Oregon Court of Appeals: Party who claims no contract existed can't recover attorney fees

Contracts often provide for an award of attorney fees to one of the parties in the event of litigation relating to the contract.  Under Oregon statutory law, a prevailing party in such a lawsuit is entitled to recover its attorney fees even if "the party prevails by reason of a claim or defense asserting that the contract is . . . void or unenforceable."  ORS 20.083. 

The Oregon Court of Appeals addressed last week whether this statute applies when the prevailing party convinces the court that the contract was never finalized.  In Dess Properties, LLC v. Sheridan Truck & Heavy Equipment, LLC, the parties negotiated a contract to sell real property.  Plaintiff later sued to enforce the contract, but defendant succeeded in arguing that the parties did not complete the deal.  Defendant sought to recover its attorney fees under ORS 20.083, claiming that a never-finalized contract is the same as a "void" contract.  The court refused to award fees, holding that the phrase "void contract" is a legal term of art meaning an agreement "actually entered into [but] unenforceable" due to failure to comply with some other legal requirement.  In this case, the contract was nonexistent rather than void, and the prevailing party was not entitled to recover fees.

Oregon Court of Appeals OKs contract claim despite delayed business registration

Under Oregon statutory law, at 648.135(1), a person operating under an assumed business name cannot file suit on behalf of that business unless the assumed name is registered with the state.  The Oregon Court of Appeals held last week that, even if a party lacked standing to sue because its business name was unregistered, its filing of a registration while the lawsuit is pending can cure the defect.

In Pacific Coast Recovery Service, Inc. v. Janice Jean Johnston, a collection agency appealed from a judgment of dismissal, arguing that the trial court erred in holding that the collection agency lacked standing to maintain an action for breach of contract.  The trial court had determined that, because the collection agency's assignor -- the business that had retained the agency to collect the debt -- had not registered its assumed business name under ORS 648.007 at the time the action was filed, the collection agency was precluded from pursuing its lawsuit. 

In reversing the trial court, the Court of Appeals held that, because the collection agency's assignor had registered by the time the trial court ruled on the motion to dismiss, the asserted lack of standing had been "cured" before the trial court granted the motion to dismiss.  The statutory "cure" will not, however, help plaintiffs where the statute of limitations has expired before registration of the assumed business name.  In those circumstances, according to the Court of Appeals, the action will be barred.

You've gotta pay to play, says the Washington Court of Appeals

In a sharply-worded opinion, the Washington Court of Appeals yesterday reiterated some bedrock principles governing contract formation.  In Granton v. State Lottery Commission, a pro se plaintiff claimed that he was prevented from purchasing what he believed would have been a winning lottery ticket for a "Mega Millions" drawing, due to a malfunctioning ticket distribution machine in a gas station convenience store.  He asserted that the "play slip" he handed to the clerk with his chosen lottery numbers matched the winning numbers later drawn; accordingly, despite the fact that the faulty machine prevented him from actually paying for and receiving an official lottery ticket, he sought the jackpot.

Not a chance, said the Court -- literally.  The Court noted that, because the ticket sale was frustrated, plaintiff did not have a valid ticket and was unable to provide the required consideration (the ticket price) necessary to accept the Lottery Commission's offer of a chance to win a prize.  Therefore, no contract was formed.  The plaintiff was lucky nonetheless:  the Court, in an exercise of merciful discretion, decided not to impose monetary sanctions on the plaintiff for having filed a frivolous lawsuit.

Ater Wynne scores trial court victory in commercial lease dispute

Last Friday, Ater Wynne trial lawyer Steve Blackhurst obtained a jury verdict in favor of telecommunications provider Verizon, following a two-week trial in Grants Pass.  At issue was the interpretation of a lease associated with Verizon's West Coast fiber optic system.  By a vote of 12-0, the jury denied the landlord's effort to terminate the lease. 

Oregon Supreme Court enforces a letter of intent, but limits damages

The Oregon Supreme Court last week held that an "agreement to agree' can be enforceable, at least in part, but limited the damages that can flow from a breach.  In Logan v. D.W. Sivers Co., the parties had entered into a letter of intent for the sale of real property.  The plaintiff-buyer intended to use the property in a section 1031 exchange.  The letter of intent stated that it did not constitute a binding agreement, but provided that the defendant-seller agreed not to enter into an agreement to sell to any other party for a period of 60 days.  Notwithstanding that restriction, the seller accepted another party's offer to purchase the property before the 60th day.

The disappointed buyer sued for breach of contract, and the jury awarded as damages nearly $1 million, representing the additional taxes plaintiff was required to pay because of her inability to satisfy the requirements for a section 1031 exchange.

The Supreme Court agreed with the trial court that the letter of intent did not obligate the parties to reach an agreement to sell the property, but that it did obligate the seller to refrain from selling to another party for 60 days.  While the seller was liable for breach of contract on that basis, the majority of the court reversed as to the measure of damages.  In particular, because there was no binding promise to complete the sale, plaintiff could not recover the amount of tax liability resulting from her inability to purchase the property.  Justice Gillette, writing for the majority, remanded for a new damages calculation. 

Justices Kistler, Durham and Walters dissented on the issue of damages, contending that the jury should be allowed to award damages for the loss of the expected benefits of the transaction. 

Promises by an unknown employee can't create an express warranty under the UCC

In a sale of goods under the Uniform Commercial Code, the statements of an unidentified employee aren't sufficient to prove an express warranty, according to a case decided yesterday by the Oregon Court of Appeals.  In East County Recycling, Inc. v. Pneumatic Construction, Inc., the court addressed an alleged representation about a baling machine's ability to operate in Oregon's wet weather.  The buyer of the machine sued the seller when the baler didn't hold up to the elements.  The buyer claimed that, before it made the purchase, an unidentified employee of the seller promised over the phone that the baler would work outdoors, thereby creating an express warranty as to the machine's characteristics under the UCC. 

Because the identity of that employee was unknown, the buyer could not show that the employee had authority to make representations about the machine on behalf of the seller.  Lacking that evidence, the buyer was unable to prove the existence of an express warranty, and the Court of Appeals affirmed summary judgment for the seller.

This case shows that, when making a big-ticket purchase, it's critical to get in writing any representations about the product's features and characteristics.  Testimony about an oral representation by the other side may not stand up in court.

Creating a real property easement in Washington

Earlier this week the Washington Court of Appeals Division III ruled that recording a document labelled an "easement" is not by itself sufficient to create a real property easement.

In Zunino v. Rajewski, a property seller created and recorded a document at the time of sale entitled "Private Road and Utility Easement." The document was signed only by the seller. The statutory warranty deed given to the buyer did not reserve or grant an easement. The court noted that the creation of an easement is governed by the statute of frauds, which requires that an easement be by written deed. The deed must convey land and must be in writing, signed by the party to be bound, and must be acknowledged. Because the document entitled "easement" did not convey land, it did not create a valid easement.  In addition, the burdened property owner's agreement to the easement, which is a vital element in the creation of an easement, was lacking in this case.

Attorney's failure to approve makes contract unenforceable, Court of Appeals holds

When two parties agree on all material terms of a contract, the agreement may be unenforceable if one of the parties makes the transaction subject to review by his lawyer.  That was the conclusion last week by the Oregon Court of Appeals in Oregon Southwest, LLC v. Kvaternik.  The parties negotiated the sale of real property, agreeing on the purchase price and payment terms.  The written agreement included a provision that the transaction was "subject to review and approval" by the seller's attorney.  After later consulting with his attorney, the seller proposed alternative financing terms.  The buyer sued for specific performance of the original agreement, and the trial court granted summary judgment in favor of the buyer.  Judge Schuman writing for the Court of Appeals reversed, holding that a condition precedent -- the attorney's approval -- never occurred, negating the contract.

Governor signs bill limiting non-competition agreements

Earlier this week Gov. Ted Kulongoski signed into law Senate Bill 248, which significantly restricts Oregon employers' ability to require employee non-competition and arbitration agreements.  The new law applies to agreements entered into beginning January 1, 2008.  See our earlier coverage of the legislation, including a description of its key elements, here.

Oregon legislature curtails employee non-competition and arbitration agreements

At the end of its 2007 session, the Oregon legislature passed a bill that imposes significant new restrictions on employee arbitration and non-competition agreements.  If the governor signs Senate Bill 248 into law, both arbitration and non-competition agreements between employers and employees will be unenforceable unless (1) the employer informs the employee of the agreement by a written offer received at least two weeks before the first day of employment, or (2) the agreement is entered into upon subsequent bona fide advancement of the employee. 

In addition, aside from some restrictions specific to the broadcast industry, non-competition agreements will not be enforceable at all unless

• the employee is exempt from overtime pay under ORS 653.020(3),
• the employee has access to trade secrets or other competitively sensitive business information, and
• the employee's annual gross compensation at termination exceeds the median family income for a four-person family under Census Bureau guidelines. 

The bill provides that non-competition agreements will not be enforceable for a period longer than two years.

The new law says that the foregoing restrictions do not apply to employee or customer nonsolicitation agreements.  But it is unlikely that courts would uphold such nonsolicitation agreements where the employer is unable to show a protectable interest or that the restrictions as to time and/or scope are reasonable.

The new law will apply to arbitration and non-competition agreements entered into on or after January 1, 2008.

Marketing agreement may be a RICO violation, Ninth Circuit holds

Courts must resist the impulse to narrowly interpret the standards for civil RICO liability.  That's the message an en banc panel of the Ninth Circuit sent on Friday, as it reinstated a case in which the plaintiffs claimed that a marketing agreement between Microsoft and Best Buy formed the basis for a RICO claim.  Odom v. Microsoft Corp. concerns allegations of a marketing arrangement under which Best Buy gave its customers CDs for trial subscriptions to the MSN service.  Plaintiffs alleged that customers were charged for the MSN subscriptions without their consent, and that because the activity involved wire fraud it constituted a civil violation of the Racketeer Influenced and Corrupt Organizations Act. 

Parsing the technical language of the RICO statute, the court held that, to state a viable claim, plaintiff need not plead that an "associated-in-fact enterprise" has an ascertainable structure separate from its "pattern of racketeering activity."  The court consequently reversed the lower court's dismissal of the complaint.  The court acknowledged a split among the circuits on this pleading issue, but asserted that it's bound by U.S. Supreme Court precedent to read the statute broadly in order "to effectuate its remedial purpose."

See other law blog coverage of the case at How Appealing, Legal Pad, and Blawgletter.

Court of Appeals applies "frustration of purpose" doctrine to energy contract

The failed deregulation of the California energy markets in the late 1990s continues to have repercussions in the courts.  Yesterday the Oregon Court of Appeals held that the manipulation of those markets, resulting in skyrocketing prices in 2000 and 2001, may have been sufficiently severe to void a contract between an electrical utility and its customer in Oregon.  In Wah Chang v. Pacificorp, the court held that Wah Chang, an electricity customer of Pacificorp, brought forward evidence "that California's energy markets had been subjected to manipulation so egregious and pervasive, and so unprecedented in its scope and magnitude, as to be beyond the parties' reasonable contemplation" when they entered into their contract in 1997.  This evidence is sufficient to proceed to trial on Wah Chang's theory that the rarely-used doctrine of "frustration of purpose" voided its obligations under the contract.

Court of Appeals upholds mandatory arbitration in employment contract

This week the Oregon Court of Appeals reversed the trial court's finding of unconscionability and upheld a mandatory arbitration clause in an employment contract, sending an employee's discrimination and other claims to an arbitrator instead of a jury.  Upon initial employment with the defendant, plaintiff signed an agreement to arbitrate all disputes rather than file suit in civil court.  Both federal and Oregon law favor arbitration, but the enforceability of any arbitration agreement in Oregon is governed by Oregon contract law.  "Unconscionability" is one defense to the enforcement of contracts in Oregon.  The test for "unconscionability" has two parts, one procedural and the other substantive.  A contract is procedurally unconscionable, and therefore not enforceable, if there is "oppression" or "surprise" in the "conditions of contract formation," but unequal bargaining power alone is insufficient for a finding of procedural unconscionability.  A contract is substantively unconscionable if the "terms" of the contract are "unreasonably" one-sided, such that their "effect" makes the parties' respective obligations "so unbalanced as to be unconscionable."

The Court reviewed the terms of the arbitration ageement in light of the foregoing, and held that the agreement was enforceable, sending the case back to be litigated in the agreed-upon arbitration forum.  In doing so, the Court noted that the agreement did not unfairly impair the employee's rights because it provided for the same law as would have applied in court, and for many of the same procedures followed by the courts.  Further, the agreeement did not impose restrictions on the type or amount of recovery that could be awarded by the arbitrator; did not exclude punitive damages or attorney fees; did not impose unreasonable limits on discovery or admissible evidence; and did not impose tight deadlines on the filing of claims.  To read the entire opinion in Motsinger v. Lithia Rose-FT, Inc., click here.

Class action prohibition in arbitration agreements: Be careful what you ask for

For years now, courts have enforced mandatory arbitration provisions in consumer and employment agreements.  The usual mandatory arbitration provision in a consumer or employment contract provides that all disputes of any kind shall be decided not in court, but by an arbitrator.  Early on, it was assumed that mandatory arbitration could only resolve individual suits.  More recently, however, plaintiffs have pursued class actions in arbitration, and many arbitration services today provide for class action arbitrations.  As a result, some companies and employers have responded by including within the arbitration clause a prohibition on class actions. 

According to plaintiffs' lawyers, combining the mandatory arbitral forum for dispute resolution with a prohibition on class actions, effectively eliminates the class action mechanism for mass resolution of, often, small-value claims that individual claimants would not otherwise pursue.  Some courts are beginning to agree, finding that a prohibition on class actions is "unconscionable" and, therefore, not enforceable.  See Riensche v. Cingular Wireless in which a Washington federal district court determined that the prohibition against class actions was "unconscionable" and denied the defendant's motion to compel arbitration.  An Oregon Court of Appeals case decided today similarly held that a prohibition on class actions, in part, rendered the otherwise mandatory arbitration agreement unenforceable.  See Vasquez-Lopez v. Beneficial Oregon, Inc. 

In both of these cases, the courts threw out the entire arbitration agreement, and the plaintiffs were allowed to litigate in court, an outcome the defendant had sought to avoid with the arbitration agreement in the first instance.  In other cases, the courts have struck the specific prohibition on  class actions, but otherwise upheld the arbitration agreement.  This leaves the defendant in the untenable position of facing a class action with a single arbitrator without the many procedural protections afforded to defendants in civil court. 

While it may be tempting to push the limits of mandatory arbitration as a way to rein in costly and protracted litigation, one should proceed with caution and seek competent counsel in defining the parameters of such agreements.

When is a delivery not a delivery?: Risk of loss and the UCC

Consider these facts:  A seller of manufactured homes delivers a home to the buyer's lot, but a month later, before the seller completes the finishing work inside the home and before it's ready for occupancy, a storm causes extensive damage.  Who is responsible to pay for repairs - the seller or the buyer?

In Lucas v. Berry, the Oregon Court of Appeals decided last week that the seller had to pay to repair the manufactured home because the risk of loss had not yet passed to the buyer at the time of the storm.  The parties' contract required the seller to deliver and set up the home, but didn't address when the buyer would become responsible for damage to it.  The court turned to Article 2 of the Uniform Commercial Code, governing sale of goods, for the answer.  ORS 72.5090(1)(b) states that the risk of loss passes to the buyer when the goods are duly tendered so as to enable the buyer to take delivery.  Even though the home had been delivered to the buyer's lot, it had not yet been "delivered" as that term is used in the UCC.  The seller had contracted to provide a home fully ready for occupancy, and until that happened there was no delivery to the buyer and the risk of loss remained with the seller.

Court of Appeals fills in blanks to specifically enforce a contract

The Court of Appeals yesterday addressed an area of uncertainty in Oregon contract law: how definite and certain a contract's terms must be to support the remedy of specific performance.  In Earls v. Corning,the parties signed a preprinted form contract to sell real property, but left blank the date for closing the sale.  The purported seller passed away a few days after signing the document, and plaintiff purchaser sued the personal representative of her estate for specific performance of the agreement.  The trial court found, among other things, that the failure to agree on a closing date made the contract too indefinite to be specifically enforced.
The Court of Appeals reversed.  While a contract must be definite in all material respects to be subject to specific performance, there is conflicting case law on whether an agreed closing date is a prerequisite for that equitable remedy.  Judge Rosenblum, writing for the court, held that the failure to provide a closing date does not render the contract indefinite, and the court may specify a reasonable time for performance.

Exclusive dealing contracts invite antitrust risk

Exclusive dealing contracts are a great tool for manufacturers, but a recent case from the Sixth Circuit shows that they create a risk of antitrust liability when they shut competitors out of the market.  In NicSand, Inc. v. 3M Co., NicSand was 3M's only competitor in the market for "DIY retail automotive coated abrasives".  NicSand claimed that 3M used its superior market power to enter into multi-year exclusive dealing contracts with four of the six largest retailers of those products, effectively shutting NicSand off from potential customers and sending it into bankruptcy.  3M was able to achieve that result in part by offering substantial discounts to the large retailers - and the court said those discounts "served no business purpose other than to exclude NicSand's products from the market."  While a dissenting judge argued that the discounts represented vigorous competition rather than illegal monopolization, the majority held that NicSand stated a valid antitrust claim and ordered the case to proceed to trial.  The lesson is that, when a manufacturer has a large presence in a product market, it must take care not to eliminate rivals' access to customers.

Recitals in Contracts

In negotiating a contract, parties often spend little time contesting the language in the recitals.  In a hurry to get to the seemingly more significant terms of the agreement, the lines beginning with "Whereas" often receive less attention.  At one level, this is understandable since the recitals  appear to be a benign introduction to the actual agreement. 

This neglect, however, can have serious consequences.  For example, in Miller v. Miller, 276 Or. 639, 647 (1976), the Oregon Supreme Court held that where the recital clause of a contract is inconsistent with an operative provision of the contract, the contract as a whole is ambiguous.  Moreover, ORS 42.300 provides that "[e]xcept for the recital of a consideration, the truth of facts recited from the recital in a written instrument shall not be denied by parties thereto, their representatives or successors in interest by a subsequent title." 

Simply, since the recitals cannot later be denied, parties must carefully analyze them before entering into the contract.  This examination, ideally by a litigator, should not only include a review of the accuracy of the facts recited, but also include a review of how the recitals interact with the more heavily-negotiated terms of the agreement. 

Securities Fraud Provisions Apply to Settlement Agreements

In settling disputes with shareholders or former employees, businesses often repurchase the stock in the company owned by the settling shareholders or former employees.  When entering into these settlements, business lawyers need to remind themselves that these settlements are subject to the securities fraud provisions in state securities laws, and that the settlement transaction may result in future litigation if there is a significant increase in the value of the company shortly after these shares have been repurchased.

In Oregon, the key statute is ORS 59.115 which imposes liability for selling stock by means of an untrue statement or omission of material fact.  The key case is Towery v. Lucas, 128 Or App 555, 876 P2d 814 (1994), holding that the antifraud provisions apply to settlement agreements to the same extent as any other transaction that involves the sale of securities.

While Washington's securities antifraud states are different from those in Oregon, Washington courts also recognize that in certain circumstances a misrepresentation or omission in settlement negotiations can be actionable under its statutes.  In Guarino v. Interactive Objects, Inc., 122 Wash App 95, 86 P3d 1175 (2004), the dispute involved a claim to severance benefits by former officers of the company.  The company repurchased stock owned by the former officers as part of the settlement of the severance benefits claim without disclosing that the company had signed a letter of intent to merge with another company.  When that merger occurred, the value of the company's stock increased dramatically.  The appellate court found the failure to disclose the possible merger to be actionable under Washington's securities laws.

Oregon Court of Appeals finds that letter of intent has teeth

In business transactions, the parties may enter into a letter of intent to negotiate further.  If no final contract results after further negotiations, the parties often have no recourse against each other.  However, the Oregon Court of Appeals recently enforced a letter of intent and awarded damages to the buyer caused by the loss of the deal.  In Logan v. Sivers Co., C-31283CV (August 2, 2006), the parties entered into a letter of intent to negotiate the sale of commercial real estate.  The letter of intent included a term, referred to as a "non-shop" provision, that prohibited the seller from soliciting offers or a contract to sell the property for a period of 60 days.  Twenty-one days after the parties entered into the letter of intent, the seller entered into a sales agreement with a third party to sell the property and the first buyer sued.  The seller countered by arguing that the letter of intent was unenforceable as merely an "agreement to agree."   

While the Oregon Court of Appeals acknowledged that certain terms in the letter were too indefinite to be enforceable, it found that the non-shop provision was sufficiently definite and the parties manifested their intent to be bound by it.  Accordingly, the court held that the seller breached the non-shop provision and turned to the issue of whether plaintiff was entitled to damages.  Plaintiff had attempted to purchase the property for purposes of a 1031 like kind exchange to avoid tax liability from her prior sale of other commercial property.  She sought damages in the amount of her tax liability as result of losing the purchase.  Although the seller argued that such damages were consequential losses that were not reasonable foreseeable, the jury found that the damages were foreseeable and the court of appeals held that the verdict was supported by the evidence.  Consequently, the court awarded the damages amounting to plaintiff's tax liability.

Contractual survivorship clauses

No business likes to discover that it is a party to a contract that is unclear.  Here is an example:  Company A enters into a one year distribution agreement with Company B.  The contract includes a survivorship clause that defines the specific contractual provisions that remain in effect after the termination of the contract.  The contract also provides for all contract disputes to be resolved by arbitration and for the contract to be governed by Oregon law.  Unfortunately, neither the mandatory arbitration provision nor the choice-of-law provision is included in the list of contractual provisions that survive termination of the contract.

After the contract terminates a dispute develops between the parties.  Each company asks its respective lawyer if arbitration is required or if litigation is possible.  Each also asks if the post-termination dispute is governed by Oregon law or the law of some other state.  Their lawyers research the issues and then tell their respective clients that they cannot give a definitive answer.  The contract is ambiguous on its face so the arbitrator or court has to determine what the parties intended when they did not include the arbitration clause and choice-of-law clause in the list of clauses that survive the contract.  There is case law supporting either possible interpretation of the contract.

Both companies are frustrated and unhappy with the legal system and probably with their lawyers.  The solution:  when drafting a contract with a survivorship clause, make certain that both the dispute resolution provision and the choice-of-law provision survive the termination of the contract.  If, for some reason you client does not want those provisions to survive, say so explicitly in the agreement.