Articles Posted in Contract Law

Is Your Business’s Confidentiality Agreement Enforceable? Part 1

August 19, 2013 | Michael R. Smith

Confidentiality agreements (also known as non-disclosure agreements or NDAs) are common in today’s business world. They are sometimes in the form of stand-alone agreements, often used when two businesses are discussing a potential deal and at least one of them needs to disclose to the other information that is not available to the public (sometimes called confidential business information or CBI). Other times, they are embedded in agreements with a broader scope, such as employment contracts, service contracts, and contracts for the sale and purchase of a business.

The fundamental concept of a confidentiality agreement is simple. The person receiving or possessing the other person’s CBI promises not to disclose it to others and (usually) not to use the information for any purpose other than the discussions of a potential transaction or the purpose of the larger contract in which the confidential provision is embedded.

The details, however, can be tricky, and one of the thornier details is the question of how long the obligations of nondisclosure and nonuse last. Naturally, the person disclosing the CBI wants the commitments to last forever, but the person making the commitments wants them to expire at some point in time, not necessarily because he or she wants to use or disclose the information, but because he or she wants the possibility of being sued for breach to come to an end, and the sooner the better.

So how long can, or should, a confidentiality obligation last? Before answering that question, a little review of some legal principles is in order. Note that these issues are very fact-sensitive and that the law varies a fair amount from state to state. For that reason, this discussion is based on general concepts; the results may be very different in any particular case.

Restrictive Covenants
Confidentiality agreements are sometimes considered to be within a larger category of contracts known as restrictive covenants, i.e., agreements that in one way or another restrict commercial trade. With freedom of trade and commerce being so important to American society, restrictive covenants are not favored by public policy or the law. That doesn’t mean restrictive covenants are necessarily void or illegal, but they may be unless the restrictions are sufficiently narrow. At least some courts have held that confidentiality obligations can last for only a reasonable period of time (with an exception discussed below), and a confidentiality obligation that lasts too long may result in a court refusing to enforce the agreement.

Unfortunately, there are no clear rules to tell us what amount of time is reasonable for the duration of a confidentiality obligation. Instead, there are factors that must be weighed and balanced. Those factors include the nature of the legitimate business interests of the owner of the CBI; the effect of the restrictions on the person making the non-disclosure and non-use commitments; and the public interest.

So far we know that it may be necessary for a confidentiality obligation to expire after a reasonable period of time, and, if it doesn’t, the agreement may be unenforceable. HOWEVER, there is a major exception, and that exception is for CBI that also meets the definition of a “trade secret.”

Trade Secrets
Although “confidential business information” does not have a universal meaning,the definitions contained in most confidentiality agreements are broad enough to encompass “trade secrets,” a term defined by state statute. In Indiana, section 24-2-3-2 of the Indiana Code defines a trade secret as information that

has independent economic value because others who could obtain economic value from the information do not have the information and cannot reasonable acquire it; and
is the subject of reasonable efforts to maintain its secrecy.

Trade secrets are a form of intellectual property, and the trade secret statute provides protection against improper use or disclosure, in addition to the protection provided by a confidentiality agreement. Unlike most forms of intellectual property, such as patents, trade secrets never expire; they remain protected by statute for as long as the information continues to meet the definition. For that reason, some courts have ruled that the requirement for confidentiality agreements to be limited to a reasonable period of time is subject to an exception for trade secrets. To the extent a confidentiality agreement covers a trade secret, the confidentiality obligation is permitted to last forever, or at least for as long as the information continues to qualify as a trade secret under the statutory definition.

Here’s where that leaves us: With respect to trade secrets, confidentiality obligations do not need to expire. (In fact, as we’ll see later, they should not expire.) With respect to other CBI, confidentiality obligations may need to expire after a reasonable period of time to ensure enforceability. In the next article, we will consider how to deal with that bifurcation.
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Anticipatory Breach and Damage Mitigation: A Minefield for Real Estate Sellers?

June 25, 2013 | Michael R. Smith

July 17, 2014. Update. Today the Indiana Supreme Court reversed the decision of the Court of Appeals. Check back soon on the Indiana Business Law Blog for a discussion of the Supreme Court’s decision.

A ruling in a recent case, Fischer v. Heymann, illustrates the pitfalls one can encounter when selling real estate. By not changing a light bulb and pushing the little red button on a couple of electrical outlets, the seller lost over $90,000!

The Case
Gayle Fischer entered into a contract to sell a condominium to Michael and Noel Heymann for $315,000. The buyers could inspect the property and, if they found serious defects, cancel the sale unless she agreed to fix the problems. On February 10, 2006 the Heymanns demanded that Fischer fix some minor problems: a couple outlets weren’t working and a light bulb needed to be changed. Fischer wrote back on Feb. 13th, saying she’d respond by Feb. 28th. The Heymanns wrote back two days later, demanding a response by Feb. 18th. Fischer did not make any further replies until the 19th, when the Heymanns attempted to cancel the contract, and the lawsuit ensued, with Fischer claiming total damages of more than $94,000, including $75,000 in direct damages (which represented the difference between the agreed price of $315,000 and the best offer Fischer later received, $240,000.)

The Decision
The Court of Appeals applied two standard contract principles but to reach a result that may seem surprising. First, the buyers committed an “anticipatory breach”.or “breach by repudiation,” which occurs when one party declares its intent to breach the contract. Here, the Heymanns’ refused to buy the condo unless Fischer made repairs, which the Court of Appeals held was an anticipatory breach. (The Heymanns would have had the right to cancel the contract if the defects in the condo were serious, but they weren’t.) An anticipatory breach is treated the same as an actual breach. Fischer did not need to wait until Heymanns failed to show up at the closing.

Second, once a breach has occurred (anticipatory or otherwise), the other side has an obligation to mitigate damages, or to take reasonable steps to avoid ‘piling up’ additional damages. One way of mitigating damages when a buyer backs out of a real estate purchase is to attempt to find another buyer. Here, the agreed price was $315,000. If the best price Fischer could get from another buyer was $300,000, the Heymanns would have owed her only $15,000. However, if Fischer passed up the $300,000 offer and later sold it for only $240,000, the Heymanns would still owe only $15,000 because that’s what the damages would have been if Fischer had mitigated.

Although the Court of Appeals did not describe its analysis quite this way, it essentially treated the Heymanns demand for repairs as a breach of the original purchase agreement and a new offer to buy the condo for the same price after the repairs were made, repairs which cost only $117 — the price for an electrician to make a service call to reset the ground fault interruptors and change a light bulb. Certainly, if, immediately after the Heymanns breached, a third person had offered to buy the property for the same price, less $117, mitigation of damages would have required Fischer to accept it. The Court of Appeals held that mitigation of damages required Fischer to make the repairs requested by the Heymanns. Result: The Heymanns owed Fischer $117, not $94,000!

Note that these principles apply to contracts in general, not just to real estate purchase agreements. Does it surprise you that one party can make the other party choose between accepting an amendment to the contract or collecting damages that are worth no more than the amendment? That’s effectively what happened in this case, and it surprised the Court of Appeals judge who dissented from the decision. I don’t know if Fischer’s lawyer has petitioned to transfer the case to the Indiana Supreme Court. If so, it will be interesting to see if the Supreme Court accepts the case. And if the decision stands, it will be interesting to see how later Indiana court decisions apply Fischer to other situations.
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Construction Manager Liability: Part three

September 7, 2012 | Michael R. Smith

I explained in my last two posts how construction managers can be subject to liability when a construction contractor’s employee is injured. Ordinarily, the construction manager has no duty to provide a safe workplace for the employees of a construction contractor and, therefore, is generally not liable for injuries to those employees. However, a construction manager can assume a duty to those employees in one of two ways — either by contract or by actions — and end up with liability for injuries.

For that reason, some construction managers have been reluctant to have any involvement with safety programs. By drafting contracts carefully, a construction manager can be fairly certain of not assuming a duty contractually, but it is difficult to know exactly what actions a construction manager can or cannot take without incurring liability. The Plan-Tec and Hunt cases discussed in our last post create some certainty. Specifically, a construction manager may take on contractual commitments to perform certain actions without assuming a duty to the employees of construction contractors and, consequentially, without incurring liability it would not otherwise have.

However, the construction management must avoid contractually undertaking to be the “insurer of safety for everyone on the project.” Here are some examples of what a construction manager should include in the construction management contract:

(a) To “make certain its avoidance of liability” the court in Hunt said a construction manager can include a provision with language expressly disavowing responsibility for job-site safety (EX: “in no case shall…the Construction Manager…have either direct or indirect responsibility for matters relative to Project safety.”).

(b) In Plan-Tec, the court held that the construction manager had not assumed a duty because the construction management contract “unequivocally state[d] that the contractors were to have the responsibility for project safety and the safety of their employees.” This language demonstrates that the responsibility for project safety belonged to the construction contractors, not the construction manager.

(c) Hunt’s contract stated that the construction manager’s services were “rendered solely for the benefit of the [Project Owner] and not for the benefit of the Contractors, the Architect, or other parties performing Work or services with respect to the Project.” This confirmed that no one but the Project Owner, not even a subcontractor’s injured employee, could expect to “benefit” from Hunt’s contract with the Project Owner or claim the contract obligated Hunt to assure their safety.

(d) Hunt’s contract provided that Hunt was not “assuming the safety obligations and responsibilities of the individual Contractors,” and that Hunt was not to have “control over or charge of or be responsible for…safety precautions and programs in connection with the Work of each of the Contractors, since these are the Contractor’s responsibilities.” In addition, it said that the construction contractor was the “controlling employer responsible for its own safety programs and precautions,” and Hunt’s responsibility to review, monitor, and coordinate those programs did “not extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors, their agents or employees or any other persons performing portions of the Work and not directly employed by Hunt.” This proved that Hunt was not vicariously liable for a subcontractor’s negligence in executing its own safety precautions.

Given the above contract provisions which help construction managers to avoid contractually assuming responsibility for job-site safety, consider one related reminder about avoiding liability as a result of actions. Remember how construction managers can become liable when they voluntarily perform safety obligations beyond what they previously agreed to in the construction management contract? For this reason, one last contract provision which would benefit construction managers could require that, if the project owner demands that construction manager begin to perform additional safety obligations, such new obligations would first be incorporated into the original contract via an amendment. This would serve as a contractual way to manage the risk of that other means of incurring liability – the construction manager’s actions.

Now, here are some examples of what a construction manager seeking to avoid liability should not include in a construction management contract:

(a) Provisions by which the construction manager accepts the “duty to maintain safety on the project.”

(b) Provisions providing that the construction manager is responsible for the contractors’ compliance with state and federal regulations. A provision like that could show that the construction manager was undertaking legal oversight of the subcontractors. As recounted in point (d) above, construction managers can safely contract to review, monitor, and coordinate safety programs and precautions, but not to be responsible for those programs as the “controlling employer.” The important inquiry is whether the construction manager has agreed to ensure contractors’ compliance with the law or whether the construction manager has only agreed to monitor contractors’ compliance for the project owner.

(d) Language such as: The construction manager “shall take all necessary precautions for the safety of employees on the work.”

(e) Language such as: The construction manager “shall take all necessary precautions for the safety of all employees on the project.”

Ultimately, the Indiana Supreme Court held that even though Hunt had agreed to some safety-related responsibilities in the original contract, those responsibilities didn’t invoke “vicarious liability.” In doing so, the court chose to further the policy of providing “a way of promoting safety without exposing contract managers to suits like this one,” rather than encourage construction managers to avoid taking on any responsibility for promoting job-site safety for fear of incurring liability.
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Construction Manager Liability: Part two

July 18, 2012 | Michael R. Smith

As discussed in my last post, general contractors and construction managers have very different roles in a construction project. General contractors are sometimes sued when their subcontractor’s employees are injured on the job, but that’s not as often the case for construction managers. In addition, the liability analysis is quite different for construction managers because, unlike general contractors, construction managers do not have overall responsibility to perform the construction and they generally only contract with project owners, not with other subcontractors. A recent Indiana Supreme Court opinion, (“Hunt Construction Group, Inc. v. Garrett“) (“Hunt“)sheds light on the analysis of construction manager liability.

The opinion concluded litigation which had arisen out an accident which occurred during the construction of the Lucas Oil Stadium. In Hunt, a subcontractor’s employee was injured and subsequently sued the construction manager (“Hunt”). The Hunt court based its analysis on Plan-Tec, Inc. v. Wiggins (“Plan-Tec“), the first reported case in Indiana where the employee of a subcontractor sued a construction manager. Indiana courts use Plan-Tec as a “template” to evaluate claims of negligence against construction managers for injuries suffered by subcontractors’ employees, and the central test of the template specifically says that “a construction manager owes a legal duty of care for job-site employee safety in two circumstances: (1) when such a duty is imposed upon the construction manager by a contract to which it is a party, or (2) when the construction manager assumes such a duty, either gratuitously or voluntarily.'” Thus, a court will determine whether a construction manager is liable for the employee’s injury based on the construction manager’s contracts and actions, and only one of these is necessary to prove liability.

Three things in Plan-Tec led the court to find no contractual liability for the construction manager: (1) The construction manager’s contract did not specify that the construction manager had any safety responsibilities, (2) the subcontractor’s contracts clearly indicated they had responsibility for project safety and the safety of their employees, and (3) the subcontractor’s contracts expressly disclaimed that the construction manager had any direct or indirect responsibility for project safety.

Unlike in Plan-Tec, in Hunt, the construction manager’s contract did impose some general safety-related responsibilities on the construction manager. For example, Hunt was responsible for approving contractors’ safety programs, monitoring compliance with safety regulations, performing inspections, and addressing safety violations. Hunt also had the ability to remove any employee or piece of equipment deemed unsafe. However, the court determined that none of the safety-related provisions imposed on Hunt a specific legal duty to or responsibility for the safety of all employees at the construction site. Instead, the contract included “clear language limiting [Hunt’s] liability” which persuaded the court that the construction manager did not have a legal duty of care to subcontractor’s employees for job-site safety. We will explore that specific contractual language which limited Hunt’s liability in the next post.

But even if construction managers are not liable because of their contracts, they can still, by their actions or conduct, assume “a legal duty for job-site employee safety.” In Plan-Tec, it was Plan-Tec’s assuming of new supervisory duties beyond those required by the initial construction documents and after the project had already begun which raised the issue of whether it had assumed by its actions such a legal duty of care. For example, Plan-Tec took on extra responsibility by appointing a safety director, initiating weekly safety meetings, directing that certain safety precautions be taken by the subcontractors, and daily inspecting the scaffolding (which scaffolding ultimately injured the employee in that case). However, in Hunt, the court affirmed that the Plan-Tec ruling does not mean that a construction manager must avoid all such responsibilities in order to avoid liability for workplace injuries. In fact, Hunt had equally undertaken each of the previously mentioned actions taken by Plan-Tec. The difference was that, in Hunt’s situation, none of these actions were beyond those required by the original construction documents, and (as discussed above) those documents limited Hunt’s liability. This simple fact indicated to the court that Hunt did not by its actions assume a legal duty for the employee’s safety. Because Hunt neither assumed a duty by its contracts nor its actions, Hunt prevailed.
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Construction Manager Liability: Part one of a three-part series

July 5, 2012 | Michael R. Smith

When it comes to occupational injuries, the construction industry is among the most dangerous. According to the Bureau of Labor Statistics, in 2010 there were more fatal occupational injuries in construction than in any other private industry sector. And when a worker is injured, it sometimes leads to a lawsuit.

In most cases, the workers’ compensation statue (in Indiana, Ind. Code 22-3) restricts the amount an injured worker can recover from his or her employer to the amount of workers’ compensation insurance, but it does not limit the amount the worker can recover from anyone else. See Ind. Code 22-3-2-13. For example, the workers’ compensation statute does not prohibit an employee of a construction subcontractor from recovering from the general contractor or a construction manager. It is not uncommon for general contractors to be sued when their subcontractor’s employees are injured on the job, and there are a number of reported cases in Indiana dealing with that type of claim. However, in the recent case of Hunt Construction Group, Inc. v. Garrett, the Indiana Supreme Court had an opportunity to address the liability of a construction manager. I’ll discuss that case in the next couple of postings, but first let’s look more closely at the difference between a general contractor and a construction manager.

Although the roles of construction managers and general contractors are sometimes confused, they are really very different. A general contractor has the obligation to the owner of a construction project to perform the work necessary to complete the project. In most cases, of course, a general contractor does not actually do all the work but rather subcontracts at least part of the work to one or more subcontractors (for example, to an electrical subcontractor or a mechanical subcontractor). In other words, the general contractor works for the owner, and the subcontractors work for the general contractor. The owner pays the general contractor for the entire cost of the project, and the general contractor pays the subcontractors out of the amount it receives from the owner. If a subcontractor makes a mistake, the general contractor is accountable to the owner for that mistake, just as if the general contractor made the mistake itself. Naturally, managing its subcontractors is an inherent part of a general contractor’s job, and the general contractor has a great deal of direct control over the subcontractors.

Sometimes, however, the owner of a project hires a construction manager to oversee the construction project and to coordinate the work of all the various contractors and subcontractors on the project. Unlike a general contractor, a construction manager is not responsible for actually building the project. The construction manager essentially acts as the owner’s on-the-site representative with responsibilities such as managing the budget, the schedule, and the contract documents; sending out bid requests and receiving bid submissions; approving subcontractors when they are hired; inspecting and approving the work; and more. There may also be a general contractor with responsibility for constructing the entire project, or the owner may contract directly with companies that would otherwise be subcontractors (e.g., electrical and mechanical subcontractors) without hiring a general contractor.

Either way, the construction contractors and subcontractors do not actually work for the construction manager; instead, they work either for the general contractor or directly for the owner. The owner does not pay the entire construction price to the construction manager; the construction manager receives only a fee, and the owner pays the construction contractors and subcontractors either directly or through the general contractor, if there is one. The only authority the construction manager has to do anything related the construction is in its capacity as the owner’s agent.

In Hunt Construction Group, Inc. v. Garrett (“Hunt“), an employee of a subcontractor, Baker Construction Company, was injured and sued the construction manager, Hunt, claiming that Hunt was vicariously liable for Baker’s actions and that Hunt negligently breached its own duty of care for job-site safety. In the next entry, we’ll see how that case came out, and in the third entry we’ll look at things a construction manager can do to minimize its exposure to liability for injuries to construction workers.
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Always read agreements before signing them

March 10, 2011 | Michael R. Smith

Most people understand that signing a Krad v. BP Products North America, BP wanted to build a gas station on property owned by Dr. Krad. However, BP need only a portion of Dr. Krad’s property, not all of it. With the assistance of a real estate broker, BP approached Dr. Krad with a proposal to lease part of Dr. Krad’s property, and the discussions led to a letter of intent that described the approximate size of the parcel that BP would lease. Eventually, BP gave Dr. Krad a proposed lease agreement, and Dr. Krad signed it after a review by his attorney. Although a preliminary survey had been completed, the lease agreement did not contain a legal description of the leased property. Instead, it stated that another survey would be completed within sixty days after the lease agreement was signed, and the final survey report would be attached to it as an exhibit, subject to approval by both BP and Dr. Krad. In other words, the lease agreement would not be complete until Dr. Krad signed the final survey report.

After the lease agreement was signed, BP decided it needed more land than it had anticipated and ordered a final survey of a larger piece of Dr. Krad’s property, apparently without discussing it with Dr. Krad. The final survey report, which contained a legal description of the larger piece of property, was delivered by the broker to Dr. Krad at his office. The broker interrupted Dr. Krad while he was with a patient and asked him to sign the survey report so it could be recorded. Dr. Krad signed the report without reading it and without telling his attorney or asking his attorney to review the report, assuming that the report described the piece of property that was originally discussed.

Dr. Krad knew something was amiss when the construction equipment arrived and started site preparation outside the boundaries of the parcel he assumed he had leased to BP. Eventually, Dr. Krad sued BP, asking for additional compensation for the difference between the size of the parcel he thought he had leased and the size of the property actually described in the final survey report.

Dr. Krad lost at both the trial court level and in the Indiana Court of Appeals. As the Court of Appeals wrote,

Under Indiana law, a person is presumed to understand what he signs and cannot be released from a contract due to his failure to read it. . . . Mere neglect will not relieve a party of the terms of an agreement in the absence of some excuse for the neglect, such as fraud, trickery, misrepresentation, or breach of trust or confidence.

Although the court acknowledged that the final survey report was given to Dr. Krad “somewhat abruptly,” it found that neither BP nor the broker did anything fraudulent in getting Dr. Krad to sign it. He was free to accept it or to reject it. In addtion, the court pointed out that, without a legal description, the lease agreement was an unenforceable agreement to agree, and, if Dr. Krad had refused to sign the survey report, he could have walked away from the deal or he could have pressed BP for more money.
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