Essential Case Law Updates For Business Lawyers from Cases Published in 2023

 

 

On January 10, 2024, Attorney Trevor Crow presented a webinar on essential case law updates for business lawyers at the Annual Case Law Update, sponsored by the tax and business law sections of the Colorado Bar Association. This presentation focused the Colorado cases that were published in 2023 and involved business law issues.

The full outline of all cases is available to download as a PDF here.

Below, we provide a description and the key takeaways from the three most interesting cases below:

1. Highlands Broadway OPCO, LLC v. Barre Boss, LLC

This case related to a breach of contract claim (i.e., breach of a Lease Agreement) and the defenses of impossibility and frustration of purpose asserted by the tenant defendant.

The Facts: 

In May 2017, Barre Boss, LLC (Tenant) entered into an 84-month lease with Highlands Broadway OPCO, LLC (Landlord) for commercial property with the plan to operate a fitness facility. The lease contained a force majeure clause that excused a party’s delay in performing under the lease, but did not excuse a tenant from the prompt payment of any rent.

In response to COVID-19, the governor issued an executive order requiring Tenant to close effective in March 2020. Following this order, the parties signed a letter agreement with terms for Landlord to defer Tenant’s’ rent obligation. Additionally, Landlord was able to market the premise to prospective new tenants and terminate the lease for any reason giving 30 days’ advance written notice. In December 2020, Tenant notified Landlord that it could no longer make monthly rent payments and that it was immediately surrendering possession of the premises.

The Landlord sued for payment of rent.

The Arguments: 

The Tenant asserted, among others, the defenses of impossibility and frustration of purpose to support the non-payment of rent. These arguments were made in response to the effect COVID-19 had on the business.

Tenant argued that the trial court erred by holding the defense of impossibility and frustration of purpose were unsupported. It argued that there was no tenant liability towards Landlord because COVID-19 was unforeseeable, and the executive order made the tenant’s performance illegal, therefore impossible.

The Ruling: 

The court initially provided some background about these defenses.

Early cases involving the impossibility defense often interpreted the word “impossible” literally, while newer case law does not require the cause of nonperformance to be actually impossible, but rather an undue burden, although proving impossibility is harder than it may seem. Notably, economic hardship, even that resulting in bankruptcy or insolvency, does not constitute a factor bearing on the determination of impossibility. Even in the event of a government-issued order, a party asserting impossibility generally must have explored viable alternatives that would permit performance.

Frustration of purpose refers to an excuse for non-performance of contractual duties when a later and unforeseen event impedes the purpose for entering into the contract. Both parties must have been aware of the primary purpose for the contract to begin with. Lastly, a plaintiff has a duty to take reasonable steps under the circumstances to mitigate or minimize its damages.

The Court held that the lease’s force majeure clause manifested the parties’ clear intent to allocate to the Tenant the economic risks associated with paying rent. Additionally, the events of COVID-19 were not unforeseeable as Tenant and Landlord entered into a letter agreement and lease amendment in response to the financial impact resulting from the circumstances. Lastly, the executive order did not make it illegal to pay rent, which is the only contractual duty Landlord alleged Tenant breached.

Takeaways: 

Although the interpretation of the defense of impossibility has been altered from its initial meaning, as seen in this case, specific contract language will not permit this defense. Parties who want to rely on the defense of impossibility, or frustration of purpose will want to check the contract for language disallowing this reliance and understand the governing law of its contract as jurisdictions may treat these doctrines differently.


2. Air Solutions, Inc. v. Spivey

This case required the court to determine whether a contract existed and if so, if specific performance was available if breached.

The Facts: 

Benjamin Vrbancic negotiated to buy Air Cleaning Specialists, Inc. (the Seller) for $2.5 million. Vrbancic filed articles of incorporation to create a new entity (Air Solutions) that would purchase the assets of the Seller.

Vrbancic did not qualify to borrow the full purchase price under a Small Business Administration (SBA) loan, and the sellers agreed to carry $375,000 of the price as a loan. Still needing $250,000, Vrbancic entered into an agreement with Christopher Spivey who contributed $250,100. In exchange for the contribution, Spivey was immediately entitled to 17.5% ownership interest in Air Solutions with the right to 49% ownership interest when Air Solutions repaid its SBA loan.

Contract terms were never fully revised and after the business sale closed, Spivey began working as Chief Financial Officer for Air Solutions. Later, Vrbancic terminated Spivey’s employment who then demanded his shares equal to 49% of Air Solutions.

The Arguments: 

Vrbancic and Air Solutions argued that (a) Spivey is not a shareholder of Air Solutions because there was never a binding agreement, (b) the $250,100 was merely a loan; and (c) Air Solutions’ return of Spivey’s $250,100 contribution with interest would resolve the dispute between the parties.

Spivey argued that there was a contract and Vrbancic and Air Solutions breached the contract.

The Ruling: 

The Court held that a contract existed and Spivey was entitled to specific performance of the contract.

Takeaways: 

This case highlights the importance of having appropriate documentation for each deal to avoid protracted and expensive litigation.


3. Macasero v. ENT Credit Union

This case concerns constructive notice of a change to terms of service to include an arbitration provision.

The Facts: 

Macasero opened a savings account with ENT.  When opening the account, Macasero elected to receive communications electronically. In 2019, ENT updated the terms of service with its members to include an arbitration provision. Members were notified via email or mail, depending on how they had agreed to receive important notices, with their monthly bank statement. The arbitration provision provided members with an opt-out option. Macasero received the email, but it was never opened by Macasero.

Macasero brought a class action lawsuit against ENT for other reasons and ENT sought to have it dismissed and move the claim to arbitration.

The Arguments: 

Macasero argued that she did not have constructive notice of the change to the terms of service and as such could continue with her claim in court without pursuing arbitration. ENT argued that she received constructive notice and that the arbitration provision should be binding.

The Ruling: 

The court held Macasero had constructive notice of the updated terms.

The Court concluded, when determining whether a plaintiff had constructive notice of an arbitration agreement based on email correspondence, courts consider (i) the parties’ prior course of dealing, (ii) whether the email was designed in such a way that the notice or hyperlink was reasonably conspicuous, and (iii) the accessibility of the change in terms.

First, Macasero agreed to receive all communications from ENT via email, therefore both parties mutually understood that important notices would be conveyed in this manner.

Second, the term “reasonably conspicuous” is based on the reasonable person standard and questions whether a reasonable person have known about the terms and conduct that would be required to assent to them. The Court found that the notice was not buried or hidden in ENT’s emails or the surrounding information on the screen. Macasero argues ENT was required to send multiple emails to alert her of the updates, but the Court found that this would be asking the Court to improperly hold arbitration agreements to a higher standard than other types of notices.

Third, the hyperlink in the email took readers to a webpage clearly titled “Important Disclosures” with a subheading titled “Important Account Information”.

Therefore, the Court held that Macasero had constructive notice of the arbitration agreement because ENT’s notice was: (i) provided to Macasero in the exact manner to which she had agreed to receive important information and consistent with her prior course of dealings with ENT; (ii) reasonably conspicuous such that a reasonable person would have known about the updates and the process for assenting to, or opting-out of, the arbitration agreement; and (iii) easily accessible by using the included hyperlinks.

Takeaways: 

Colorado and federal law recognize a strong public policy interest in favor of enforcing arbitration agreements. Arbitration is a matter of contract, and a party cannot be required to submit to arbitrate any dispute which he has not agreed to submit. When updating terms of service provide notice by means in which customers or users are expected to receive notice and make sure the notice of change is conspicuously posted.


 

Click here for a PDF of the detailed case law report.

For more information, please contact us at info@doidacrow.com.

 

 

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