Confidentiality Clauses Must Meet Public Policy Tests

Focus on Contract Law

Sharp Thinking

No. 149      Perspectives on Developments in the Law from Sharp-Hundley, P.C.    March 2018

Confidentiality Clauses Must Meet Public Policy Tests 

            “A bargain to refrain from disclosing to a third person, to whom a duty of disclosure exists, information of value or interest to him is illegal.”

            So says the Appellate Court in Chicago in a decision concerning confidentiality terms in contracts.

            Ruling in Signapori v. Jagaria, 2017 IL App (1st) 160937, the court dealt with a situation where the confidentiality provision was inserted to conceal from banks and the Small Business Administration that the parties were violating previous agreements with those bodies.  The court rejected an argument that relief should be denied because violation of bank fraud statutes had not in fact been proven. 

            “There is no question that the purpose of the confidentiality provision was to conceal the parties’ prior and continuing misrepresentations to the banks and the SBA,” the court said.  “We do not see any indication that the nature of the injury, whether criminal or tortious, is essential to the central issue of whether the confidentiality provision is contrary to the public policy of this State.”

Existence Of Release Depends On Operative Language

                A document’s apparent intent to release claims is insufficient if the document does not also contain operative release language.

            That’s the ruling of a panel of the Appellate Court in Chicago in C.O.A.L., Inc. v. Dana Hotel, LLC, 2017 IL App (1st) 161048.

            In Dana Hotel, plaintiff and defendant made an agreement for plaintiff to manage a restaurant in defendant’s hotel.  Things did not go well, and the parties entered into a separation agreement.  That agreement contained language referencing release provisions therein, and even included a section including “Release” in its title. Nowhere, however, was there any actual release language. 

            The panel held plaintiff had not released its claims against defendant.  “Releases can be general or specific, and the scope of releases is a subject of frequent litigation,” the panel said.  “It is impossible to interpret a release without any express language present.”  Furthermore, it said, “releases are strictly construed against the benefitting party and must spell out the intention of the parties with great particularity.  We will not read a release into a contract where one is not expressly provided.”

            Dana Hotel also teaches that contract drafters should draft integration clauses with care.  In Dana, the clause provided that the separation agreement superseded all prior agreements “with respect to the subject matter hereof.”  The panel held that the management agreement (under which the parties had done business) “was a more comprehensive document” than the separation agreement and that therefore promises in the former were not barred by the latter.

Court Enforces Liquidated Damages Clause

            The present value of future lost rent is an appropriate measure of a commercial lessor’s damages upon the tenant’s breach, though there may be a set-off under the landlord’s duty to mitigate.

            So held a panel of the Appellate Court in Chicago recently.  1550 MP Road, LLC v. Teamsters Local Union No. 700, 2017 IL App (1st) 153300.

            In 1550, the court dealt with a lease term which gave the landlord the right upon tenant’s breach to “a sum of money equal to the value of the Rent provided to be paid by Tenant for the balance of the Term.”  The successor to the tenant (upon which liability was imposed under successor liability principles) contended that the clause imposed an unenforceable penalty.

            The court noted that three elements must be present for a liquidated damages clause to be enforceable: “(1) the parties intended to agree in advance to the settlement of damages that might arise from the breach; (2) the amount of liquidated damages was reasonable at the time of contracting, bearing some relation to the damages which might be sustained; and (3) actual damages would be uncertain in amount and difficult to prove.”

            Finding those tests met, the panel enforced the liquidated damages formula.

Existence Of Contract Defeats Quantum Meruit Claim

            In determining whether a plaintiff may recover in quantum meruit, it doesn’t matter so much whether the plaintiff is seeking to recover on a contract as whether the contract exists and covers the items for which plaintiff seeks recovery under a quantum meruit basis.            

            That’s the message of a recent decision in the Appellate Court in Chicago.  Ruling in Archon Constr. Co. v. U.S. Shelter, L.L.C., 2017 IL App (1st) 153409, the court said that “[i]f the work for which a plaintiff seeks remuneration under a quantum meruit theory concerned the same subject matter of the express contract, then the quantum meruit claim is barred as a matter of law.”          

            In Archon, plaintiff had first sought recovery for certain work as “extras” under a construction contract, but then dismissed the contract claim and sought recovery only in quantum meruit.  However, the contract existed and had terms covering the work at issue, and that, the court said, doomed the quantum meruit claim.

            Quantum meruit means “as much as he deserves” and often is pleaded as an alternative to a contract count.  Archon teaches that such pleading must be undertaken with care, lest matter introduced on an unsuccessful contract claim be fatal to the quantum meruit count as well. 

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