Tag: early termination

No Future Damages Allowed in Wage Payment and Collection Act Claim – IL 2d Dist.

Eakins v. Hanna Cylinders, LLC, 2015 IL App (2d) 140944 is the third in a trio of recent Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq., (“Wage Act”) cases that address an employee’s rights to recover future damages after an employer prematurely terminates a multi-year contract.

(The other two cases – Majmundar v. House of Spices (India), Inc., 2013 IL App (1st) 130292 and Elsener v. Brown, 2013 IL App (2d) 120209 are summarized here and here.)

The Eakins plaintiff sued after he was fired 14 months into a 24-month contract to serve as a plant manager for the industrial company defendant.  The employment contract was silent on grounds for termination.  The plaintiff sought as damages, compensation for the ten month remaining on the employment contract under a breach of contract theory and he joined a Wage Act claim.  The trial court entered summary judgment for the defendant on both claims and the plaintiff appealed.

Held: Breach of contract judgment reversed; Wage Act judgment for employer affirmed.

Q: Why?

A: The appeals court reversed the breach of contract judgment for the defendant employer.  In Illinois, an employment agreement with no fixed duration can be ended at the will of either party.  The contract here was clearly for a fixed term, 24 months, and so wasn’t at will.  By firing the plaintiff 14 months into the contract term, the defendant breached.

The court rejected defendant’s argument that the plaintiff’s failure to meet certain performance metrics (e.g. keep costs down, grow market share, meet sales quotas, etc.) justified defendant’s premature termination of the plaintiff.  The court found that since the contract didn’t specify poor performance (as opposed to outright failure to perform – e.g. by not showing up to work) as a ground for contractual cancellation, the defendant breached by firing plaintiff before the 24 months was up.

Otherwise, according to the court, any employer could transmute a fixed-term contract into an at-will one by claiming the employee didn’t meet the employer’s performance requirements.  The court remanded to the lower court so it could decide plaintiff’s money damages. (¶¶ 23-29).

The court did affirm judgment for the defendant on the Wage Act claim though.  Looking to Majmundar for guidance, the court held that unpaid future compensations coming due under an untimely ended employment contract doesn’t qualify as “final compensation” under the Wage Act.  The reason for this is that once an employee is fired, he no longer performs any services for the employer.  So the employer isn’t receiving anything of value from the employee to support an obligation to make future payments. (¶¶ 31-32).

Take-aways:

Where a contract is for a fixed term and doesn’t provide for “for cause” firing or otherwise spell out grounds for termination, the contract will be enforced as written in the employee’s favor and his failure to meet an employer’s subjective work standards won’t constitute a basis for nullifying the contract;

Future payments due under a fixed-term contract aren’t considered final compensation under the Wage Act since there is no reciprocal exchange (services for wages) once an employee is fired;

Procedurally, the case makes clear that the denial of a summary judgment motion is appealable so long as there are cross-motions for summary judgment filed and the disposition of those motions resolves all issues in a given case.

 

Commercial Frustration and Prior Material Breach – Mizzou Appeals Court Weighs In

Clean the Uniform Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602 (Mo. 2009), a case from a jurisdiction I don’t practice in and that involves an unsexy fact pattern and monetary amount (less than $20K), still has some across-the-board relevance for its examination of liquidated damages clauses and the commercial frustration contract defense – two staples of commercial disputes.

The plaintiff and defendant entered into a three-year contract (the “Services Contract”) for plaintiff to rent cleaning uniforms and supplies to the defendant.  The contract called for the defendant to make at least partial payments on a weekly basis.  The contract contained a liquidated damages provision that said if the defendant prematurely terminated the Services Contract, the plaintiff could recover 50% of the average weekly rental charges for the six month period preceding the breach times the number of weeks remaining in the contract term.

The Services Contract also provided that it would be suspended for events that occurred beyond the parties’ control (a “force majeure” clause).

Defendant defaulted when its own one-year contract (the “Hospital Contract”) with a large VA hospital expired and wasn’t renewed.  Without the large VA hospital account, defendant couldn’t pay under the Services Contract.

Plaintiff sued to recover past-due amounts and liquidated damages under the Service Contract’s early termination provision.  The defendant argued that the VA hospital’s refusal to renew the Hospital Contract was an event beyond defendant’s control and excused its contract obligations to the plaintiff.

The trial court entered judgment for the plaintiff and the defendant appealed.

Held: Affirmed.

Q: Why?

The court found that the Hospital Contract’s termination was an event beyond defendant’s control.  The law is that if a party to a contract wants its performance to be excused if a certain event happens, and that event is reasonably foreseeable to happen after a contract is signed, the party should expressly provide for that contingency in the contract.

The commercial frustration doctrine posits that “if the happening of an event not foreseen by the parties and not caused by or under the control of either party has destroyed or nearly destroyed either the value of the performance or the object or purpose of the contract, then the parties are excused from further performance.”

While performance is technically still possible in a commercial frustration case, the defense will apply if the expected value of performance by a party has been destroyed by an intervening and unexpected event.

The court held that the defendants should have appreciated that the Hospital Contract could expire during the term of the Services Contract and not be renewed.  The defendant could have negotiated to make the Services Contract dependent on the continuing viability of the Hospital Contract but didn’t do so.  It wrote: “non-renewal of the [Hospital Contract] was a reasonably foreseeable risk at the time of contracting that did not excuse Customer’s performance under the [Services Contract].”

For the same reason, the defendant’s argument that it’s default was caused by an event beyond its control failed.  The Service Contract’s force majeure provision listed “strikes” and “lockouts” as specific events beyond the parties’ control.  But a third party’s refusal to renew an ancillary agreement (here, the Hospital Contract) wasn’t similar enough to a strike or lockout to absolve defendant’s payment obligations under the Service Contract.

Afterwords: To prevail on a commercial frustration argument, a defendant has a heavy burden.  Parties should take pains to spell out events that could happen during the term of a contract that makes it impossible for one party to perform its obligations.  A failure to clearly account for contingencies can result in a court finding that you assumed the risk of an intervening event making contractual performance impossible