Focus on Contract Law

Sharp  Thinking

No. 122       Perspectives on Developments in the Law from The Sharp Law Firm, P.C.    November 2014

Extra Burdens Apply For Breach Of Confidentiality Agreement

            A plaintiff claiming breach of a confidentiality agreement cannot merely rely on the existence of such an agreement and its breach, the U.S. Court of Appeals for the Seventh Circuit has held.

            Ruling in nClosures Inc. v. Block & Co., __F.3d __, 2014 WL 5359725 (7th Cir. 2014), the court said that under Illinois law such a plaintiff also must show that “the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.”

            In nClosures, the parties had signed a confidentiality agreement at the onset of their business relationship, but additional confidentiality agreements were not required of individuals who accessed design files; design drawings were not marked as confidential or proprietary; and drawings were not kept under lock and key or in a computer with limited access.  “These facts show that nClosures did not engage in reasonable steps to protect the confidentiality of its proprietary information, and therefore that the confidentiality agreement with Block is unenforceable,” the court said.

Piercing Corporate Veil Difficult In Contract Cases 

            Quoting Tower Investors, LLC v. 111 E. Chestnut Consultants, Inc., 371 Ill.App.3d 1019 (2007), the Appellate Court’s First District has emphasized that the law imposes “stringent” standards when courts are asked to pierce corporate veils in breach-of-contract cases.

            Noting that in other contexts courts will pierce corporate veils where (1) a unity of interest and ownership appears so strong that the separate personalities of the corporation and the parties who compose it no longer exist, and (2) adhering to the fiction of a separate corporation would promote injustice or inequitable circumstances, the panel said that in contract cases “additional compelling facts” – such as a finding of fraud – “may also be required.”  Saletech, LLC v. East Balt, Inc., 2014 IL App (1st) 132639.

            “The reason is that a party seeking relief for a breach of contract presumably entered into the contract with the corporate entity voluntarily and knowingly and expecting to suffer the consequences of the limited liability status of the corporate form,” the court stated.

Contractual Venue Clause Enforced

            Where one party to a prospective contract places a choice-of-venue clause into the contract and the other party acquiesces, the former “freely and voluntarily waive[s] any objection” to the latter’s exercise of venue discretion granted by the subject clause, a panel of the Appellate Court in Chicago has ruled.

            Acting in Saba Software, Inc. v. Deere & Co., 2014 IL App (1st) 132381, the panel seemed to distinguish prior authority where the clause at issue hadn’t been suggested by the later-objecting party.

            The clause in Saba permitted venue to be placed in any Illinois court, and the plaintiff chose Cook County.  Deere then sought transfer to Rock Island County, where its headquarters are located.

            Noting that the venue provisions of the Code of Civil Procedure may be waived, the court said that “[w]hen a party places [a venue clause] in a contract and the other party agrees, fundamental fairness requires that the party who placed it in the contract cannot later complain that the clause is void as against public policy,” absent prejudice to others’ due process rights.

Burden High When Contract Gives Party Interpretation Power

            When a contract gives one party the discretion to interpret its terms, the other party can establish a breach of contract only by alleging and showing that the first party’s interpretation is unreasonable, the Seventh U.S. Court of Appeals has ruled.           

            Applying Illinois law to a challenge to United Air Lines’ administration of its Mileage Plus Program, the court said that when the contract confers such discretion it is not enough to allege that a contract term is ambiguous and that the objector’s interpretation is supported by extrinsic evidence.  Hongbo Han v. United Continental Holdings, Inc., 762 F.3d 598 (7th Cir. 2014).

Retaining Payment Was Ratification Of Dubious Release

            Even if a general release was initially unenforceable under the doctrine relating to unanticipated claims, a party’s retention of the payment made under that release “independently ratified that release” and barred him from later suing on claims allegedly excluded under the unanticipated claims doctrine, a panel in the Appellate Court in Chicago has ruled.

            In Rohr Burg Motors, Inc. v. Kulbarsh, 2014 IL App (1st) 131664, a disgruntled vehicle purchaser accepted a full refund payment but claimed that the general release given to receive that payment did not cover his claims of fraud and misrepresentation because the vehicle had been damaged in an accident prior to purchase.  Interpreting the release as a matter of contract law, the court rejected that argument, but held that even if those claims were not anticipated when the release was signed, they were barred by the doctrine of ratification because the buyer kept the refunded price after learning of the claims.  

“[E]ven if we concluded that the release was voidable, we would find that Kulbarsh ratified the release by his retention of the consideration for his promise not to sue,” the court said.

            In addition, the court said the dealer could sue upon the release.  In addition to attempting to press the fraud and misrepresentation claims, the buyer had refused to return the vehicle after receiving the refund payment.

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