One-sided contracts are a bad deal for ALL parties (or getting greedy will get ya’)

The Court of Appeals just released a decision that shows that getting greedy will get ya’ in the end. Despite precedents that show that contracts substantially favoring the party with the greater power often are deemed unconscionable (so unfair as to not be enforceable), lawyers stiff draft them and companies still like them. That is what occurred in Speedway SuperAmerica, LLC v. Erwin, 2007-CA-000451-MR (March 21, 2008)(to be published).

The contract involved in the Erwin case was drafted by Speedway and designed to have Sebert Erwin be an independent contractor for Speedway. It also provided that Sebert (love that name!) would indemnify (pay for) and hold harmless (not sue) Speedway for any damages arising out of any breach of the contract. Further, Speedway expected Sebert to get $300,000 in insurance that also insured Speedway plus his own workers’ compensation insurance. The contract was for five (5) years, but Speedway could cancel it any time they wanted for any reason whatsoever, but Sebert could not do the same. He could not even assign the contract to someone else. Basically, the contract only benefited Speedway and provided no protection for Sebert. First year law students learn that such contracts are problematic at best and yet Speedway paid some lawyer big money to come up with the rag.

Sebert had considerably less sophistication regarding contracts; the Court pointed out that he had an eighth (8th) grade education (though my law professors swore they only taught on an 8th grade level when we did not understand them). He likely had no idea exactly what rights he was signing away and had no power to bargain for better terms. He needed a job and Speedway probably said he could take it or leave it. One day, Sebert was directed to help move a different station to move a walk-in freezer. While assisting in that task, Sebert fell and was injured so he sued Speedway. Speedway countersued to enforce the indemnification clause of the contract (basically, if Sebert won his suit, he would have to pay himself the damages).

The trial court dismissed Speedway’s counterclaim because it found that the indemnification clause was not clear and understandable enough for an ordinary person to understand what he or she was contracting away. Speedway appealed and argued that rule only applied to pre-injury releases and, instead, this was an indemnity provisions. They cited case law that found such a provision valid. If you have a greater interest in the process and reasoning of the court, please read the decision. For our purposes here, we are going to cut to the heart of the matter.

The Court decided that it did not matter which case law was applied to this particular contract because the guiding principal fit both pre-injury releases and indemnification clauses. The holding of the Court is that when a contract that is used to defend against the indemnifee’s own negligence is “agreed to by a party in a clearly inferior bargaining position” (Id. at 9) then it is against public policy and not enforceable. In other words, by taking advantage the less sophisticated Sebert and trying to have all the protection and none of the risk, Speedway made their fancy contract worth no more than the paper it was written on. I sure would like to know how much they paid for that contract to be drafted.

This is a narrow holding by the Court in that such indemnification provisions are generally enforceable. If Sebert had been a business savvy contractor, the outcome probably would have been different. Even if the specific holding narrowly rests on the differential bargaining power, the court highlighted other factors that seemed to influence them. Businesses should be aware that they are on shaky grounds when their contracts:
1) Are “take it or leave it” deals with person with clearly less bargaining power.
2) Allow for one-sided termination of the contract.
3) Allow for termination of for ANY reason.
4) Deny assignability for ANY reason.
5) Try to make someone an Independent Contractor but still try to control how that person performs their tasks.
6) Requires the other party to waive a lien or other mechanism for insuring they get paid.
7) Essentially, are too greedy and attempt to get without giving.

Lesson learned: Make deals that are balanced; contracts that distribute risks and responsibilities fairly. Such deals will be honored by courts and your businesses wealth and reputation will benefit over the long term.

Franchisor vicarious liability

In a case of first impression (first time an issue has been ruled upon) in Kentucky, the state’s Supreme Court addresses franchisor vicarious liability in Papa John’s Int’l, Inc. v McCoy, 2005-SC-000614-DG (Jan. 24, 2008)(to be published). Frainchisor vicarious liability is like having a first cousin once removed.

The first cousin of liability is employer vicarious liability which is a well settled area of Kentucky law. In employer vicarious liability (also known as respondeat superior), if an employee commits a tort (a bad act, neglect, etc.) while they are acting within the scope of their employment, then the employer is also liable for the tort even though there is a degree of separation in their relationship. When the employer is a franchisee, then there is an addition degree of separation between the employee and the franchisor.

In this Papa John’s case, Gary McCoy owned a scrap metal business and was working late so he kindly called the pizza place to have pizza’s delivered both to his home and to his office. After prying into the particularities of pepperoni placement upon the pizza, he proffered payment at his place of productivity after they popped the primary pizza off at his private pad (his wife had no doe at home). Once the delivery dude arrived at Gary’s office, things got a little weird.

Either Burke, the delivery guy, hung out voluntarily at Gary’s trying to get a job at Gary’s scrap-yard while watching a video of a deer hunt, or Gary held Burk at the office at gun point and forced him to watch the deer hunt video. Either way, beer and deer were involved. We’ll leave the rest to the imagination, but Burke either escaped or Gary finally got rid of him only after RWT, Inc. began wondering why their driver was gone so long.

Back at Papa John’s, Burke related his hostage related version and another employee called the police. Gary was subsequently arrested for unlawful imprisonment which must have been a bit embarrassing when a story about it ran in the paper a few days later. So, he sued.

None of the foregoing facts were actually pertinent to the court establishing their rule about franchisor liability, but they sure make for an interesting story. The pertinent facts are that Burke worked for RWT, Inc., a franchisee of Papa John’s Int’l, Inc., and Gary McCory claimed he committed a tort against him while acting within his scope of employment. Gary sued Burke, Papa John’s Int’l, Inc. and RWT, Inc. The trial court dismissed the suits against the two business entities for different reasons, but the Court of Appeals reinstated one claim against RWT, Inc., the employer, and two claims against Papa John’s Int’l, Inc.

The Kentucky Supreme Court ruled that the claim against RWT, Inc. could not stand because Burke was acting soley for personal reasons if he made false allegations about false imprisonment; he was acting outside the scope of employment. The Court noted that “there seems no more certain way to send customers to another pizza place than to accuse them falsely of imprisoning delivery drivers when they are delivering pizza. . . .” to highlight the point. If Burke did not lie, then there was no tort. If he did lie, it was for personal reasons. RWT, Inc. is off the hook.

In determining the final issue of Gary’s claims against the franchisor, the Court adopted a rule that enjoys an emerging judicial consensus. They note that a franchise is an agreement between two businesses that licenses the use of intellectual property, brand identiity, marketing, and operational methods for a fee. The rule arrived at was taken from a Wisconsin case, Kerl v. Dennis Rasmussen, Inc., 682 N.W.2d 328. The rule for franchisor vicarious liability now adopted by Kentucky is:

“that a franchisor may be held vicariously liable for the tortious conduct of its franchisee only if the franchisor has control or a right of control over the daily operation of the specific aspect of the franchisee’s business that is alleged to have caused the harm.”

This is actually a slight narrowing of the “control or right of control” rule that it was adapted from because it focuses on the specific aspect of the business causing the tort. In this particular case, Papa John’s Int’l, Inc. had no control or right of control over an intentional and independent course of action taken by Burke and so they are off the hook too.

What this means to franchisors is that if they exercise or contract for the right to exercise control over specific aspects of the franchisee’s business, they may be found liable for torts by employees of the franchisee.

Garnishment: where business law & family law intersect

This post captures the final lessons learne from the recently released Kentucky Court of Appeals case of Mickler v. Mickler, 2006-CA-001313-MR (Jan. 25, 2008)(to be published). Many other lessons related to family law exist in the underlying facts and procedure and can be found at this post at Lexington Family Law blog. Suffice it to say that a doctor, Andrew, with his own practice went through a bitterly fought divorce over some pretty respectable assets. Terry, his wife, came out with an overall award of well over a million dollars. Andrew was not happy about this so he appealed and tried various tactics, including bankruptcy, to avoid paying. Terry, unwilling to walk away from a million plus, filed garnishments on various insurance carriers thought to owe money to Andrew’s practice.

Andrew argued that Terry could not garnish the entirety of those payments because they qualified as earnings under KRS 427.010 and so only 25% of the paymenbts could be taken. The Court kindly pointed out that his argument more precisely came under KRS 427.005 defining earnings a compensation paid for personal services. Andrew stated that all payments from the insurers were for his personal services as a physician.

The Court of Appeals agreed here with the trial court finding that “that these funds are due to Dr. Mickler’s medical practice and contain not only fees for the professional service delivered by Dr. Mickler but also fees for other services delivered by the staff and employees in Dr. Mickler’s medical practice.” Id. at 5. The Court of Appeals adopted the analysis of a Bankruptcy Court in Idaho because there was no case law on point in Kentucky. The Idaho Bankruptcy court looked at that state’s identical statute and determined that whether such payments are earnings is a fact specific analysis of what parts of such payments are for the personal services of the individual physician. Here, Andrew failed to put forth evidence to the trial court as to what parts of those payments were to compensate him solely for his services and what was attributable to services of other staff or service in his medical practice. For the lack of this evidence, Andrew’s appeal failed.

There is a two-fold less here for small business owners. First, it is wise to recognize that the personal tragedy of divorce can very much impact your business regardless of whether you have an LLC, LLP, S-Corp or other organizational structure. The second lesson is that good record keeping can save you in the event of such litigation. Of course, you have to use the records you have. Here, Andrew’s attorney took and all or nothing approach rather than putting forth evidence of where exactly those insurance payments would be going. Perhaps the records were not available. Either way, the point is the same, keep good records and use them in litigation.

Arbitration provisions: if you have to sneak it in, it probably is not enforceable

Arbitration provisions are found everywhere these days. Retailers and service providers are quite smitten with arbitration because they anticipate it will reduce litigation costs considerably. This overriding desire to arbitrate can lead to creative measures to secure a contract provision requiring arbitration. However, it is more important that any such provision is actually binding.

The recent Court of Appeals case, Paul Miller Ford, Inc. v. Rutherford, 2007-CA-000293-MR (Dec. 28, 2007)(NOTto be published) gives a great example of an unenforceable arbitration agreement. The actual language was not the problem:

ARBITRATION: Any claim or dispute arising out of or in any way relating to this contract, the negotiations, financing, sale or lease of the vehicle which is the subject of this contract, including any claim involving fraud or misrepresentation, must be resolved by binding arbitration administered by the Better Business Bureau of Central and Eastern Kentucky, Inc. in accordance with its rules. All arbitration proceedings shall be held in Lexington, Kentucky. The decision of the arbitrator(s) will be final, conclusive and binding on the parties to the arbitration and no party shall institute any suit with regard to the claim or dispute except to enforce the arbitration decision. Venue for any action to
enforce this arbitration agreement, or an arbitration decision shall be in Fayette County, Lexington, Kentucky.

The problem was that this was a paragraph near the bottom of a page that was styled as a questionnaire. Furthermore, there was no place for initials or a signature with this paragraph while other twelve paragraphs on the page did require initials.

The Court, in making a fact specific determination if this arbitration provision was unconscionable, found that the nature of the document containing the provision was “masuerading as [a] performance evaluation. . . .” Id. at 8. Basically, Rutherford did not voluntarily and knowingly agree to arbitration.

I have no idea why Paul Miller Ford decided it wise to try and slip an arbitration clause in on the customer. Perhaps an attorney advised them to do it this way. Paul Miller should ask for their money back if that is the case. Regardless, not only did this approach prevent the clause from being enforceable, it also engendered mistrust of their business practice in this area. A wiser, and more cost effective approach would be to offer straight up information about arbitration. Explain arbitration fully to the client and have them sign a clear statement agreeing to arbitration.

A business could make enforcement of the provision even more likely to be binding by offering additional consideration for signing the provision - such as an extra $100.00 off the price or a free oil change. This would be a cost saver since the business would garner the savings of arbitration with a highly enforceable provision.

Get it in writing (or where’s the beef)

It is true that a contract can be formed orally; no writing is required to create a contract. Some contracts, though, are unenforceable as a matter of law without being in writing. For example, a contract for the sale the real estate is unenforceable unless it is put in writing. Many contracts are created AND are enforceable even if they are never written down. I would not recommend relying on oral contracts in business dealings though. The recent Kentucky Court of Appeals case Quadrille Business Systems v. Kentucky Cattlemen’s Association, Inc., 2005-CA-002621-MR & 2006-CA-000009-MR (December 28, 2007)(to be published) highlights the value of writing down agreements.

Quadrille and Cattleman’s did agree to work together to obtain a grant from the Kentucky Agricultural Development Board (”Board”) to establish and manage a cattle cooperative. However, Quadrille failed to make it to the jury on their breach of contract claim. This was because Quadrille “remembered” the contract one way and Cattleman’s “remembered” it quite another. Neither remembered the oral agreement to have sufficient details to establish definite terms of a contract. The Court noted that even Quadrille’s alleged terms “demonstrate[d] its lack of specificity and defiteness.” Id. at page 6. For example, there was no agreement as to how or what Quadrille would be paid for their efforts. This was fatal to the breach of contract as well as the quantum meruit claim.

Quantum meruit is a legal failsafe doctrine designed to prevent one party from getting a benefit from another party for free when some kind of compensation had been expected. An example would be if a homeowner contracted for a worker to install an inground pool and insisted that the pool be tiled. The worker digs the pool, pours the concrete, but gets sidetracked with a more lucrative job. The homeowner gets tired of waiting and hires someone else to tile the pool. While the homeowner may want to pay the first worker nothing because they failed to finish the job, they will have to compensate him for the work done though not the full contract price. The value of the work done is its quantum meruit value. Quantum meruit does not even require a contract to exist.

In this case, Cattleman’s did end up with a grant sans the elements that Quadrille wanted. Quadrille claimed they should be compensated for the work they put into the grant proposal since it benefited Cattleman’s. They actually won this from the jury, but the Court of Appeals said the trial court should have given Cattleman’s a directed verdict (taken it out of the jury’s hands and denied Quadrille’s claim). This was because there was no compensation complated in whatever agreement had existed between the two parties. In fact, Quadrille admitted they did not keep track of the time they spent on the project because they anticipated benefiting from the grant they hoped to recieve.

Since Quadrille’s only anticipated income from their work was the ultimate business deal with the Board, and there were no terms for compensation from Cattleman’s, they could not get quantum meruit relief. Once again, the absence of definite provisions to the alleged contract was fatal.

Finally, Qaudrille also claimed Cattleman’s had a fiduciary duty to them that was breached. The Court rightly found no fiduciary duty arose from a simple, arms length business deal. There has to be some mutual understanding of confidentiality or the undue exercise of power or influence. Neither existed here.

So, it is always best to commit an agreement to writing. The exercise of doing this allows for misunderstandings to be exposed and corrected. Having a written agreement also supplies evidence of what was meant in the first place if a later disagreement arises. In some cases, a writing is necessary to enforce an agreement. So, get it in writing.

Look Before You Release II

A recently released opinion from the Court of Appeals, Larkins v. Miller, 2006-CA-002043-MR (October 26, 2007)(to be published), gives a concise synopsis of the steps courts are to take in determining is a release of liability will hold up. In this case, the Larkins purchased a residential lot in Hebron, Kentucky, from Akin & Miller Land Developers (”Developer”). Apparently the undeveloped lot was a bit steep which occasioned John Akin of the Developer to comment on additional construction costs. Mr. Akin assured the Larkins that the increase would be only a few thousand dollars.

Later, the Larkins closed the deal for $160,000.00 on the lot. This exhausted their resources so they did not build on the lot for aobut five years. While the Court’s opinion does not elucidate on the circumstances between purchase and building, I picture poor Mr. and Mrs. Larkin sleeping in hammocks tied to trees clinging to the side of a hill while livestock with legs shorter on one side (so they don’t fall over) walk past. Regardless, once they do hire a construction company, they learn the increased cost of building on this slope would be $83,000.00. Perhaps this just indicates that Mr. Akin loosely defines “a few thousand dollars.” Shocked by this sum, the Larkins sued for breach of contract and fraud.

I will add that an engineering report was completed and the Larkins reviewed this report at the meeting where they closed on the property. Apparently, Mr. Akin reaffirmed his “few thousand dollars” estimate at this time. The Larkins signed a release which said, in pertinent part:

In consideration of Akin and Miller Land Developers agreeing to sell a hilltop residential lot to Purchasers, Purchasers do hereby for themselves, their heirs, executors, administrators, successors, and assigns, release and forever discharge Akin and Miller Land Developers, Miller, individually, and Akin, individually, their heirs, executors, administrators, successors, and assigns, from all claims and demands, actions, or causes of action, which have arisen or which may arise, related to, either directly or indirectly, slope stability or any other directly or indirectly related issue.

Some controversy was introduced over whether this release was signed at the same meeting where the closing on the land occurred or if it occurred some time later (thus lacking in consideration), but the Trial Court granted summary judgment for the Developers. The Court of Appeals found this controversy no barrier either because the Release was dated July 14, 2000, which coincided with the date a check was tendered from the Larkins to the Developers. So, the Court of Appeals determined that valuable consideration for the release existed.

I will not argue excessively with the Court, but “consideration” is an exchange from each party to the other of something valuable. Here, the Larkins are giving a release of liability to Developers AND give a check, but the Developers are giving nothing of value to the Larkins (unless the release was signed at the closing). If, in fact, the land was conveyed days earlier by deed instead of in the same meeting, then where exactly is the consideration for the release?

Tedious points of law aside, the Court defines a release as “an agreement between parties where one party surrenders the right to sue the other party for a claim that might arise” which is supported by valuable consideration. Id. at 7. Once a court determines there is a valid release, then “a court should interpret the terms of the contract according to their plain and ordinary meaning.” Id. This release could not have been any clearer and it even took pains to state that the Larkins reviewed the engineering report and that the Developers were not experts in slopes. Becaus the Court found a valid release that was unambigous, they never considered whether Mr. Akin made fraudulent representations.

Lessons learned: 1) Never accept vague assurances, such as it’ll only cost “a few thousand dollars” to keep you house from sliding down that hillside; rather, demand they be specific and in writing. 2) If you are the one seeking a release, keep it clear and simple. 3) If you are a business person asking for a release from liability, be sure that you are giving something of value in exchange for that release. 4) Hillside homes cost more.

When is business litigation like making stew? When all else failed:

A recent Kentucky Court of Appeals decision provides a veritable grocery list of business related causes of action and their elements: Kenney v. Hanger Prosthetics & Orthotics, Inc., (2006-CA-000939-MR)(to be published).

In the case, John M. Kenney had been an employee of Hanger Prosthetics, but ventured out on his own. He alleged that Hanger employee Michael Adams said many bad things about him, such as that he embezzled from Hanger and was barred from competing with Hanger per a non-compete contract provision. Only Kenney’s claim of breach of contract passed summary judgment while the defamation and tortious interference with business claims died there.

Since the litigation souffle fell with those carefully crafted claims, Kenney’s persistent lawyer(s) decided to make stew. They tried to amend the complaint with just about every conceivable claim:

A. Interference with Prospective Contractual Relations
[t]he tort of interference with a prospective advantage is plagued with the absence of a uniformly recognized terminology. It has been referred to as the tort of interference with a business relationship, inducing refusal to deal, interference with a prospective economic advantage, interference with advantageous relations, interference with reasonable economic expectancies, or interference with prospective business expectancies. . . . The American Law Institute has named the tort “Intentional Interference with Prospective Contractual Relation.”
. . . .
B. Defamation Per Quod
The difference between defamation per se and defamation per quod is that, in the former, damages are presumed and, in the latter, the plaintiff must prove special damages.
. . . .
C. Unfair Competition/Trade Practices
unfair competition consists of either (1) injuring the plaintiff by taking his business or impairing his good will, or (2) unfairly profiting by the use of the plaintiff’s name, or a similar one, in exploiting his good will. Underlying the whole theory is the matter of actual or intended deception of the public for business reasons.
. . . .
D. Slander of Title, Trade Libel/Disparagement, Injurious Falsehood
Corporations and other businesses can and do recover for libel or slander when they have been defamed by charges such as crime or fraud. But defamatory charges commonly made against individuals–adultery, for example–have little relevance to corporations and many of the imputations about corporations are harmful without being defamatory. When the publication asserts that the corporate product is defective, inadequate, or harmful without asserting personal defamation, the traditional view regards the claim as essentially different from the claim for defamation. The same is true if the publication merely says that the plaintiff has gone out of business. This different claim goes under the general name of injurious falsehood. When the publication attacks a product, it is also called trade libel or commercial disparagement. When the publication attacks title to property rather than
quality of a product, the claim is likely to be called slander of title.
. . . .
1. Slander of Title
that the defendant has knowingly and maliciously communicated, orally or in writing, a false statement which has the effect of disparaging the plaintiff’s title to property; he must also plead and prove that he has incurred special damage as a result.
. . . .
2. Trade Libel/Disparagement
Trade libel involves disparaging and false assertions about the quality of one’s property rather than title to it.
. . . .
3. Injurious Falsehood
One who publishes a false statement harmful to the interests of another is subject to liability for pecuniary loss resulting to
the other if (a) he intends for publication of the statement to result in harm to interests of the other having a pecuniary
value, or either recognizes or should recognize that it is likely to do so, and (b) he knows that the statement is false or acts in
reckless disregard of its truth or falsity. Restatement (Second) of Torts § 623A (1977).
. . . .
E. Illegal Restraint of Trade and Commerce
A restraint of trade may be adjudged unreasonable if it is per se unreasonable or violates the rule of reason. Id. Examples of per se unreasonable conduct include price-fixing arrangements, tying arrangements, agreements among competitors to divide markets or to allocate customers, group boycotts, and agreements to limit production. . . . Kenney has clearly not alleged any of these practices or any comparable practices. As for a restraint which violates the rule of reason, “showing merely injury to oneself as a competitor is insufficient.” . . . . Thus, the trial court did not err by failing to permit Kenney to amend his claim in this regard.
(internal citations omitted)

The Court of Appeals found this cause of action stew rather bland and rejected each one of these attempts to amend the original complaint to survive summary judgment. I do not know if Mr. Kenney retained his attorney’s on a contigent fee or was being billed hourly. If the latter, Mr. Kenney got very expensive pot of unsavory legal stew. But for this huge bill, he also achieved fame through a published case which is an excellent primer on potential business litigation causes of action and how they did not fit his situation.

Lesson of the day: Business litigation strategy should be focused to create a cogent theme. This may include multiple causes of action, but the relevant facts should be put forth so that each cause of action plausibly follows from those facts. Overreaching to try and force tenuous causes of action to fit those facts simply creates excess litigation costs and, like in this case, probably will not change the result.

Charge back of commissions in “bill validation” provision

An opinion of the Kentucky Court of Appeals rendered September 14, 2007, rules in favor of AT&T on enforcing charge back of commissions based on a “bill validation” provision in the agreement with the sales reps. In AT&T Corp. v. Fowler et al., (2006-CA-000402-MR, 2006-CA-000535-MR)(to be published), Mr. Fowler worked for AT&T selling high speed data services and Mr. Grant was a specialist and consultant earning commissions derivatively from Mr. Fowler’s sales. Part of the compensation agreement governing Mr. Fowler’s employment stated:

Under circumstances listed below, a Sales Associate may be debited for a sale that has been credited to them. This may be accomplished through debiting future commissions or the issuance of a certified personal check to AT&T by the sales associate. . . . .
All services must remain installed, billing and maintain an acceptable payment history (including meeting commitments) for 12 months. If all or part of the service comprising a sale is discontinued before that time, a Sales Associate will be debited.

Fowler earned $100,000.00 in commissions on sales to Darwin Networks, Inc. which began having financial problems and eventually declared bankruptcy. Darwin’s financial problems resulted in not maintaing an “acceptable payment history” for the required 12 month period. Subsequently, AT&T charged back the lion’s share of Fowler’s commissions as set-offs of future commissions. Fowler and grant challenged the charge back as a violation of KRS 337.060 prohibiting companies from recovering losses from their employees’ wages.

Fowler and Grant lost at the administrative level. The Commissioner of the Department of Labor disappointed Fowler and Grant by ruling that the charge backs were allowed because the commissions were contingent “wages” subject to a certain income stream from the sales. Franklin Circuit court agreed with the Commissioner that the commissions were wages, but disappointed AT&T by ruling that the charge backs were unlawfule under KRS 337.060(2)(e).

The appeal followed where AT&T argued that the commissions were advances and not earned wages. The Court of Appeals deemed this argument to be just plain silly, but AT&T prevailed anyway because the language of the statute refers to wages that were “agreed upon”. The purpose of the statute, says the Court of Appeals, is to prevent employees from losing wages that were agreed to be paid by the employer. Here, the agreement to charge backs were expressly agreed to in the compensation plan.

Lesson to be learned by employers: write good clear contracts regarding compensation. Lesson learned by employees: read the contracts to avoid surprises and be sure your time and effort is worth what is agreed upon. Both parties can benefit from investing a small amount of money in the beginning to have an independent attorney review and clarify any employment agreement.

When being busy is a mixed blessing

I just wanted to take a moment to let readers know that I have not been on sabatical. Rather, this has been a period of increased business. This has been a blessing, but I miss having the time to write. Hope to be back soon.

When alternative dispute resolution agreements meet agency law

Businesses often rely on arbitration agreements in their contracts with clients/customers to reduce the expense of potential litigation. When done correctly, these are legally binding contracts and, as noted in Kindred Hospitals Limited Partnership v Luttrelly, 2006-CA-000221-MR (July 27, 2007)(to be published), Kentucky law favors enforcement of such agreements. In fact, the U.S. Supreme Court has stated: “‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration . . . .’ Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983).” Id. at 9.

So, Kindred Hospitals thought they were on solid ground when they sought enforcement of an arbitration agreement signed by Susan Luttrell. Susan had signed the agreement on behalf of her mother, Altha Duncan upon admission to Liberty Care Center (owned by Kindred). However, Susan did not have power of attorney and the only authority her mother had granted her was that of cashing checks and depositing money into Altha’s savings account. This meant that Susan did not have actual authority to bind Altha under the arbitration agreement.

Kindred next argued that Susan had either implied or apparent authority. Kentucky defines these two concepts as:

Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated. Estell v. Barrickman, Ky.App., 571 S.W.2d 650 (1978). Apparent authority on the other hand is not actual authority but is the authority the agent is held out by the principal as possessing. It is a matter of appearances on which third parties come to rely. Estell v.Barrickman, supra. Mill Street Church of Christ v. Hogan, 785 S.W.2d 263, 267 (Ky.App. 1990). Id. at 11

So, the implied authority of an agent covers those situations where things were not spelled out, but the authority follows in line with what the agent is supposed to do. For very simplistic example, a purchasing agent for a company may specifically be authorized to buy certain products, but no one said he or she could authorize payment of shipping costs. Well, you cannot get the product unless you can have it shipped so the authority to authorize payment for shipping is implied. Since none of Susan’s actual authority came close to covering the signing of contracts, implied authority could not exist.

Apparent authority was probably Kindred’s best shot, but they failed to establish that either. Apparent authority would have arisen if Altha had done something, or failed to act where one normally would have acted, that would have lead a reasonable person to believe Susan had authority to sign such a contract. For example, if Altha had been present and in a competent state of mind when the agreement was signed and she said nothing to indicate Susan lacked authority, apparent authority would have arisen and she would have been bound to it.

Now, business associations professor, Bif Campbell, may argue with the precise definitions of implied and apparent authority, but the real point would remain the same. Always check to see if the person signing your arbitration agreement, or any contract really, has the authority to form such a contract.