Tag Archives: Contracts

Owning the Fruit of our Labors

Increasingly, companies are requiring their employees to assign to their employers any inventions or ideas they may come up with during, or after, the course of their employment. This Op-Ed in the New York Times discusses an interesting study the author made examining this question: “How does a reality in which we own so little of what we create affect our drive to make something new and original?” The short answer: we are less focused on solving problems and more prone to making errors when we do not own the fruit of our labors.

Risks of Electronic Contracting

How easy is it to enter into a multi-million dollar (or more) contract via e-mail?  As easy as clicking “send” on an e-mail, it would seem.

Under the Texas Uniform Electronic Transactions Act (UETA), parties can enter into a legally binding agreement by e-mail or other electronic communications, even for matters that traditionally were required to be in writing, such as agreements to purchase real property, including oil and gas interests.  Under UETA, if the parties intend to enter into an agreement electronically, an otherwise enforceable agreement will not be unenforceable solely because it was entered into electronically.

A recent court case, 2001 Trinity Fund, LLC v. Carrizo Oil & Gas, Inc., which was decided by a Texas state appeals court in Houston, illustrates the danger of negotiating the terms of a business transaction over e-mail.  In that case, the trial court analyzed a series of e-mail messages between two oil and gas companies and concluded that the e-mails collectively constituted a binding legal agreement to amend and revive their existing participation agreement.  The e-mails including statements such as:

• “I agree in principle, but need to have this interest flow directly back to me.”

• “[i]f you are in agreement in principle, then I’m assuming we can work out the mechanics.”

• “That will work.  I will call before the day is over and give you an exact time.”

• “Yes, has been my final answer.  I will give you the final date ASAP.”

• “As I told you before, I intend on being involved in the drilling program.”

The trial court initially awarded one of the parties over $10 million in damages for the other party’s breach of the alleged electronic agreement. That trial court verdict was later overturned on appeal when the appellate court reached the opposite conclusion, finding that the evidence was legally insufficient to support the jury’s conclusion that an electronic agreement existed.

Nonetheless, the takeaway is obvious.  When in discussing a business transaction via e-mail or other electronic means, one should make sure it is crystal clear whether or not the party desires or intends to enter into an electronic agreement, or if the party does NOT have such desire or intent.  Otherwise, courts may be deciding whether or not an electronic agreement exists, and you may not like its decision.

Getting “Hometowned”: U.S. Supreme Court Enforces Forum Selection Change

Forum selection clauses in contracts are important terms which govern where a certain dispute will be litigated.  For example, parties to a contract which provides for performance in one state may agree that all disputes will be litigated in another state.  Forum selection clauses are not to be confused with choice of law provisions in contracts, which dictate which state’s law will apply. State and federal courts, as well as state legislatures have provided a patchwork of decisions and rules which have affected the enforceability of these forum selection clauses, which can lead to uncertainty when negotiating contracts, as well as litigation costs regarding disputes over the locale where the lawsuit will be.

The United States Supreme Court clarified forum selection rules in a recent decision, the Atlantic Marine case. In that case, a general contractor based in Virginia was hired to build a child development center in Fort Hood, Texas. The general contractor contracted with a Texas subcontractor, and that contract provided that any dispute related to the subcontract must be brought in Virginia. The subcontractor subsequently brought a claim for payment in Texas Federal Court.  The subcontractor, who opposed the forum selection clause, successfully persuaded the trial judge that forcing its small company to litigate this dispute in Virginia, despite that the project was in Texas, would inhibit its ability to prosecute its case.  For example, the subcontractor was concerned about its inability to compel necessary witnesses as well as the expense of litigation in Virginia.  The Supreme Court’s reversed the trial court, holding that the increased expense and convenience of the parties was not sufficient excuse to disregard the forum selection clause that required the case to be brought in Virginia.

The Supreme Court also pre-emptively negated arguments about unfairness to companies with less bargaining power by noting that the negotiation of the forum selection cause “may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place.”  The Court concluded that the interest of justice is served by holding parties to their bargain. In fact, the only way to defeat a forum selection clause based on this recent ruling, is if the trial court finds that there are extraordinary circumstances unrelated to the convenience of the parties.  The Court does not give examples of what those circumstances may be.

When contracting, companies should be cognizant of the issues that may arise by agreeing to litigate outside of the company’s “home” state, including such considerations as increased expenses. Based on this recent ruling by the Supreme Court, it will be much more difficult to overcome a forum selection clause that is unfavorable if you end up litigating in Federal Court.

The Texas Supreme Court Narrowed the Scope of the Contractual Liability Exclusion

In a unanimous decision, the Texas Supreme Court recently sided with the contractor in an insurance coverage dispute involving allegations of faulty construction. In Ewing Construction Company, Inc. v. Amerisure Insurance Company, the Texas Supreme Court limited the scope of an insurance policy exclusion for liabilities that contractors assume through contracts.

Commercial General Liability (CGL) insurance policies often include a contractual liability exclusion, which is an exclusion from insurance coverage when the allegations in a lawsuit arise from duties that are undertaken in contracts other than duties that the insured would have had in the absence of the contract or agreement. The question before the Supreme Court was whether a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assumes liability” for damages arising out of the contractor’s defective work so as to trigger the contractual liability exclusion.

The coverage dispute between Ewing and Amerisure arose when a school district sued Ewing alleging that Ewing’s construction of tennis courts was defective. In its contract, Ewing agreed that it would build the tennis courts in a “good and workmanlike manner.” Relying on this provision in the contract, Amerisure argued that the contractual liability exclusion in its policy barred coverage for a lawsuit against Ewing over the defectively built tennis courts.

The Texas Supreme Court ruled that the contractual liability exclusion is not triggered by faulty construction suits when a general contractor agrees in a contract to perform construction work in a “good and workmanlike manner.” The Court stressed that the contractual liability exclusion only applies when construction companies assume liabilities in a contract that they would not have had under common law. Based on the Ewing opinion, the contractor’s agreement to carry out work in a good and workmanlike manner does not create any additional liabilities by contract that would trigger the contractual liability exclusion.

The Ewing decision clarified the Texas Supreme Court’s holding in Gilbert Texas Construction LP v. Underwriters at Lloyd’s London, a 2010 opinion that interpreted similar contractual liability exclusion. In its ruling, the Court distinguished Gilbert on the basis that Gilbert involved unusual circumstances because the contractor there had assumed liability through its contract that was greater than it would have had under general law.

The Ewing and Gilbert decisions exemplify the importance of thoughtfully drafted contract provisions and will impact the way contacts are written in Texas for both contractors and owners.

Cantey Hanger attorneys regularly review construction contracts for contractors, design professionals, and owners, either at the beginning of a construction project or in litigation that sometimes results. For more information, please contact Stephanie Harrison at 817-877-2838 or sharrison@canteyhanger.com.