate Duke Energy to maximize production of synthetic gypsum. The Court found that this clause excused Duke Energy’s obligation to supply synthetic gypsum if future changes in laws or regulations restricted Duke Energy from supplying synthetic gypsum, but did not excuse Duke Energy if it could continue to lawfully supply synthetic gypsum even if the expense of doing so increased to an unanticipated degree.
The Court further noted that the agreements contained a force majeure article that expressly provided that “certain specific events” would excuse either party’s obligations, although the “primary duty” clause did not have similar force majeure language.
The result was that the Court found that the supply agreements excused Duke Energy from its obligations to supply synthetic gypsum only if it could no longer legally supply the product.
Application to COVID-19 Situations: The language of the contract is supremely important. Even though Duke Energy believed that its obligation as a public utility should excuse its performance from supplying synthetic gypsum (which was no longer economically advantageous), the Court determined that the primary purpose clause did not excuse performance and that the failure to provide force majeure events that might excuse performance prevented the use of such defense.
Doctrine of Frustration of Purpose; Doctrine of Impossibility of Performance; Contract. Brenner v. Little Red Sch. House, Ltd., 302 N.C. 207, 274 S.E.2d 206 (1981)
Plaintiff entered into a contract by which Defendant (private school) agreed to enroll Plaintiff’s son in the fourth grade class of Defendant-school. The contract required Plaintiff to pay one year’s tuition in advance, and explicitly provided that the tuition was non-refundable. Plaintiff was divorced, and his former wife received custody of the child. Although Plaintiff paid one year of tuition in advance, his former wife refused to allow the child to attend the school.
The trial court granted summary judgment to Plaintiff; but the Court of Appeals reversed that decision. The Supreme Court of North Carolina found that summary judgment could not be granted to either party.
Plaintiff asserted the doctrine of impossibility of performance arguing that he should be excused from an executory contract (a contract requiring future performance) since the subject matter of the contract (attending the school) was destroyed without fault of Plaintiff. Since it was still possible for the child to attend the school, the doctrine of impossibility of performance was not applicable.
Plaintiff asserted that the doctrine of frustration of purpose should apply to require that the contract be rescinded. The doctrine of frustration of purpose provides that “changed conditions supervening during the term of a contract sometimes operate as a defense excusing further performance on the ground that there was an implied condition…that such a subsequent development should excuse performance or be a defense…even though the subsequent condition that developed was not one rendering performance impossible.” The doctrine of frustration of purpose is not a form of impossibility of performance, but more properly relates to the issue of “consideration.” While performance is possible, performance is excused because an event causes a failure of the consideration or a practically total destruction of the expected value of the performance.
The doctrine of frustration of purpose is not applicable if (a) the frustrating event was reasonably foreseeable; or (b) if the parties allocated the risk involved in the frustrating event.
In this case, (a) there was no substantial destruction of the value of the contract since Defendant-school made preparations to educate the child; reserved a space for the child; and kept a place open for the child; and (b) the possibility of the child not attending was foreseeable, and the contract expressly provided for that event (making tuition nonrefundable) and allocated the risk to the Plaintiff.
Application to COVID-19 Situations: A stay-at-home order may be seen as destroying the consideration that might be received from a contract. A good argument can be made that such a virus, and the subsequent shut down orders, is not reasonably foreseeable. Thus, if the contract does not otherwise allocate the risk of such a shutdown, the doctrine of frustration of performance could provide a basis to rescind the contract.
Doctrine of Frustration of Purpose; Commercial Lease. WRI/Raleigh, L.P. v. Shaikh, 183 N.C. App. 249, 644 S.E.2d 245 (2007)
Plaintiff (Landlord) and Defendant (Tenant) entered into a lease so that Tenant could operate an Italian restaurant on the premises. After signing the lease, Tenant learned that City Ordinance required a 1,000 gallon grease trap. Although Tenant was aware prior to signing the lease that a grease trap was required, Tenant believed the minimum capacity was closer to 200-300 gallons; there was no grease trap on the Premises and no plans to install a grease trap when the lease was signed.
Tenant received estimates for modification of the Premises to add a grease trap, but was informed that any system was likely to clog repeatedly. Tenant decided that he could not open a restaurant on the Premises, and tendered the keys to the Landlord. Plaintiff sued for breach of contract, and a jury found Tenant liable. The jury specifically found that “Defendant’s failure to perform under the terms of the commercial lease” was reasonably foreseeable as a preliminary question before considering the amount of damages to be awarded.
Defendant argued that the doctrine of impossibility (i.e. Tenant could not have operated the restaurant Tenant planned to operate) should excuse his performance. The Court of Appeals noted that the premises existed and were in the same condition as when the contract was signed. Additional evidence demonstrated that subsequent tenants were running a restaurant and had installed a grease trap. Based on those factors, the Court found that someone could have performed under the terms of the lease and, therefore, the doctrine of “impossibility” was inapplicable.
Defendant next asserted that his performance under the lease should be excused under the doctrine of frustration of purpose. Defendant argued that, after the lease was signed, “investigation after the lease was signed revealed conditions that resulted in practically total destruction of the expected value of the performance.” Under the doctrine of frustration of purpose, performance under a contract is excused whenever a fortuitous event supervenes to cause a failure of the consideration or a practically total destruction of the expected value of performance of the contract. The fundamental premise for the doctrine of frustration of purpose is to give relief when the parties could not reasonably have protected themselves by the terms of the contract against contingencies which later arose.
The doctrine of frustration of purpose does not apply when the frustrating event was reasonably foreseeable. The Court of Appeals found that the question of foreseeability was properly submitted to the jury, and therefore the jury’s verdict necessarily meant that the jury had found that performance was “not excused by an event which was reasonably foreseeable.” The jury’s verdict did not allow the Court of Appeals to overturn the verdict.
Application to COVID-19 Situations: This statement of the doctrine of frustration of purpose would seem to allow for excusing performance under a commercial lease since an unforeseeable event (the COVID-19 virus and shut down) supervenes so that there was a failure of consideration (paying rent in return for the right to rent a certain space). Of course, the countervailing argument is that the space was still available for the tenant to use, and that the tenant could have used it for some business purpose.-
If you would like to discuss the impact of the coronavirus or the resulting shutdown of your business, please contact Bert Andia at 336.273.1600 or email@example.com
Noncompetition agreements (“non-competes”) present thorny issues. In most cases, you have a former employee who has signed a black-and-white contract prohibiting him or her from engaging in certain employment, and the employee goes and does the one thing that the contract specifically prohibits. Not that long ago, most judges would view the matter purely as a contract issue, and once an employee’s attorney admitted that yes, that was the client’s signature on the agreement, they did not want to hear much else, with visible disinterest giving way to agitation the longer the argument proceeded.
On rare occasions, if the employee could present special circumstances, the trial courts would do more than pay lip service to the maxims like “noncompetes are strongly disfavored in North Carolina.” Was the territory much more expansive than where the employee actually operated? Was this really a lower-level employee, with the noncompete designed to keep the employee hostage rather than protecting legitimate employer interests?
For the most part, however, it seemed that trial courts would not scrutinize too closely the many hurdles that can arise in noncompete cases. The North Carolina Business Court played a significant in role in changing the noncompete litigation landscape. In balanced, thoughtful opinions, the Business Court developed the law of noncompetes in an evenhanded fashion in several areas; for example, it issued opinions addressing the implications of mergers and acquisitions on the enforcement of noncompetes. See, e.g., Covenant Equip. Corp. v. Forklift Pro, Inc., 2008 NCBC 10, 2008 NCBC LEXIS 12 (Mecklenburg County Super. Ct. May 1, 2008) (asset-purchaser could enforce non-compete upon date of sale but not upon employee’s subsequent termination); Artistic S., Inc. v. Lund, 2015 NCBC 109, 2015 NCBC LEXIS 113 (Wake County Super. Ct. Dec. 9, 2015) (noncompetition obligation began to run on date of asset sale, not employee’s subsequent termination).
Fourth Circuit Enters Noncompetition Fray
Although federal courts are often utilized to enforce noncompetition agreements, they are hesitant to expound or expand the law in this area because it is grounded in state law. In RLM Communications, Inc. v. Tuschen, ___ F.3d ___, 2016 U.S. App LEXIS 13726 (4th Cir. July 28, 2016), however, the Fourth Circuit Court of Appeals significantly elaborated on North Carolina noncompetition and trade secrets law.
RLM Communications was in the cyber security/information technology business. In 2007, it hired Amy Tuschen. On her first day of work, Tuschen signed a noncompetition agreement stating that for one year after her employment she would not “directly or indirectly participate in a business that is similar to a business now or later operated by Employer in the same geographical area.” Id. at *8.
Tuschen rose in the ranks to Director of Information Assurance, with responsibilities that included oversight of large government contracts. In 2013, she quit and began working for eScience, a nearby competing federal contractor. Although initially it appeared the two would part amicably – with RLM providing gift cards and a “giant bouquet of roses” as parting gifts – RLM soon changed its tune.
It learned that Tuschen and eScience were attempting to land a large government contract serviced by RLM that was up for re-bidding. Not only that, Tuschen was contacting RLM employees to line them up in the event eScience successfully won the contract bid. RLM filed suit and quickly secured an injunction. The district court later, however, granted summary judgment in Tuschen’s favor, finding the agreement lacked adequate consideration. RLM Communications, Inc. v. Tuschen, 66 F. Supp.3d 681 (E.D.N.C. 2014).
On appeal, the Fourth Circuit focused on the overbroad nature of the restrictions. The court cited North Carolina cases holding that restrictions “must be no wider in scope than is necessary to protect the business of the employer.” Id. (citing Manpower, Inc. v. Hedgecock, 42 N.C. App. 515, 257 S.E.2d 109, 114 (1979). That means covenants cannot restrict employees from working in capacities unrelated to their previous jobs. Here, the restrictions were too broad:
Even ignoring for a moment the bar on indirect participation in similar businesses, the noncompete is overly broad by preventing direct participation in similar businesses. Tuschen is not merely prohibited from working for RLM competitors in a position like the one she held at RLM. She may also not mow their lawns, cater their lunch businesses, and serve as their realtor.
Id. at *9 (emphasis in original). The court goes on to outline various arrangements that would be prohibited by the noncompete, such as selling computer software for a business or investing her retirement accounts in mutual funds that owned a competing company.
The court also concluded that any attempt to “blue-pencil” the covenant would be futile. Citing the N.C. Supreme Court’s recent decision, Beverage Sys., LLC v. Associated Beverage Repair, LLC, 784 S.E.2d 457, 461 (N.C. 2016), the court noted that North Carolina adheres to the “strict blue pencil doctrine,” which while allowing the striking of distinct overly broad terms, prohibits re-writing covenants to make them enforceable.
Thus, the court found the noncompete overly broad and therefore unenforceable, affirming the district court’s grant of summary judgment in Tuschen’s favor.
Trade Secrets: Access and Suspicion Not Enough to Force Trial
The RLM decision is also remarkable for its holding on trade secret misappropriation. RLM alleged – and Tuschen admitted – that she had access to trade secrets while she was employed by RLM. Tuschen denied, however, that she used any of the information in her subsequent employment.
The court noted misappropriation requires that the user “[h]as a specific opportunity to acquire it for disclosure or use or has acquired, disclosed or used it without the express or implied consent or authority of the owner.” Id. at *15 (citing N.C. Gen. Stat. § 66-155). The court reasoned that the language was open to alternative interpretations. Applying one interpretation in a summary judgment context would allow an Employer to survive summary judgment just by showing it had given the employee access to trade secrets during the regular course of employment.
The court reasoned that such a literal interpretation would lead to absurd results. It also cited North Carolina cases indicating that something more is required before an employer can require an employee to stand trial for misappropriation. After analyzing various interpretations, it crafted a rule sufficient for the case before it: “When an employer brings a misappropriation claim against an employee, admitting that the employee had authorized access to its trade secrets at all relevant times, the employer must raise an inference of actual acquisition or use of trade secrets to survive summary judgment.” Id. at *23 (emphasis added).
Wholesale copying of files shortly before exiting the company or evidence of use of the trade secrets by a competing company might suffice to avoid summary judgment. But here, RLM had presented no “fishy circumstances” surrounding Tuschen’s departure, and no evidence of the trade secrets’ use in her new employer’s work. Thus, the court concluded, summary judgment had been properly granted to the former employee.
Jonathan Wall is a partner with Higgins Benjamin, PLLC,and a former Chair of the NCBA Labor & Employment Law Section. This item originally appeared in L3: Long Leaf Pine, the blog of the North Carolina Bar Association, at http://ncbarblog.com/2016/09/fourth-circuits-rlm-communications-llc-v-tuschen-tackles-noncompetition-and-trade-secret-misappropriation-issues/.
By Peter Isakoff, Associate Attorney, Higgins Benjamin, PLLC
As a landlord, taking a tenant to court can be a confusing and daunting process. A common reason landlords take tenants to court is when tenants default on leases by not paying rent. North Carolina law, specifically N.C. General Statute Chapter 42, provides a detailed, multi-step process for these types of cases in North Carolina. The law spells out what must be done to legally remove residential tenants in North Carolina and prohibits landlords from using self-help.
As a practical matter, landlords often make written demand on tenants to “cure” their default by paying the balance of rent owed prior to initiating a lawsuit. Depending on the wording of the rental agreement/lease, this step may not be necessary in a particular case. If the tenants do not cure the default, the landlord can sue the tenant.
There are two (2) avenues available to landlords. The first is a summary ejectment in which the landlord only seeks a court order terminating the tenant’s right of possession under the lease, and allowing the landlord to evict the tenant. The second is a lawsuit by which the landlord seeks to obtain monetary damages (for damage to the premises, for back rent, late fees) and for possession.
For either process, the first step is to file your lawsuit. As long as you are not seeking more than $10,000.00 from your tenant, you can go to Small Claims court, which is the quickest way to have your case heard. To do this, the form you need to complete and file is called a Complaint in Summary Ejectment.
In this form, you list why you want to evict your tenant and whether you want possession only, or whether you want possession plus damages. You file the Complaint in the Civil Filings department of your county courthouse. The Small Claims filing fee is currently $96. Once you file the Complaint in the Civil Filings department, the clerk will give you a Summons listing the date and time of your Small Claims hearing.
In most circumstances the clerks in the courthouse will send the summons to your county sheriff so that the complaint and summons can be served on your tenant. The sheriff’s fee for service is currently $30 for each individual listed as a defendant. If the sheriff is unable to personally serve the Summons and Complaint on the tenant, the sheriff will attach the Summons and Complaint to the front door of the property (service by posting). If the sheriff is not able to personally serve the defendant(s), and if the defendant does not attend the hearing, you will be able to proceed only in obtaining possession, but cannot obtain monetary damages unless and until personal service is obtained.
The next step is to prepare for and attend the Small Claims hearing. The Small Claims court will usually schedule a hearing within about 14 days of filing the Complaint. While you are waiting for the hearing date, you should not accept partial rent payments from your tenant, since you could be considered to waive any claim for the remaining balance. You should accept rent only if the tenant pays the full balance owed.
Small Claims cases are decided by magistrates, who act similarly to judges in other courts. If the landlord is bringing the lawsuit, the landlord is the Plaintiff and the tenant is the Defendant. The Plaintiff landlord will have the burden of presenting evidence to show that the tenant breached the rental agreement/lease by failing to pay rent. At the Small Claims hearing, you should have all of your documents ready to present as evidence to the magistrate. The most important things to have ready are a copy of the rental agreement/lease, a ledger (or other proof of non-payment of rent), photographs of any damage, and any demand notice you sent your tenant for back rent owed. At the hearing, the magistrate will ask about your rental agreement/lease and how much rent your tenant owes you. You want to have all your figures ready to give the magistrate (including the monthly rent, the late fee, and how much rent is currently owed through the date of hearing).
If you proved your case, the magistrate will give you a judgment in your favor. If the magistrate thinks you did not prove your case, he or she will dismiss your lawsuit. If the magistrate gives you a judgment in your favor, the tenant has 10 days to appeal the magistrate’s decision to District Court. If the magistrate does not rule in your favor, you have 10 days to appeal the decision to District Court. There is a $150 filing fee for an appeal to District Court.
If you get a judgment in your favor, once 10 days have expired and the tenant has not appealed to District Court, the next step is to get your tenant to leave the property. It is a good idea to first send your tenant a letter telling them that they should leave the property (a Notice to Vacate). If the tenant does not leave, you can have the sheriff remove the tenant from the property and padlock the property. You do this by filing a Writ of Possession with the Civil Filings department.
The filing fee for the Writ of Possession is $25. The sheriff also has to serve your tenant with the Writ of Possession, which costs another $30 per tenant.
The removal of the tenant from the property (padlocking process) with the sheriff usually takes place about 5 to 7 days after filing the Writ of Possession. The sheriff will contact you beforehand to let you know when the padlocking is scheduled, and you will need to have a locksmith present at the padlocking to change the locks. The sheriff requires no additional fee beyond the $25 Writ of Possession fee to perform the lockout, but landlords bear the cost of the locksmith services. It is important that you do not change the locks without the sheriff present. Once the padlocking occurs, if the tenant has left any personal property at the unit, you have to give the tenant 7 days to come back and get the personal property. To avoid the tenant claiming the landlord has allowed them to continue living at the property, it is important not to give the tenant keys to the property after the padlocking, but rather to unlock the door for the tenant if they need to get any personal property, and then lock it back up after them.
The entire eviction process usually takes a little bit over one month. To summarize, the eviction timeline normally is:
– 14 days (approx.) from filing of Complaint in Summary Ejectment until the Small Claims hearing.
– 10 days from date of Small Claims hearing until appeals period expires/filing of Writ of Possession.
– 5-7 days (approx.) from filing Writ of Possession until padlocking with sheriff.
– 7 days after padlocking for tenant to retrieve any personal property left behind.
As with any court proceeding, more complicated cases can take longer and require extra steps. Also, if either you or your tenant appeals the Small Claims decision to District Court, the process will be extended. In District Court (but not in Small Claims court), if the landlord is a business (a corporation or an LLC), it will be required to be represented by a lawyer.
If you have any questions about a potential eviction case, it is a good idea to contact a lawyer who practices in this area for advice.
DISCLAIMER: The information in this article is provided for informational purposes only. It is not offered as and does not constitute legal advice. The accuracy of the information may change pending changes in applicable law. If you have questions about a specific matter, you should contact a lawyer. The use of this article or any information provided in it does not establish any lawyer/client relationship.
If you would like to discuss a dispute arising in the context of landlord/tenant law, please contact Peter Isakoff at (336) 273-1600 or firstname.lastname@example.org
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By Stephen E. Robertson, Managing Partner, Higgins Benjamin, PLLC
Most of us get our perceptions of lawyers from TV, hairdressers, jilted relatives, domestic violence news accounts and other sensational but less than reliable sources. When we face an often emotionally charged breakup, we might think “I want the toughest, meanest junkyard dog litigator I can get.” In reality, there are no statistics that expensive, litigation-hungry lawyers get better results.
There are two ways to walk through a marital dissolution – by agreement and through litigation. Lawyers love to litigate. They love to win in court – losing not so much – but family law clients seldom win and lose. More often, neither side is pleased with the result after trial. Both are emotionally drained and both feel they have spent an inordinate amount of their marital estate for legal counsel. Sometimes, clients feel like they lose control of the process. They go to court; nothing happens, they return, another continuance and so on. Ask any District Court Judge and he or she will tell you the courts are overcrowded. It is ultimately the client’s choice whether he or she wants to travel the road to the courthouse or pursue settlement by agreement, but if you are facing an inevitable breakup of your marriage, you should consider alternatives to litigation.
The overwhelming majority of divorce related lawsuits settle prior to trial anyway. The State of North Carolina wants cases settled before trial as a matter of public policy. There are statutory requirements that all lawsuits go through mediation before they are scheduled for trial. Where children are concerned, mothers and fathers in Guilford, and several other counties, must attend a 4-hour educational program offered by the Children’s Home Society of North Carolina called “Parenting Under Two Roofs,” attend mediation orientation, and then attend mediation itself. These programs are provided at little or no cost, and lawyers do not attend the mediation. It is an opportunity for the parents to hammer out a parenting agreement with the aid of a well-trained, experienced mediator. Child support obligations are usually, but not always, determined by a mechanical application of a formula set out in the North Carolina Child Support Guidelines, so there is seldom a need for a child support trial.
The remaining issues, the only issues for a couple with no children, are splitting the assets and debts acquired during the marriage, and determining if one spouse or the other should receive alimony. If alimony is appropriate, then the amount and duration must be determined. These matters are also the subjects of mandatory mediation. Financial mediation, unlike child custody mediation however, is not paid for by the state and your lawyers will be heavily involved. Many family financial cases settle in mediation. While a mediated settlement is usually preferable to a trial, the settlement agreement is often hastily assembled at the end of a long day or two of negotiations. Why not use a more deliberative process where the spouses are engaged over time so they can give these all-important, life-changing decisions more than a day or two of intense consideration and negotiation?
There is a time-proven method for making both the child related and financial determinations known as Collaborative Family Law. Since its inception in 1991, more than 22,000 lawyers have been trained in Collaborative Law worldwide. In 2010, the International Association of Collaborative Professionals published survey results finding that 90% of cases settled while only 10% terminated prior to settlement of all issues.
It works because you and your spouse maintain control of your outcomes. You have the benefit of a respectful, creative and individualized process. Both of you can choose a lawyer trained in the process through the Triad Collaborative Family Law Practice Group (www.triadcollaborative.com)
Further, you can choose to involve a Divorce Coach, a Child Specialist to bring your children’s needs and voices to the table, and a neutral Financial Specialist to help you understand and resolve the financial components of your divorce. You resolve the issues through a series of face-to-face meetings, on your time schedule, and with your professional team.
The practice of family law gives lawyers the chance to be of service to clients at a critical time in their lives and in a very personal way. Collaborative Family Law practitioners offer a private, cost-effective, efficient, dignified process that allows clients and their families to have the best possible post-divorce relationships – without going to court.
If you would like to discuss an issue involving Family Law, Collaborative Family Law, Divorce, or Child Custody, contact Steve Robertson at (336) 273-1600 or email@example.com.
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