By William J. O'Sullivan [1]
In 2023 Connecticut's appellate courts decided numerous cases of interest to business litigators. Following is a summary of the year's most noteworthy decisions.
I. Contracts
A. Continued employment may provide sufficient consideration to support a non-compete
In Schimenti Construction Co., LLC v. Schimenti,[2] a non-compete case, the Appellate Court reversed the trial court's grant of summary judgment in favor of the defendant ex-employee. That ruling had been based on the premise that, when an established employee-at-will is required to sign a non-compete, the employer must provide consideration above and beyond continuation of the employment relationship. The Appellate Court disagreed.
The court noted a split among Superior Court decisions on the issue of whether continued employment may suffice as consideration for a non-compete. As for those decisions holding that additional consideration is required as a matter of law, the court held that they could not be reconciled with the Connecticut Supreme Court's decision in the 1934 case Roess-ler v. Burwell.[3] The court in Roessler had observed:
The underlying purpose of the defendant in entering into the agreement was to continue thereafter in the employment of the plaintiff at a mutually agreeable salary; the benefit offered him was such a continuance, in return for which the plaintiff was to receive his services and the benefit of the restrictive covenant in the agreement. The defendant received the benefit he sought in that he was continued in the employment more than four years after the agreement was made, until he voluntarily left it. In such a situation . . . there is consideration for the agreement, and it can be enforced.[4]
But the Appellate Court did not go so far as to hold that continued employment necessarily constitutes sufficient consideration for a non-compete; the court found only that there was at least a genuine issue of material fact in this regard. "Because he was an at-will employee, the defendant's employment could have been terminated by the plaintiff at any time, and, thus, the defendant's continued employment could constitute sufficient consideration to support the nondisclosure agreement."[5] The court's observation that continued employment "could" support the non-compete underscores the need for factfinding.
The court also pointedly noted that - like the defendant in Roessler - the defendant "voluntarily resigned from his employment with the plaintiff four years after executing the nondisclosure agreement."[6] The court added that the defendant "may present evidence that there was no connection between the nondisclosure agreement [which included the covenant not to compete] and his continued employment; but, if connected, continued employment can be sufficient consideration for a restrictive covenant."[7]
Because a factbound inquiry was required, the Appellate Court determined that the trial court erred in granting summary judgment, reversed the judgment below, and remanded the case for further proceedings.
This decision is notable for the fact that in many of the Superior Court cases on this issue, the court's approach to consideration seems binary: either it exists or it does not. In Schimenti, the court frames the issue as the sufficiency, not mere existence, of consideration.
B. With no evidence of parties' intent concerning ambiguous contract term, court applies its own judgment on the most logical interpretation.
In Cody Real Estate, LLC v. G &H Catering, Inc.,[8] the Appellate Court was tasked with interpreting ambiguous contract terms - which ordinarily requires a factual determination of the parties' intent - in a case that had a trial record bereft of evidence on that very issue.
The plaintiff, a commercial landlord, sued its tenant and certain guarantors for nonpayment of a lease. The original lease had an initial term of ten years, running from 1998 to 2008, followed by "one (1) single option to renew the term" for a period of five years.[9] The guarantee agreement provided, in relevant part, "[t]he obligations, covenants, agreement and duties of [g]uarantors under this [g]uarant[ee] are unconditional and shall in no way be affected or impaired by reason of ... the renewal of the [l]ease."[10]
The tenant exercised its contractual right to renew, and subsequently entered into two further lease modification and extension agreements with the landlord. During the term of the second extension, the tenant began to fall behind in its rent, prompting the landlord to sue the tenant and the guarantors.
The guarantors argued that their guarantee did not survive beyond the initial renewal term contemplated by the original lease. "Relying on the provision of the initial lease that the tenant had 'one (1) single option to renew,' as well as the language of the guarantee agreement providing that it would not be affected or impaired by the occurrence of certain events, including 'the renewal of the [l]ease,' the corporate guarantors argue that the renewal language of that agreement applies only to the single renewal of the initial lease. . ."[11]
The landlord countered, "the guarantee agreement contains no language that limits its duration and, therefore, it is continuing in nature. Under this view, the agreement remained in full force and effect at the time of the second lease extension and, as a consequence, the corporate guarantors are liable for the tenant's obligations under the initial lease and both lease extensions."[12] The trial court agreed with the landlord, and entered judgment in its favor against the tenant and the guarantors.
The Appellate Court found "an arguable ambiguity in the guarantee agreement," but noted that the parties "presented no extrinsic evidence at trial to clarify that ambiguity,"[13]such as evidence about which party had drafted the guarantee agreement.[14] Consequently, "the trial court's interpretation of the guarantee agreement was based solely on the language of that agreement and the lease and did not involve the resolution of any evidentiary issues of credibility."[15] Because the trial court's decision was "predicated entirely on the four corners of those agreements,"[16] the Appellate Court's task involved a question of law, and thus the exercise of plenary review.
On that sparse record, the court's approach was simply to apply its own judgment as to "the more reasonable interpretation of [the contract] language."[17] In so doing, the court applied the "bedrock rule of construction" that contract language should be accorded "a rational construction based on its common, natural and ordinary meaning and usage as applied to the subject matter of the contract."[18] Under that approach, the court concluded that "the trial court adopted the better and more reasonable construction of the language at issue in concluding that renewals of the lease were expressly 'anticipated and proactively acknowledged as possible by the guarantee' agreement."[19]
C. Insurance policy did not cover COVID-related loss of business income.
In Connecticut Dermatology Group, PC v. Twin City Fire Insurance Company,[20] three healthcare facilities sought to recover COVID-19-related losses from their insurance companies, under policies requiring the insurers to "pay for direct physical loss of or physical damage to" covered property.[21]The plaintiffs claimed that as a result of the pandemic, they had suffered a loss of business income, and had incurred the expense of daily sanitation and the construction of physical barriers within the workspace. The Connecticut Supreme Court disagreed that losses of this type were covered, and affirmed the trial court's entry of summary judgment for the defendant insurance companies.
The plaintiffs argued that they were "seeking coverage for a 'direct physical loss' of their properties because the COVID-19 pandemic physically transformed their 'ordinary business properties' into 'potential viral incubators that were imminently dangerous to human beings.'"[22] The court credited "the ingenuity of this argument," but rejected the notion that there had been a "physical transformation" of the properties; "[r]ather, the COVID-19 pandemic caused a transformation in governmental and societal expectations and behavior that had a seriously negative impact on the plaintiffs' businesses."[23]
The plaintiffs also argued that the loss of productive use of their properties was equivalent to physical loss. The court rejected that proposition, instead "agree[ing] with the multiplicity of courts that have concluded that 'use of property' and 'property' are not the same thing, and the loss of the former does not necessarily imply the loss of the latter."[24]
The court also distinguished the plaintiffs' case from various decisions in which "contamination of a property by harmful substances or bacteria was deemed to be a direct physical loss."[25] The court noted that in those cases, "it was the physical presence of the contaminants at the properties that caused the loss," whereas the threat posed by COVID-19 was "the potential for person to person transmission of the virus within the building."[26] On this issue, the court was persuaded by "the cases that have held that the virus is not the type of physical contaminant that creates the risk of a direct physical loss because, once a contaminated surface is cleaned or simply left alone for a few days, it no longer poses any physical threat to occupants."[27]
In sum, "the plain meaning of the term 'direct physical loss of ... [p]roperty' does not include the suspension of business operations on a physically unaltered property in order to prevent the transmission of the coronavirus. Rather, in ordinary usage, the phrase 'direct physical loss of ... [p]roperty'...
