Delaware Business Lawyer Blog

In Delaware, the statute of limitations for breach of contract is 3 years. Under Delaware law, however, “specialty contracts” have a 20-year statute of limitations. A specialty contract is one that is under seal. To be under seal, all that’s needed is word “SEAL” to the right of your signature. The document itself does not have to contain language indicating that it was your intention to sign under seal. The signature line would look like this:

______________________________ (SEAL)
CHARLES SNYDERMAN

Another significance of signing a contract under seal is that the person who signed it cannot challenge the validity of the contract based on a lack of consideration. To put this in context, consideration is one of the essential elements needed in order for a contract to be enforceable.
Consideration is something given by one party to a contract in exchange for something given by the other party. Here's an examples that helps explain the concept of consideration.

Let’s say you’re already working for an employer. The employer asks you to sign a non-compete agreement, which you do. Later, you resign and start working for a competitor. Your employer sues you for breaching the non-compete agreement. The Delaware courts have ruled that once an employment relationship has been established, a subsequent agreement by the employee not to compete has to have consideration to be enforceable. In other words, the employee must receive some form of compensation in exchange for signing the non-compete agreement. The compensation can take different forms, including such things as a salary increase, a promotion, etc.

If there’s a lack of consideration, there was no contract in existence unless the contract was under seal.

As a Delaware litigation lawyer, I am sometimes consulted by clients who are being sued by their neighbors. While the facts are always different, the dispute usually centers around 1 neighbor who is upset over how he or his property is being affected by what another neighbor is doing. This is the first in a series of articles that addresses the balancing test the courts apply in deciding whose interests to protect.

Take the case of a homeowner's association which files a lawsuit in the Delaware Court of Chancery seking an injunction poreventing a homeowner from maintaining her property in a way that they say violates the deed restrictions, and requiring that she make alterations to bring her house into compliance. In this particular case, the complaint was that when she built her home, she used vinyl siding. The architectural review committee of the homeower's association had not approved the use of this kind of siding.

In these types of cases, the Delaware courts start with the age old legal doctrine that favors the free use of one's land. For this reason, the courts in Delaware look suspiciously at restrictions that give an architectural review commitee authority to review plans because restrictions of this nature tend to be what the courts call "arbitrary and capricious" or unreasonable. Nevertheless, if the review and approval process is controlled by clear, specific and reasonable standards that require plans to meet specific requirements, the courts feel that the potential for arbitrary decisions is minimal, and they enforce the restrictions. On the other hand, if the committee review process is based only on aesthetic considerations, they're viewed as vague, imprecise or unclear and do not usually result in evenhanded application. In these instaances, the authority granted to the review committee is not enforced.

In this lawsuit, the deed restrictions said nothing about vinyl siding. The reasom the committee objected was because they felt that property values might be adversely affected. The court ruled that "a homeowner may begin construction before obtaining approval where the approving authority unreasonably refuses to approve the homeowner's plans."

As an avid Phillies fan, I’m excited about the 2011 season which starts in less than a month. But it got me thinking about the doctrine of assumption of risk and how it relates to fans who are injured at the ballpark by a bat or ball.

I thought I’d share a true story that made me laugh although I did admire the creativity of the injured fan’s attorney. A woman was attending a baseball game. She was seated along the 3rd base line in the first row directly behind the dugout. During the game, a player hit a foul ball that struck the woman in the head and caused her to lose consciousness. Although the woman testified that she was aware that there’s a danger of being hit by a foul ball or even a bat, she claimed that she was distracted by the San Diego Chicken who was performing nearby. One of the questions she was asked was whether she understood that the game was not going to be stopped while she was watching the Chicken. She of course answered “yes.” In ruling against her, the Court noted that the fact that the Chicken appeared during the game did not absolve her from her duty to protect herself from the dangers inherent in the game of baseball. By the way, the fan also sued the Chicken!

Incorporating in Delaware. The process is easy. In fact, the forms you need are available for free on the Division of Corporation's website. So you download the form, send it in with a check, and you're a Delaware corporation. If you've done your research, you'll know that a taxpayer identifcation number is needed. If you haven't done your research, you'll find out soon enough when you try to open a bank account in your corporation's name.

If you intend to do business in another state (besides Delaware), you'll be required to become qualified in that state to do business as a foreign corporation.

But you're not finished. You should also have organizational documents, such as a statement by the incorporator, resolutions by the shareholders, resolutions by the directors, by-laws, stock certficates, a corporate seal and more. If you have partners, you'll also need a buy-sell agreement.

Over the years I've had a number of clients retain my services long after their accountant helped them become incorporated in Delaware. Unfortunately, the accountant did not let them know about these other documents, or that they should get help from a Delaware business attorney. In most cases, it's not too late to work with an attorney and correct the problems.

So if you're in the situation described above, it would be in your best interest to schedule an appointment withh an experienced attorney to review where you are and where you need to be.

A Delaware lawyer I know recently asked for advice on what he should tell his client, the father of a young driver. It seems that the father contacted the lawyer because his car insurance premiums were extremely high due to his son being the regular driver of one of the cars owned by the father. Specifically, the father wanted to know whether it made sense to reduce the insurance coverage on the car to the minimum limits, and thereby lower the cost of the insurance.

What the father didn't realize, and what I told the lawyer who asked, is that by lowering the coverage to the minimum limits, he would be putting his son at great risk.

Say, for example, that the son is an an accident caused by the neligence of another driver. Let's also assume that trhe other driver also had minimum limits. This means that the most the son could get from the other driver's insurance company is $15,000 (the minimum coverage). But what if the son is seriously injured? What if his injuries prevent him from working a full-time job for the rest of his life. Who is going to make up for this financial loss? Well, if the father reduces the coverage on the car his son drives to $15,000, the answer is that nobody will provide money to the son for his future losses.

Had the father maintained liability coverage of $100,000, or better yet, $300,000, and got the same coverage in case the other driver is underinsured, the father's insurance company would have to pay the son for his losses, up to the amount of coverage.

The lesson to be learned is while you're considering lowering your coverage in case you injure someone else, remember that you are also, in effect, lowering your own coverage in case you get injured by another person who is driving around with the same coverage that you have.

Injunctions in Delaware can fall into 1 of 3 categories:
(1) temporary restraining order, (2) preliminary injunction, and (3) permanent injunction. The Court that issues injunctive relief is the Delaware Court of Chancery. A permanent injunction is a final determination by the Court after a trial. A preliminary injunction is what’s granted on a temporary basis to maintain the staus quo until the Court decides whether to grant a permanent injunction. Where the plaintiff fears that the defendant will take action while the plaintiff is in the process of seeking a preliminary injunction, the plaintiff can request that the Court issue a temporary restraining order, even if there’s no notice to the defendant or an opportunity for the defendant to be heard. Before the Court will issue a temporary restraining order, it must be shown that there’s a treat of imminent and irreparable injury. Once this is shown, the temporary restraining order will be issued unless the Court believes that the plaintiff’s claim is frivolous,, or that the risk of harm to the defendant if the injunction is granted is greater than the risk of harm to the plaintiff if the injunction is denied, that the plaintiff has delayed in seeking the injunction which and is partly responsible for the emergency it claims exists.

The party seeking a preliminary injunction (the plaintiff) is required to show that there’s a reasonable probability that the plaintiff will prevail when there’s a final hearing on the merits of the case. In order to meet the standard for showing that the claim is meritorious as opposed to frivolous, the plaintiff only needs to show that if the facts alleged by the plaintiff are true, it will be entitled to relief.

Before the Court will issue a preliminary injunction, the plaintiff also has to show that it’s facing an imminent threat of irreparable injury if the preliminary injunction is not issued. In order to show irreparable harm, the plaintiff must demonstrate that money damages alone does not provide an adequate remedy. The Court of Chancery will not issue a preliminary injunction if the injury to the plaintiff is only speculative, or if the act the plaintiff is concerned about has already happened.

And, the final thing the plaintiff must show is that when the Court balances the interests of the plaintiff and the defendant, the scale tips in favor of the plaintiff. The balancing test involves the Court comparing the probability of harm to the plaintiff if the injunction is not granted, versus the probable harm to the defendant if the injunction is granted.

Let’s assume that a motion for a preliminary injunction is granted. What remedy does the defendant have if, after the final hearing on the merits, it’s ultimately determined that the plaintiff is not entitled to injunctive relief? To protect the defendant, the Court requires the plaintiff to post a bond in an amount that will compensate the defendant for its losses if it is wrongfully enjoined. The Court usually errs on the high side in determining the amount of the bond because the defendant’s damages are usually unknown until after the injunction is vacated.

Companies that are incorporated in Delaware but do no business in this state are sometimes sued in the Delaware courts simply because they are incorporated here. If the company has no offices in Delaware or anywhere else in the U.S. for that matter, it makes sense to try to get the lawsuit thrown out (dismissed) rather than have to litigate here.

Your Delaware attorney will file a Motion to Dismiss on your behalf. The argument supporting the motion is that the Delaware court has no jurisdiction over your company. Once the Motion to Dismiss is filed, the plaintiff has the burden of alleging facts that make a prima facie showing of personal jurisdiction over your company (the defendant). To meet this burden, the plaintiff is required to adduce facts which "establish with reasonable particularity'" that the defendant transacts business in Delaware. To assist the plaintiff in establishing with reasonable particularity that there is jurisdiction over the defendant, the Court generally allows the plaintiff to take what’s known as jurisdictional discovery before the Court decides whether to dismiss the case. However, jurisdictional discovery will not be allowed if the plaintiff’s claim is frivolous.

If the defendant files an affidavit with the Court stating facts that show the Court does not have jurisdiction, the plaintiff will not be allowed to rely on unsupported allegations in the Complaint.

For the Court to exercise jurisdiction over the defendant, the plaintiff has to show either:
(1) that defendant regularly does business or solicits business in Delaware, engages in any other persistent course of conduct in Delaware, or derives substantial revenues from the services or products used or consumed in Delaware; or
(2) that the defendant engaged in conduct that falls within at least one of the activities described in the Delaware long-arm statute, and that the plaintiff’s cause of action arises from defendant’s acts or omissions that took place in Delaware.

When the Court is faced with mere unsupported allegations regarding personal jurisdiction over the defendant, allowing the plaintiff to conduct jurisdictional discovery would amount to allowing it to conduct a fishing expedition in order to construct a basis for jurisdiction. In that event, jursdictional discovery will be denied, and the case will be dismissed.