A 200-year-old chasm you may have to cross

There is an old expression that hard cases make bad law. The reference is to a split in the legal system that has existed for a thousand years. What if one side in a legal battle has all the law on his side, but the equities go the other way? This challenge has, and still does, confront judges and juries.

American law originated in England. The early English civil law system was complex and strict to the extent that grave injustices were allowed. In desperation, complainants petitioned the chancellor, who was basically the king’s business advisor, a CEO. The chancellor took it upon himself to intercede where the law courts, by law, could not.

By this intercession, so many petitions were filed with the Chancellor that he formed his own court system, called the Chancery (equity) court.

In the United States, we have had this split between “law” and “equity” for 200 years. The federal rules of civil procedure combined the two systems, but the ideas are still with us.

What is the difference?

Chancery or equity courts are not permitted to award money damages. But what they can do is equally powerful. Chancery courts can interpret the law, decide on the meaning of contract terms, issue injunctions (“you cannot do that”), mandamus (“you must do that”), and issue a vast array of other remedies.

The distinction between law and equity is so deep that it is still with us. Delaware, for example, still has the split system.

How can you use equity law?

There is a concept in the law called “anticipatory repudiation.” Whether you know it or not, anticipatory repudiation arises on a regular basis.

We are all familiar with the idea of breach of contract. Often the major concern is not whether there is a breach, but what you can do about it? And what happens when there is not yet a breach, but you expect one in the future?

An example: The general contractor is two months late in making progress payments, and you are owed $100,000. You stop work. The general sends you a letter saying you are a wonderful electrical contractor and will pay if you return, depending on payment by the owner. His last words are: “We are experiencing a temporary cash flow problem.”

In this scenario, the contractor has breached the contract through non-payment and is indicating that future payments are iffy. Depending on the language of your subcontract, stopping work may expose you to liability. An emergency motion in court for a declaratory judgment, claiming that the general may breach the contract in the future, is a viable option.

Employment contracts have always been popular. With the rise of insurance rates, many companies are “hiring” people (engineers, sales agents, etc.) as “independent contractors” under contract terms and conditions. The nature of these agreements will be the subject of a future article.

In law, a person is free to leave his employer and join another company or form one of his own. The result may be devastating to the employer, so these contract-hire agreements often contain restrictions. The agreement with the contract hire or employee may have a clause “not to compete.” And there may be clauses prohibiting or limiting the use of client lists, proprietary information or other sensitive material.

When the clauses are breached by an executive or sales agent or engineer who quits your firm, the monetary effect on your company may not be readily known. How do you address the problem? Through equity.

Perhaps the main approach is to file an action in court to enjoin (injunction) the departing employee, not from leaving your employ, but from competing with you in your market area, or from using your client lists to solicit business or from designing and marketing a product based on proprietary information he took from you, or from any number of other hurtful things that he agreed not to do in the “non-compete” agreement.

Again, no damages are being sought, as that would be an action at law.

Equity defenses

It is as important to know the defenses in equity as it is the bases of the claims. The concepts are ancient, but no older than the human conscience. Here are a few:

Unclean Hands

The concept is this: Although you may have a right to an injunction or mandamus or other equity relief, your own bad acts led to the problem and therefore you should not be able to profit from them. Sound silly?

The concept, not the archaic expression, is a powerful negotiating tool. If you can show that the other side had information that was kept from you, or that he had ulterior motives in his actions, you will have a leg up on your opponent.

Laches

In modern law, there are statutes of limitation. If you want to file a lien, the paperwork must be filed within the exact number of days listed in the statute. The same with bond claims. A suit for breach of contract must be filed within one, two, three years, depending on the jurisdiction. Missing these deadlines is deadly.

In equity, a delay in making a claim, even though the statute of limitations has not expired, can be equally dangerous.

The idea of laches (do not use this term in negotiations as it won’t get you anywhere) is that by delaying your request for relief (time extensions, extras, acceleration damages), the other side is unaware of your plight and is caught off guard by a later demand.

So, you want a progress payment and you are concerned that if you raise an issue concerning delay/disruption/acceleration etc., payment could be postponed. You hold off on the claim, perhaps until the job is complete. No problem with the statutes of limitation, but you have given your opponent an argument: “Had I known at the time, I could have done something about it.” That is laches.

Where there are bad acts, and there is no adequate remedy at law, think equity. It may help you to reframe the problem so that a court can provide relief. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, USBuildlaw@aol.com or www.ittig-ittig.com.