Six Key Questions When Settling and Releasing Legal Claims

Louise C. Stoupe and Keiko Rose | Morrison & Foerster

Most disputes settle, so it is important for legal teams to be aware of the key issues involved in drafting a settlement agreement. This is particularly true now, as companies around the world grapple with the COVID-19 pandemic and the resulting strain on supply chains and business relationships.

When businesses decide to resolve issues amicably, the settlement agreement should accurately reflect the compromise that the parties have reached. Too often, the focus is only on the amount to be paid in exchange for the release of claims, but there are other, equally important considerations that need to be addressed.

Below are six questions that business and in-house legal teams should ask themselves when pursuing settlement negotiations and finalizing settlement and release agreements.

1. Do you want a broad or narrow release of claims?

Parties should carefully consider which claims they want to release as part of a settlement agreement and whether the language in the settlement agreement captures those precise claims. Releases may cover different categories of claims, including:

  • Claims asserted in pending litigation or arbitration;
  • Claims arising out of or related to a particular agreement;
  • Claims arising out of or related to a particular subject matter or event; or
  • Claims arising out of or related to the relationship between the parties.

In deciding which option is best for you, consider whether you want to foreclose all potential litigation (which is attractive if you would be the defendant in any future litigation) or whether you may want to retain certain claims to assert in the future.

It is also important to clarify in the settlement agreement whether the release of claims is mutual. For example, if only one party has asserted claims in pending litigation, you may want the settlement agreement to release not only claims asserted in the litigation but also any claims that the defendant may have related to the same underlying events.

2. Do you want to release unknown claims?

Put differently, do you intend to release claims that are not yet known to exist but may later be discovered? If so, then the settlement agreement should explicitly release all known and unknown claims. A general release of claims is not always sufficient to release claims that were unknown at the time of settlement.

For example, California Civil Code Section 1542 provides that a general release of claims does not extend to claims that the releasing party “does not know or suspect to exist” at the time of the release and that, if known, “would have materially affected” the settlement. If your settlement agreement is governed by California law or has another nexus to California, a provision stating that the parties agree to waive Section 1542 must be included in order to release unknown claims.

3. Who should be covered by the settlement agreement?

Normally, the parties to a settlement agreement would be the parties to the contracts at issue or the parties to the pending litigation or arbitration. But should the agreement cover anyone else? Consider whether you would benefit from adding a provision stating that entities with a legal relationship to the parties also agree to release claims. For example, you may want to ensure that the release covers a party’s “parent, subsidiaries, assignees, transferees, representatives, principals, agents, shareholders officers or directors, and all persons acting by, through, under, or in concert with them.” You may also want to include a release covering downstream customers in certain circumstances.

If you are the defendant, then you will want to ensure that all of the opposing party’s related entities are covered by the release of claims to broaden the reach of the agreement. However, even if you are in the position to assert claims, you may be willing to include such a provision if none of your related entities would have a viable claim in any event.

4. Who should bear fees and costs?

Parties to a settlement agreement often agree to bear their own legal fees, but are there any particular costs the parties should share?

5. How and when will the settlement payment occur?

The settlement agreement should be clear as to the date of any settlement payment, any conditions precedent to payment, and the means of transferring such payment. Additional considerations include whether you want the ability to assign the right to receive the payment to affiliates and, if so, whether that assignment can occur with or without the consent of the other party.

6. Who is allowed to know about the settlement agreement?

The settlement agreement will include a provision explaining confidentiality obligations, and parties typically agree that the terms of the settlement agreement must remain confidential. But consider whether you want to be able to share the existence of the settlement agreement with anyone besides the parties to the agreement. For example, you may want your customers or certain business partners to be aware of the settlement. Confidentiality provisions also normally allow disclosures to the extent required by law, regulation, or court order.

How to Prepare for Potential Construction Disputes Resulting From COVID-19

Helga A. Zauner and Sonia Desai | Construction Executive

Every industry has been affected by the COVID-19 pandemic, and construction is no exception. While construction work was deemed essential in some places, it has been limited only to pandemic-related projects in others.

In the current climate, construction companies face a myriad new challenges, including concerns about health and safety, delays resulting from employee illnesses, supply chain disruptions and increased prices for materials, as well as contract delays or cancellations by concerned contract owners. Contractors must keep their employees safe and institute what could be costly best-practice measures, while facing potential claims from employees if they get sick due to a company’s perceived lack of response to the dangers of the coronavirus.

Stakeholders in the construction process need to prepare for potential disputes and understand their rights and responsibilities. This includes understanding applicable clauses in construction contracts and subcontractor agreements as well as business interruption clauses and other provisions in insurance contracts. Stakeholders may need to seek professional counsel to help them understand their rights and responsibilities in potential disputes.

Here are some steps to take in preparing for potential disputes arising from the effects of COVID-19:

KEEP RECORDS IN ORDER

Maintaining good business and financial records will be vital in determining costs incurred by builders and potential reasons behind delays or cost overruns. This includes all contracts, signed Authorization for Expenditure (AFE) forms and change orders (with supporting budgets, estimates and documentation), all invoices with supporting backup, such as material invoices and time sheets, as well as internal accounting documents such as percentage of completion schedules. Project owners must keep good records of payments to contractors and any direct payments to subcontractors. Any communications, including memoranda, letters and emails related to a potential claim, should also be preserved. Contractors also need to file and document notice of delay with the project owners in a timely manner.

DETERMINE WHETHER YOU HAVE A CLAIM OR WHETHER A CLAIM MAY BE FILED AGAINST YOU

Owners may have the option of filing a delay claim. Their contract will specify whether liquidated damages are applicable or if they have a basis for a claim. A fundamental issue that will be resolved in COVID-19 claims is whether construction delays fall under a force majeure clause, meaning the construction delays were excusable. The nature and responsibility of delays resulting from the disruption of the supply chain also will need to be assessed.

Contractors may have the right to file breach-of-contract claims if it was the project owner who delayed or cancelled a project, outside of the provisions in their contract.

In addition, employees who are getting sick are filing claims against employers for lack of due care to protect them from the virus.

CALCULATE DAMAGES

The calculation of lost profit damages derived from COVID-19–related delays will be particularly complex. A classical shifting-the-curve or profits-delay approach will be insufficient. Unrelated market factors will need to be considered, such as the general downturn in the economy, industry-specific effects and even the trend in energy prices. Delays caused by different actors may need to be evaluated separately.

If project owners cancel or delay construction projects, contractors may also be able to claim losses. A lost profits calculation in this case would require a detailed analysis of the lost revenues, the cost of mitigating efforts and an assessment of whether any other factors are directly causing the contractor’s losses. It will be important to determine whether revenues are truly lost or merely delayed.

In addition, if a company benefited or may benefit from the Paycheck Protection Program (PPP) forgiveness provisions in the CARES Act, it could affect the calculation of their lost profits. The following example shows the lost profits calculation for a company that suffered a two-month delay due to COVID-19. Cases I and II show the lost profits calculation without and with the PPP loan forgiveness program, respectively. Case II assumes that the company received forgivable PPP loans, which it used to pay eligible rent and payroll costs. The forgiven loan proceeds must be used to offset the costs, or alternatively, recognized as income.

The IRS has disallowed the deduction of expenses paid using PPP loans for income tax purposes. However, Congress has alluded to the possibility of revising this rule. In any calculation of lost profits, the impact of the non-deductibility of expenses should be considered.

Note that PPP loans may or may not reduce a company’s lost profits, as they are designed to improve liquidity, rather than mitigate losses. For example, if a company retained non-essential employees to maximize forgiveness of its PPP loan, it may incur higher expenses than if the company had not taken advantage of the PPP loan.

Advantages of Arbitration for Resolving Construction Disputes in Light of COVID-19

Emily Hermreck | Nuts & Bolts

The COVID-19 pandemic has had significant impacts on the U.S. state and federal court systems and has delayed the progression of cases awaiting trial. While many courts have remained “open,” they have considerably modified operations and procedures to ensure the safety of court personnel, attorneys, and jurors.

Perhaps the most obvious modification has been the cancelation of in-person hearings and jury trials. For example, Missouri courts responded to COVID-19 by initially canceling all civil jury trials, with limited exceptions. Jury trials remain canceled in many Missouri circuits through at least July, while some circuit courts have announced they do not plan to resume civil jury trials until September or later. Likewise, in the U.S. District Court for the Eastern District of Missouri, a recent order extended the limitation on in-person proceedings and jury trials through Sept. 7, 2020, and has even extended the court’s Speedy Trial Act waiver in the interest of protecting the health and safety of all parties, the court, and the public (who would be called upon to serve as jurors).

All jury trials that were slated to begin before the end of the year before the Cook County Circuit Court in Illinois have been canceled, and it is unknown when the court will resume jury trials in 2021. Assuming trials will be rescheduled on a “first-come, first-served” basis, it could be years before a new case is able to be tried before a jury.

Advantages of Arbitration

Arbitration, therefore, is perhaps a more appealing option for those who wish to have their construction dispute heard and resolved sooner. Arbitrations, such as those before the American Arbitration Association (AAA), are a form of private dispute resolution separate and apart from the courts, and thus do not wait on other cases to be tried before they can be heard. Arbitrations are typically heard by one to three arbitrators selected by the parties. They do not require the seating of a jury, and they can often be heard and resolved within a year or less from the date an arbitration demand is filed. The schedule and hearing dates for arbitrations are generally “set” by the parties, giving them greater certitude as to when they can expect the dispute to be heard, as opposed to a jury trial where the trial date is more amorphous and subject to change due to outside forces such as COVID-19. Although the arbitral process has also been affected by the pandemic, arbitration naturally allows for more flexibility. In many cases, providers of arbitration services like the AAA are able to proceed, and have been proceeding, with virtual hearings via videoconference or teleconference.

In sum, because parties are allotted a fair amount of control over the timing and process of arbitration, and because arbitration is inherently more versatile, it is highly likely that even post-COVID-19 disputes will be heard and resolved sooner by arbitration than by jury trial. Therefore, contractors, owners, and design professionals seeking a quicker resolution of a dispute – and wishing to avoid the wait lines at the courthouse – may want to consider including a mandatory arbitration provision in their contracts.

When Parties May Agree to Arbitration

Although it is common to include an arbitration provision at the time a contract is executed, a mandatory arbitration provision may be added to a contract at any time during the life of the contract. To amend an existing contract to include a mandatory arbitration provision, some re-negotiation may be required, as the other parties to the contract must assent to the revised and updated contract (i.e., the contract cannot be modified unilaterally).

It should be noted that a dispute does not need to exist for this to be an option. Parties to a contract can simply recognize that although no dispute currently exists, if a dispute were to arise, it could take years to resolve in today’s protracted trial setting, and thus arbitration would be a more tenable option for all those involved. To aim for a speedier resolution of any potential disputes, parties can therefore proactively amend their existing contracts to include arbitration provisions. Even if the existing contract is never revised to include a mandatory arbitration provision, a dispute can still be arbitrated so long as all the parties agree. Contractors, owners, or design professionals may also wish to consider including a mandatory arbitration provision in all future contracts, knowing that in today’s world litigating a dispute could be a lengthy process.

Important Considerations When Drafting the Contract in Light of COVID-19

It may be advisable for parties to proactively address certain COVID-19 related issues in their arbitration agreements now, as opposed to waiting until after arbitrators have been selected. Such issues include the parties’ agreeability (or their objection) to virtual or hybrid hearings (i.e., hearings where some case participants appear in-person and others appear remotely, either via videoconference or teleconference) as well as the location, means, and methods for safely and effectively conducting said hearings.

Parties should address in their arbitration agreement their agreeability to in-person, virtual, and/or hybrid hearings, and they should state the agreed-upon “location” of the arbitration – or means and methods of conducting the arbitration, as the case may be – for each circumstance. For parties that want all efforts to be made to have an in-person hearing, for example, the AAA has arranged for alternate hearing venues that meet COVID-19 safety protocols. The parties could therefore state in their contract that any in-person hearing shall be held at a physical location with the capability for participants to be socially distanced.

For parties that are agreeable to a hybrid hearing, they can use the AAA’s alternate hearing venues in addition to the AAA’s video and audio technology intended to support hybrid hearings. Of course, parties may state in their contracts their agreeability to or preference for a completely virtual hearing, in which case it is within the parties’ discretion which videoconference platform they will use. The parties may therefore wish to state in the contract which videoconference or teleconference platform (such as Zoom, for example) will be used in the case of a virtual hearing.

There are additional important considerations the parties can address pre-hearing, either in their contracts or in a pre-hearing order, regarding the particulars of conducting a hybrid or virtual hearing (or virtual depositions, if any). For example, parties may come to agreement regarding the use of a court reporter during their virtual hearing, whether the videoconference platform will record the audio and/or video of the hearing and serve as the official record of the hearing, how witnesses shall give their virtual testimony, how exhibits will be entered and utilized during the hearing, and more. A pre-hearing order can resolve the technical details, such as whether and how the parties should test the videoconference platform before the day of the hearing, and whether a technician will be present with the parties to assist with the videoconference platform during the hearing.

Champagne Wishes and Caviar Dreams. Unlicensed Contractor Takes the Cake

Garret Murai | California Construction Law Blog

Before the Kardashians, before Empire, before Crazy Rich Asians there was Lifestyles of the Rich and Famous with Robin Leach. The next case, Moore v. Teed, Case No. A153523 (April 24, 2020), 1st District Court of Appeals, is about the unfulfilled wishes and dashed dreams of the $13 million dollar “fixer upper.”

Moore v. Teed

The $13 Million Dollar “Fixer Upper”

Justin Moore just wanted to buy a house in San Francisco. But he couldn’t afford one in the neighborhoods he preferred. But in 2011, luck struck, when Moore met Richard Teed, a real estate agent with “over 25 years of experience as a building contractor,” “an extensive background in historic restorations” and a “deep understanding of quality construction.” Teed told Moore that he could locate a “lower-priced fixer-upper in a choice neighborhood and then renovate it.” Moore was sold.

In May 2011, following Teed’s advice, Moore, with significant financial help from his father, bought a 1912 “fixer-upper” in the Pacific Heights neighborhood of San Francisco for $4.8 million. Yes, that’s a four, followed by a period, followed by an eight . . . million. According to Teed, for a mere $900,000, Teed and his team of construction professionals could deliver Moore the house of his dreams at a fraction of the cost it would have otherwise cost Moore.

From there, Moore, at the recommendation of Teed, hired architect Gregg De Meza to design the renovations as well as two engineering firms recommended by Teed. Although Moore signed contracts with De Meza and the engineering firms, Moore did not sign a contract with Teed, who told Moore that he “didn’t need contracts; that this is what he did. This is how he built his reputation.”

When the project went out to bid, bids came in from $1.6 million to $2.4 million. Teed told Moore that he would work with De Meza to get the project back within budget. Thereafter, Teed’s team of contractors gutted large parts of the house, excavated the lot and built most of the foundation. The foundation, however, was defective. It lacked waterproofing despite the property’s high water table. Teed was starting to sink.

After Moore because are of the defects he halted all work on the project and terminated De Meza. Thereafter, Moore’s father engaged consultants to examine the foundation. They concluded, despite strong resistance from Teed, that the foundation had to be torn out and replaced. By then, Moore had paid approximately $265,000 of the $900,000 of the promised costs of the renovations. Oh yeah, Teed also wasn’t a licensed contractor.

The Lawsuit

In 2013, Moore filed suit against Teed and others for breach of contract, intentional misrepresentation, negligent misrepresentation, negligence, breach of fiduciary duties, negligence per se, violation of Business and Professions Code section 17200, professional negligence, and recover against license bonds. While quite a laundry of list of claims, interestingly, they didn’t sue Teed under Business and Professions Code section 7031.

Moore later hired a new architect and general contractor. The defective foundation was demolished and replaced, and while Moore and his father expanded the renovation beyond what Teed had originally proposed, by the time the house was completed renovation costs had reached approximately $9 million. Yes, 9 million, for a total out of pocket cost of nearly $13 million for this 1912 “fixer upper.”

At trial, Moore’ expert witness testified that the cost to complete Teed’s proposed renovations were much higher because Teed’s estimate had been unrealistically low and construction costs had gone up. According to Moore’s expert witness, De Mesa’s design would have cost $4,477,249 to build in 2011-2012 and the foundation alone should have been priced at $620,000 rather than $200,000.

In closing argument, Moore’s counsel told the jury: “The first category of damage that Mr. Moore is entitled to from Mr. Teed is the difference between the renovation’s promised cost – that’s the $900,000 for the construction – and the cost calculated to do that work in 2011-2012.” This amount, according to Moore’s counsel was $3,842,160, plus an additional $693,000 for increased costs due to delays in the renovation work.

Teed’s counsel argued that there was never a promise for a $900,00 remodel and that the damages alleged by Moore did “not represent any loss that was actually sustained by the plaintiff in the real world. What it really is, is free money that is fabricated out of thin air, and we don’t think that you should award any.”

The Jury Verdict

The jury found for Moore on all claims except for Moore’s breach of contract claim. It awarded Moore the difference between the renovation’s promised costs and the actual costs to do the same work using 2011-2012 rates. The jury also awarded Moore $104,498 in increased costs due to delay, out-of-pocket costs of $822,904 to replace the foundation, and $106,920 for loss of use of the property.

Following the jury verdict, the trial court awarded Moore attorneys’ fees of $2,114,434, based on the jury’s finding that Teed had violated Business and Professions Code Section 7160, and costs of $104,498. After deducting for offsets based on Moore’s settlements with other defendants, judgment was entered against Teed for $3,153,254. Ouch.

Teed appealed.

The Appeal

On appeal, Teed attacked the judgment on several grounds. First, Teed argued that the jury could not award both the difference between the promised renovation costs of $900,000 and the actual costs to do the same work in 2011-2012 (also known as benefit-of-the-bargain damages) and the cost of to replace the foundation (also known as out-of-pocket damages). The Court of Appeals disagreed.

The Court of Appeals explained that “[t]here are two measures of damages for fraud: out-of-pocket and benefit of the bargain.” “The ‘out-of-pocket’ measure of damages,” explained the Court, “is directed to restoring the plaintiff to the financial position enjoyed by him prior to the fraudulent transaction, and thus awards the difference in actual value at the time of the transaction between what the plaintiff gave and what he received.”

“The ‘benefit-of-the-bargain’ measure, on the other hand,” explained the Court of Appeals, “is concerned with satisfying the expectancy interests of the defrauded plaintiff by putting him in the position he would have enjoyed if the false representation relied upon had been true; it awards the difference in value between what the plaintiff actually received and what he was fraudulently led to believe he would receive.”

Noting that there was a split of authority as to whether benefit-of-the-bargain damages are recoverable for fraud claims involving real property transactions, even when the fraud is perpetrated by a fiduciary, the Court of Appeals held that “the majority of courts have concluded that benefit-of-the-bargain damages are recoverable in fraud actions where a fiduciary induces an individual to purchase, sell, or exchange real property to their detriment.”

Siding with the majority of courts, the Court of Appeals held that the jury could award benefit-of-the-bargain damages, and would not disturb the jury’s finding that the only way to fully compensate Moore for the detriment caused by Teed’s misrepresentations that he and his team of experienced contractors could deliver a quality remodel for only $900,000, was to award Moore the additional cost necessary to accomplish the promised renovations. Further, held the Court, because Teed had not requested a special verdict form segregating the elements of damages, “we cannot determine from the record whether the jury awarded damages for the defective foundation as part of its $900,000 benefit-of-the-bargain award.” Thus, held the Court, Teed had forfeited this argument on appeal.

Finally, Teed argued that attorney’s fees should not have been awarded under Business and Professions Code Section 7160 because the jury had found in his favor on Moore’s breach of contract claim. Section 7160, which is part of the Contractors State License Law, provides:

Any person who is induced to contract for a work of improvement, including but not limited to a home improvement, in reliance on false or fraudulent representations or false statements knowingly made, may sue and recover from such contractor or solicitor a penalty of five hundred dollars ($500), plus reasonable attorney’s fees, in addition to any damages sustained by him by reason of such statements or representations made by the contractor or solicitor.

Noting that “statutory provisions regulating contractors are to be broadly construed,” the Court of Appeals held that whether or not the jury believed there to have been a contract between Moore and Teed  was irrelevant, because “section 7160 permits an attorney fee award against a defendant who fraudulently induces a person to enter into home improvement contracts with his confederates.” Further, explained the Court, Business and Professions Code section 7026 broadly defines the term “contractor” to include anyone who “offers to undertake” or “purports to have the capacity to undertake” or who undertakes work requiring a contractor’s license “by or through others.” Thus, held the Court, Teed fell within the definition of a “contractor” as used in Business and Professions Code Section 7160.

Conclusion

To me, Moore is an interesting case in two respects. First, it involves a situation I’ve seen before, where a professional in one line of business (e.g., architecture, engineering, interior design, real estate brokers and salespersons), as a “value add” for his or her client, sometimes legitimately and sometimes not, performs work requiring a contractor’s license without realizing the breadth of in which Business and Professions Code Section 7026 defines the term “contractor.” In other words, you don’t need to be out swinging hammers to be deemed a “contractor,” and, thereby, be required to hold a contractor’s license under Section 7026.

Second, it’s the first time I’ve run across Business and Professions Code Section 7160 in a case. While I think a bit more research on my end is required, it would appear that Section 7160 might be a way to recover attorneys’ fees against a party even if the contract does not contain an attorneys’ fee provision (or there is no contract, as was the case in Moore), since one could argue in a case against an unlicensed contractor that he or she was “induced” to enter into the contract thinking that the person was licensed to perform the work agreed to. It certainly seems to be the case.

Think Twice Before Hedging a Position or Defense on a Speculative Event or Occurrence

David Adelstein | Florida Construction Legal Updates

Sometimes, hedging a position on a potential occurrence is not prudent.  Stated differently, hedging a position on a contingent event is not the right course of action.  The reason being is that a potential occurrence or contingent event is SPECULATIVE.   The occurrence or event may not take place and, even if it does take place, the impact is unknown.

An example of hedging a defense on such a potential occurrence or contingent event can be found in a construction dispute involving a federal project out of the Eastern District of Virginia,  U.S. f/u/b/o Champco, Inc. v. Arch Insurance Co., 2020 WL 1644565 (E.D.Va. 2020). In this case, the prime contractor hired a subcontractor to perform electrical work, under one subcontract, and install a security system, under a separate subcontract.  The subcontractor claimed it was owed money under the two subcontracts and instituted a lawsuit against the prime contractor’s Miller Act payment bond.  The prime contractor had issued the subcontractor an approximate $71,000 back-charge for delays.  While the subcontractor did not accept the back-charge, it moved for summary judgment claiming that the liability for the back-charge can be resolved at trial as there is still over $300,000 in contract balance that should be paid to it.  The prime contractor countered that the delays caused by the subcontractor could be greater than $71,000 based on a negative evaluation in the Contractor Performance Assessment Reporting System (“CPARS”).   A negative CPARS rating by the federal government due to the delays caused by the subcontractor would result in a (potential) loss of business with the federal government (i.e., lost profit) to the prime contractor.   The main problem for the prime contractor:  a negative CPARs rating was entirely speculative as there had not been a negative CPARs rating and, even if there was, the impact a negative rating would have on the prime contractor’s future business with the federal government was unknown.   To this point, the district court stated:

In this case, [prime contractor’s] claim for damages is wholly speculative.  [Prime contractor] has not produced any evidence that its stated condition precedent—a negative CPARS rating—will actually occur and will have a negative impact on its future federal contracting endeavors. Specifically, [prime contractor] has not identified any facts that indicate that it will be subject to a negative CPARS rating or any indication of the Navy’s dissatisfaction with its work as the prime contractor on the Project… Further, a CPARS rating is only one aspect taken into consideration when federal contracts are awarded.  In sum, there is no evidence of the following: (1) a negative CPARS rating issued to [prime contractor]; (2) [prime contractor’s] hypothetical negative rating will be the result of the delay [prime contractor] alleges was caused by [subcontractor]; or (3) [prime contractor’s] hypothetical negative CPARS rating will result in future lost profits.

U.S. f/u/b/o Champco, Inc., supra, at *2 (internal citation omitted).

The prime contractor hedged its defense on the potentiality that it would receive a negative CPARs rating and, if it did, it would lose business with the federal government.  Based on this, the prime contractor decided to withhold more than $300,000 in contract balance over and above the $71,000 in delay damages it could prove.  The district court saw right through this argument by finding it wholly speculative and granting summary judgment in favor of the subcontractor for the subcontract balance over and above the $71,000 that the prime contractor did not have an objective basis to withhold.