I. INTRODUCTION
This article is meant to serve as a practical tool for litigators defending contract disputes. It is not intended to be a comprehensive analysis of the areas of law discussed herein but, instead, it is intended as a checklist of issues to consider when such a litigation is being defended and as a brief analysis of the interplay between the various concepts discussed herein.
II. GETTING STARTED
When defending an action arising from a contract dispute, no step is more crucial than to read the contract (including all attachments) carefully, repeatedly, and in its entirety. A litigator must fully understand the nature of the agreements and the relationship formed between the parties. Conceptually, this seems simple enough, but this analysis is surprisingly and consistently neglected. Know the contract at issue inside and out.
While reading the contract, prepare a list of “players” and their respective duties and obligations. Make a complete list of all documents or other exhibits that form the complete contract, whether as attachments or documents incorporated by reference. Then immediately obtain full and complete copies of these documents and exhibits. As with the contract itself, make sure that each of the additional documents and exhibits has been identified and read in its entirety.
Next, compare the contract to the allegations of the plaintiff’s complaint. This will prove useful in identifying discrepancies, errors, and/or omissions in the plaintiff’s understanding of the contract and in the dispute. As this is being done, make a list of all relevant documentation that may later need to be requested in discovery from either the plaintiff or any nonparty. Such documents may include information the plaintiff was required to generate, other exhibits, specifications, standards, or other related materials. In addition to determining which document requests are necessary, begin defining the areas of inquiry for other written discovery and depositions. Consider the use of request for admissions to establish the genuineness of the contract and other documents for introduction into evidence at trial.1 Combining these analytical steps with the initial formation of your discovery outline will prove to be efficient, strategic, and cost-effective.
Further, as the contract is read, analyze whether it is written to be neutral or instead favors one party over the other. If possible, determine who was involved in the negotiation and review of the contract and who, in particular, reviewed the contract on behalf of the plaintiff as well as for the client. When answering the complaint, avoid “long-shot” defenses such as unconscionability, duress, lack of consideration, or illegality, unless clearly supported by the facts.2
Never assume that opposing counsel has the entire contract or that he has read it carefully or in its entirety. Always ask for a complete copy of the entire agreement from opposing counsel in the initial discovery stage of the litigation. This will confirm that all parties are litigating over the correct and entire contract or, at the very least, that the defense is litigating over the correct and entire contract.
Likewise, never assume that the client has provided the entire contract. Always obtain a full and complete copy of the client’s file including all contract documents and exhibits. Also obtain from the client copies of all correspondence (including letters, faxes, and e-mails), previous negotiation drafts, memoranda, notes, photographs, and recordings.3 At the outset of the litigation, always take time to examine the client carefully to ascertain all facts, good and bad, so as to avoid surprises to the greatest extent possible.
As a matter of good practice, make a habit of copying the client on anything sent or received by your office in the matter to ensure that the client has as complete a file as you have. When served with discovery, establish a system to get it to the client as soon as possible so that the client has ample time to formulate accurate and complete responses. This will also help ensure timely responses to opposing counsel.
At the outset of the litigation, do some preliminary background work on both the plaintiff and plaintiffs’ counsel. Do research, including Internet or other searches, on the plaintiff and also on any potential witnesses, either lay or expert. In addition to corporate web sites, consider other sources of information such as MySpace4 and Facebook.5 A surprising amount of information can be obtained through this sort of investigation.
Further, investigate the plaintiff’s experience and expertise in the field that is the subject matter of the dispute. It is also helpful to determine the plaintiff’s financial viability. This information can give you insight into whether the plaintiff can afford protracted litigation expenses and whether the plaintiff can satisfy any judgment that may be obtained on behalf of the client. This information will also allow for a more accurate litigation summary to the client.
It can also be helpful to research the experience and expertise of the plaintiffs’ counsel to evaluate his areas of practice and relative competency. Further, ascertain the plaintiffs’ counsel’s trial experience. Knowing this can be of significant benefit in determining the likelihood of settlement or resolution by trial.
III. ANALYZING THE CONTRACT
A. DETERMINING CONTROLLING LAW
Different laws apply depending on the nature of the contract at issue. There are myriad types of contractual disputes, and it is crucial to determine at the outset whether the dispute is controlled by statute, common law, or a combination of the two.6 Much of the current litigation arising out of commercial contract disputes involves mixed transactions dealing with both goods and services.7 A determination of whether the contract is solely for goods, solely for services, or is mixed can be crucial because it may denote significantly different rights and remedies under law.8
If the contract involves both goods and services, Indiana applies the “predominant thrust test” to determine whether the mixed contract is primarily one for goods or whether it is primarily for services.9 In essence, if the contract is exclusively or primarily for goods, then article 2 of the Uniform Commercial Code (“UCC”) will control unless the context otherwise requires.10 If the contract is exclusively or primarily for services, then common law will control.11
Under the predominant thrust test, the law applicable to a mixed contract dispute is decided by considering whether the transaction’s predominant factor, [its] thrust, [its] purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom).12
Under the predominant thrust test, courts will look at the following factors: (1) “the language of the contract . . . in light of the situation of the parties and the surrounding circumstances;” (2) “the circumstances of the parties” and the primary reason for entering into the contract; (3) the final product bargained for and whether that product is best described as a good or a service; and (4) “the costs involved for the goods and services, and whether the purchaser was charged only for a good or a price based on both goods and services.”13
Indiana courts have declined to consistently apply an alternate analysis known as the “bifurcation approach,” which some other jurisdictions follow.14 Under the bifurcation approach, the UCC would apply to that portion of the transaction involving goods, while the common law would apply to that portion of the transaction involving services.15 However, it is important to note that Indiana courts have explicitly left open the potential for using the bifurcation approach in some cases as a secondary approach in determining the applicable law.16 In light of this, when faced with a mixed contract, evaluate the contract under the predominant thrust test to determine the applicable law. However, keep in mind the possibility of arguing for the application of the bifurcation approach if the analysis under the predominant thrust test does not result in the desired controlling law.
B. IDENTIFYING THE CONTRACT DOCUMENTS
The contract documents originally signed may not, in fact, be the source of the dispute. As stated above, one initial step is to conclusively ascertain which documents comprise and govern the entire contract, including drawings and specifications. Once that has been done, analyze all of the documents as a whole along with the file you obtained from the client to clarify whether there have been modifications or amendments to the original contract and the process by which such changes were made.
This analysis may demonstrate that crucial, but often subtle, changes may have been made. This is where obtaining the client’s entire file and requesting all contract documents from the plaintiff in discovery becomes critical. All of these materials must be carefully reviewed to establish the actual contract that is the subject matter of the litigation. If amendments and/or modifications were made (or purportedly made) to the original contract, you should consider whether they were done so in conformity with the terms and conditions of the applicable contract.
C. SPECIFIC CONTRACT PROVISIONS AND CONDITIONS PRECEDENT TO THE INITIATION OF SUIT
1. Substantiation of Claim Clauses
Some contracts have provisions that prohibit a party from unilaterally filing suit. As such, examine whether there are conditions precedent to the plaintiff’s bringing suit and whether the plaintiff has complied with them.17 One such provision found in commercial contracts is a requirement that the plaintiff first provide a substantiation of its claim and its alleged damages before initiating litigation. This provision is usually designed to avoid needless litigation expenses and facilitate the exchange of information and more expediently resolve disputes.18 If such a presuit condition exists, ensure that the plaintiff has complied. Further, ensure that the client has complied with any similar terms that may apply before either a counterclaim or other claim is brought against a third party.
2. Forum Selection Clauses
Another fairly common provision in commercial contracts is a requirement that the plaintiff first provide the client with an opportunity to select the forum in which the dispute will be resolved before initiating litigation. A forum selection clause is “a contractual provision in which the parties establish the place (such as the county, state, or type of court) for specified litigation between them.”19 Determine whether the client has the opportunity to select whether the litigation is filed in state court, federal court, or in an arbitration setting and, if so, carefully analyze the benefits of each and the concomitant jurisdiction, venue, and procedural requirements.20
3. Arbitration Provisions
Develop a habit of looking for an arbitration clause in the contract while assessing the contract for the other clauses discussed in this section.21 The importance of whether the contract has this provision (and others), needs to be separately analyzed in the particular context. Be aware of the fundamental impact an arbitration clause may have on how the litigation transpires and what effect it may have on the other rights and obligations contained in the contract.
4. Venue Clauses
In addition to substantiation, forum, and arbitration provisions, some contracts may contain a mandatory venue clause.22 If there is such a clause in the contract, decide whether the plaintiff brought the suit in the proper venue compliant with the terms of the agreement. The clause may even mandate that a particular court (such as superior or circuit) be the requisite venue. If the stated venue is not favored by the client, thoroughly analyze this clause to see whether the venue provision is enforceable under statute and/or trial rules.23
If the plaintiff has failed to comply with any of the above contractual prerequisites, decide whether a motion to dismiss or other filing is appropriate and worthwhile. If a motion is not filed, ensure that each noncompliance by the plaintiff is raised as an affirmative defense to preserve those issues.
5. Choice of Law Provisions
Another common clause in commercial contract disputes is a choice-of-law provision.24 Complex litigations often typically involve businesses with citizenship, residence, and/or principal place of business outside Indiana.
For that reason, determine whether the laws of Indiana or some other state control.25 If the contract is silent on choice of law, do not assume that Indiana law applies. Instead, determine which state law applies by reviewing the background of contract negotiations, the place of performance, party citizenship, location of subject matter, and situs of the breach, which are factors considered by Indiana courts in determining which state law controls in contract actions.26
D. CRUCIAL CONTRACT PROVISIONS
The following are some of the more important contract provisions to look for when reading the contract.27
1. Attorneys’ Fees Provisions
The first and foremost determination is whether the contract contains an attorneys’ fee provision. If so, immediately ascertain whether the fee provision is a “one-way” or a “mutual” provision. A one-way fee provision, as the name implies, provides that only one party (determined according to the terms of the contract) will be awarded attorneys’ fees incurred in the litigation. A mutual fee provision usually states that any party forced to incur fees as a result of the breach of the other is entitled to an award of fees.
Even if not stated in the contract, an award of fees under either type of fee provision will almost always depend upon whether the party entitled to an award of fees is a prevailing party in the litigation.28 However, keep in mind that, under a mutual fee provision, each party may be entitled to set off some or all of the other’s fees if there is more than one prevailing party under the contract. This is because a fee award would be entered as a judgment entitling the client to set off that amount as against the plaintiff’s damages, if any, in favor of the client under the contract, Trial Rule 13, or both.
To the extent this type of clause is encountered, become adept at anticipating litigation expenses, especially costs and attorneys’ fees. Moreover, always use an attorneys’ fee provision to the maximum benefit of the client by using it as a means to recover additional damages, to offset damages, or to obtain a more favorable settlement for the client. Specifically, remain cognizant of counterclaims and, if the client may be entitled to an award of fees under a fee provision, consider raising this fee entitlement as a separate counterclaim.29 Further, determine when the fees begin to accrue, that is, when the dispute arose or when suit is filed. In cases where the contract is silent as to when fees begin to accrue and the fee provision is in the client’s favor, argue that fees should be awarded from the time the dispute arose. At the very least, argue that fees began to accrue when suit was filed.30
2. Contractual Right to Setoff
Review the contract to see if there is a contractual right to setoff or abatement. At common law, a setoff or abatement right allows one party to discharge, reduce, or otherwise diminish another’s claim.31 The contract may give one party the right to hold some or all of the monies at issue pending resolution of the dispute. To fully protect the client, the monies sought to be set off should be asserted in a counterclaim.32
However, the contract may expand a party’s rights to setoff or abatement over and above what is provided by Trial Rule 13. That is, the contract may allow the withholding of monies regardless of whether the amount sought to be set off exceeds the amount of the plaintiff’s claim. What needs to be established is whether the contract contains this language. Thus, give serious consideration to whether the contract broadens or at least makes clearer that the right to setoff may not be dependent on whether the amount sought to be set off exceeds the plaintiff’s claim. In fact, this provision is usually included in a contract to accomplish this very purpose.33
3. Liquidated Damage Provision
Also determine whether there is a liquidated damages provision and, if so, what triggers it and whether such damages continue to accrue.34 If the client is liable for liquidated damages that continue to accrue, you should ascertain whether steps need to be taken to “stop the bleeding.”35 If the client is entitled to recover liquidated damages for the plaintiff’s breach, ensure that you bring this as a counterclaim. Like attorneys’ fees and setoff provisions, be sure to consider a liquidated damages clause’s potential application in making the client a prevailing party (assuming the contract has a prevailing party attorneys’ fees provision).
4. Scope of Agreement
Make note of any warranties, promises, and/or representations that were made by any party to the contract. Also, determine whether all essential and material terms are contained in the contract. If they are not, locate the documents and texts in which they are contained and/or defined. Some contracts may reference legal or industry standards or other applicable guidelines governing the contract.36 Familiarize yourself with each such standard and evaluate whether there has been any noncompliance with any standard by any party that could be the basis for an award of damages to the client via a counterclaim.
E. ADDITIONAL CONSIDERATIONS
1. Conditions Precedent and Cure Obligations
In addition to presuit conditions, the contract may have other conditions precedent. As such, verify whether both the plaintiff and the client have complied with all such conditions precedent under the contract and, if not, what needs to be done to comply.37 Further, ascertain whether there is a “cure” obligation, that is, a requirement that a party who claims a breach of another party gives the other party an opportunity to rectify, or cure, the breach before litigation is filed.38 If there is a cure obligation, determine whose obligation it is, what it entails, the timing parameters for it, and what notice or other conditions must be followed. Further, if a cure obligation exists and the client was not offered an opportunity to cure, raise any unfulfilled cure obligations as an affirmative defense. Consider asserting the same as a potential counterclaim if the plaintiff’s failure to comply with the cure obligation has caused separate damages to the client.
2. Miscellaneous Contract Provisions
Contracts will often contain an integration or “zipper” clause. An integration clause is a “contractual provision stating that the contract represents the parties’ complete and final agreement and supersedes all informal understandings and oral agreements relating to the subject matter of the contract.”39 As a general matter, under Indiana law, the presence of an integration clause bars the introduction of parol evidence. The absence of this clause is more noteworthy than its inclusion. Consider whether you have any parol evidence issues and, if so, which exceptions you may be able to use to introduce parol evidence.40
Another miscellaneous contract provision sometimes seen in agreements is an “exculpatory clause.” An exculpatory clause is a contractual provision that relieves one party from liability resulting from negligence or other wrongful conduct.41 An exculpatory clause should be viewed in light of the client’s obligations contained in the contract in that the client may be relieved of liability despite failing to perform a requisite obligation. Despite being listed as a miscellaneous provision in the contract, such a clause may be very important and underscores the necessity of carefully reading the entire contract.
It is also helpful to ascertain who drafted the contract and whether the contract or common law permits ambiguous language to be construed against the drafter. As alluded to above, never ignore the boiler plate terms and provisions of a contract. These standard provisions are not always so standard and may contain important rights, remedies, and/or obligations. They should not be glossed over. Instead, they should be read with the same scrutiny as the rest of the contract.
Of additional importance is the determination whether there is a contractual waiver to a jury trial. Some contracts may provide that, whether state or federal court is the forum, the case must be tried to the bench. Most often, these provisions are either a combination of a determination by the party with the most bargaining power that a bench trial is preferable or, otherwise, incorporated into the agreement as a cost-savings provision since bench trials are usually less expensive than jury trials.
IV. DAMAGES ISSUES
Establish, as accurately as possible, the contract damages for both the client and the plaintiff. Immediately start to collect all documents and other evidence that support each aspect of the client’s damage claim, and decide which documents are needed to independently verify and/or refute the plaintiff’s damage claim. Never assume that the plaintiff will provide the documents necessary to support its claim. In fact, it is the best practice to not rely upon the plaintiff to establish its case. Instead, take the position of aggressively defeating it.
Further, avoid overinflating the client’s damages. Overinflation of damages invariably presents a weaker case as discovery progresses and the plaintiffs’ counsel uncovers the lack of merit in the overinflated claims. Even if the plaintiffs’ counsel fails to recognize the overinflation, it is unlikely that a court, arbiter, or jury will. In addition, overinflation of damages makes settlement more difficult since it gives the impression that you cannot reasonably estimate actual loss. When you begin substantiating your damages, consider whether the retention of one or more consultants or experts will be required to refute the client’s liability, to refute the plaintiff’s claimed damages, to support a defense or affirmative liability claim, or to establish the client’s damages.42
In essence, the sooner the necessary supporting documents are obtained, the easier it will be to favorably settle the litigation or to try the case should settlement fail. In any event, it is extremely valuable to accurately determine the true strengths and weaknesses of both the client’s case and that of the plaintiff.
V. LIABILITY AND DAMAGE-SHIFTING ISSUES
Another critical consideration in the defense of a contractual litigation is how to shift liability from the client. There are several ways to do this. A counterclaim is the most often used means of setoff and/or recovery of damages. Further, cross-claims and third-party claims may be used to receive contribution and/or established liability on another individual or entity. However, the contract may go beyond that concept and provide for a right of indemnification from a party in the lawsuit or a party not yet named. In essence, that individual or entity would act as a private insurance carrier and be liable for paying any defense costs and for indemnifying the client for any established liability. Whether such a provision exists in the agreement should be carefully analyzed.
VI. INSURANCE COVERAGE AND RELATED ISSUES
Be aware that there may be insurance policies that will cover some or all of the claims asserted by or against the client. Obtain copies, through discovery or otherwise, of all applicable insurance policies that may be in the possession of the client, the plaintiff, or a nonparty. Whenever possible, obtain the full policy rather than just the declaration sheet, which shows merely basic policy information such as coverage limits and endorsements.
Note that there may be numerous types of insurance available as they pertain to the claim. Uncover whether there is a commercial general liability (“CGL”) policy, an errors and omissions policy, or a builder’s risk policy. Note the coverage limits for each policy and whether there are any referenced excess and/or umbrella policies. Also, in a construction litigation, determine whether there are any relevant bonds (either performance or payment) or sureties.
When all policies are secured, carefully review each one to determine whether the client has any applicable insurance coverage.43 Have a good understanding of the type of insurance with which you are dealing in light of the allegations of the complaint. Many commercial clients will have a CGL policy as their primary policy. Reviewing the allegations of the complaint will give you a very good idea of whether there will be potential coverage under a CGL.44 However, keep in mind that the generally accepted law in Indiana (as well as numerous other jurisdictions) is that there is usually no coverage under a CGL for breach of contract allegations.45 In close cases, it is usually advisable to make a claim. Keep in mind, however, that a tender may trigger a declaratory judgment suit by the carrier and result in additional litigation for the client. That notwithstanding, if there is potentially applicable insurance, make certain that proper notice is given to the carriers and timely claims made. Ensure that the form of notice given complies with the contract at issue, the insurance contract, and state law.46
Also understand that, if there is insurance covering defense and indemnification costs, there may be a conflict as to asserting a counterclaim or other claim to recover damages the client may assert under the contract. That is, defense counsel hired by a carrier will probably be unable to assert affirmative claims on behalf of the client because the carrier is unlikely to pay for such services and because a conflict arises: every dollar received on the client’s claim would serve only to reduce the carrier’s obligation to pay on the plaintiff’s claim and the client would realize no monetary gain. The only party to benefit would be the carrier. However, if a carrier does assume the defense and indemnification of the client, take advantage of those resources. Specifically, seek to have the carrier pay for (or at least split) investigation costs, consulting and/or expert fees, and so forth.
If a carrier hires defense counsel for the client, consider the common interest doctrine and possibly entering into a joint defense agreement. The common interest doctrine provides an exception to the general rule that a client waives the attorney-client privilege by communicating previously privileged information to a third party.47 Specifically, the common interest doctrine extends the attorney-client privilege to privileged communications shared by parties with a common legal interest for the purpose of furthering that common interest.48 Indiana recognizes the common interest doctrine “at least where individuals with a common interest meet in the presence of an attorney.”49
The doctrine allows the free flow of information with counsel retained by the carrier without causing a privilege waiver. In order to invoke the common interest doctrine, a party must generally show that (1) an underlying privilege (such as the attorney-client privilege) protects the communication; (2) the parties disclosed the communication at a time when they shared a common interest; (3) the parties shared the communication in furtherance of that common interest; and (4) the parties have not waived the privilege.50
The common interest doctrine applies in the work product context as well, in that “waiver [of the work product doctrine] would not occur if disclosure of otherwise protected work product was made to a third party with a common legal interest or would not otherwise substantially increase the ability of an adversary to gain the information.”51 Joint defense agreements “generally manifest the parties’ intent that the information exchanged remain confidential as to any outside parties.”52
VII. FORUM SELECTION
A. ARBITRATION PROVISIONS
Referenced above is the concept of forum selection and the possibility that the contract may have an arbitration clause.53 Where an arbitration provision exists, the first determination should be whether arbitration is mandatory. Also, you should establish whether the arbitration clause provides that the arbiter’s ruling is binding. A contract may provide, inter alia, that arbitration is binding either in all cases or only if there is a damage award over a certain amount.
Whenever arbitration is mandated, determine which arbitration rules govern; the procedural rules; the time lines; the nature, makeup, and selection of the panel; the evidentiary standards that govern; the costs and deposit amounts; and whether the process will be via witness testimony and document submission or via document submission only. Also, pin down which appellate options are available. Also, consider whether the Federal Arbitration Act (“FAA”) applies.54
Keep in mind that both Indiana and federal law demonstrate a strong preference to enforce arbitration provisions contained in contracts.55 The FAA reflects congressional intent to “foreclose state legislative attempts to undercut the enforceability of arbitration agreements.”56 The FAA “applies to written arbitration provisions contained in contracts involving interstate commerce.”57 Under the FAA, a court “must order the parties to arbitrate in accordance with the terms of the agreement,” including its forum selection clause.58 Only generally applicable contract defenses such as fraud, duress, or unconscionability may be applied to invalidate arbitration agreements without contravening the FAA.59
Understand the client’s position on arbitration. Some clients may have a positive view toward arbitration and others a negative one. Obtaining the client’s perspective on arbitration will greatly assist in formulating your stance on its desirability and whether you will need to formulate arguments to defeat its applicability.
Punitive damages are not usually recoverable in a contract dispute but may be recovered if there is a showing of an independent tort.60 However, the recovery of punitive damages may be specifically excluded in arbitration depending on the controlling arbitration rules. Also, consider whether equitable remedies are recoverable given the controlling arbitration rules as equitable remedies may be particularly important to your suit.
B. LITIGATING IN FEDERAL COURT
Analyze whether removal to federal court is advisable and allowable both under the contract and under federal statute. Ensure that you keep in mind federal court jurisdictional requirements.61 You will most likely be faced with diversity jurisdiction, but federal question jurisdiction may apply on occasion. With diversity jurisdiction, keep in mind the amount-in-controversy requirement.62 In addition to jurisdictional considerations, know the removal requirements that will have to be met if removing the litigation from state to federal court.63 Also, in determining to which federal court the action is to be removed, review the federal venue requirements.64
C. CHANGE OF VENUE FROM THE JUDGE
If federal court is not an option or is undesirable and state court is the applicable forum, consider whether a change of venue from the judge would be advisable.65 First, ensure that the request would not violate the terms of the contract. Next, ensure, if a motion for change of venue is filed, that the request is timely made.66 A motion for change of venue from the judge shall be filed not later than ten days after the “issues are first closed on the merits.”67 Usually, the issues are first closed on the merits when a defendant files an answer.68 In a multidefendant lawsuit, the issues are first closed with the filing of the first answer on the merits.69 Keep this latter point in mind if you are involved in a multidefendant litigation and more than ten days has passed since the first defendant has filed its answer.70
D. LOCAL RULES
Regardless of which court you are in, whether it is a state court or a federal court, be extremely diligent about referencing and following the particular local rules of that court. If courts have taken the time to adopt local rules, they expect the rules to be followed. It is not only good practice but a sign of respect for the court and the judge.
VIII. SETOFFS, COUNTERCLAIMS, AND THE CRIMINAL CONVERSION STATUTE
As discussed above, always determine whether there is a contractual or statutory right of setoff or abatement. A right of setoff can be such a powerful tool for several reasons. Probably the biggest benefit to a contractual right of setoff is that it gives the client a claim against the plaintiff, which could result in a judgment allowing the client to prevail under the contract and be thereby entitled to fees should the contract have an applicable fee provision. Further, the right affects the analysis under the Criminal conversion statute and Indiana’s crime victim relief statute.71 Specifically, if the client’s setoff is greater than the plaintiff’s damages, the right may give merit to a claim for criminal conversion and, therefore, entitle the client to recover its attorneys’ fees and treble damages. A setoff right is also important in that it allows the client to succeed independently against the plaintiff’s claim while holding some or all of the disputed monies. After giving monies to plaintiff, recovering them may be difficult. A common-law right of setoff does not specifically exist. Thus, whether the right exists is not only important and beneficial for these reasons, but it factors into an analysis of the viability of a criminal conversion claim that the client or the plaintiff may bring.
That is, as the right relates to the criminal conversion statute, if a contractual or statutory right of setoff exists, then an analysis of whether the client’s counterclaim exceeds the plaintiff’s claim is not necessary because a conversion claim is not tremendously threatening. Usually the contract will allow any currently outstanding amount to be set off and payment suspended until the dispute is resolved thereby vitiating any conversion claim the plaintiff may assert. However, carefully read the contract to ensure that this is the case.
If there is no contractual or statutory right of setoff and the client has a viable counterclaim, carefully evaluate whether the amount sought under the counterclaim exceeds the amount sought to be recovered by the plaintiff as this scenario may give merit to a conversion claim. Indiana Rule of Civil Procedure 13(C) provides, in relevant part:
A counterclaim may or may not diminish or defeat the recovery sought by the opposing party. It may claim relief exceeding in amount or different in kind from that sought in the pleading of the opposing party.72
Understand that Indiana Rule of Civil Procedure 13(C) and interpretive case law allows for a setoff of even unrelated claims.73 Moreover, a counterclaimant is entitled to a setoff and judgment for the difference entered in its favor.74 Thus, if there is no contractual or statutory right of setoff or abatement but the client’s counterclaim exceeds the plaintiff’s claim, a conversion claim is essentially a nonissue.
However, if there is no contractual or statutory right of setoff and you determine that the client’s counterclaim does not exceed the plaintiff’s claim, consider more seriously the potential applicability of Indiana’s criminal conversion statute.75 Indiana’s conversion statute defines conversion as follows:
A person who knowingly or intentionally exerts unauthorized control over property of another person commits criminal conversion, a Class A misdemeanor.76
Under Indiana’s criminal statute, “[a] person engages in conduct ‘knowingly’ if, when he engages in the conduct, he is aware of a high probability that he is doing so.”77 In turn, intentionally is defined to mean “when [a person] engages in the conduct, it is [that person’s] conscience objective to do so.”78 Finally, unauthorized is defined as “without the other person’s consent . . . .”79 The burden of proof in showing criminal conversion in a civil case is a preponderance of the evidence standard.80 Keep in mind that any defense that mitigates the client’s damages is proper to defeat the plaintiff’s claim of actual loss and should be vigorously asserted.81
Just as the client may have a conversion claim if its right of setoff or counterclaim exceeds the plaintiff’s claim, the opposite analysis is applicable. Any party that proves criminal conversion can seek remedies under Indiana’s civil crime victim relief statute, which will be discussed in the next section. Keeping things in perspective, however, understand that Indiana’s criminal conversion statute does not ordinarily apply in contract dispute cases.82 Further, Indiana’s criminal conversion statute is less likely to be applicable in a contract action if the right to hold the money under the contract is ambiguous and/or a reasonable contractual interpretation militates toward a finding of an authorized retention.83
IX. THE CRIME VICTIM RELIEF STATUTE
The criminal conversion statute and Indiana’s crime victim relief statute have an intimate interconnection.84 Indiana’s crime victim relief statute provides for the recovery of, inter alia, treble damages and attorneys’ fees where there has been a showing of, inter alia, criminal conversion.85 The crime victim relief statute provides, in part, as follows:
If a person suffers a pecuniary loss as a result of a violation of . . . I.C. 35-42-3-4 [Indiana’s Criminal Conversion statute] . . . , the person may bring a civil action against the person who caused the loss for the following:
(1) An amount not to exceed three (3) times the actual damages of the person suffering the loss.
(2) The costs of the action.
(3) A reasonable attorney’s fee.86
While actual damages may be trebled pursuant to Indiana Code § 34-24-3-1(1), costs and attorneys’ fees exist in separate subsections and are not susceptible to trebling.87 Moreover, there is no absolute entitlement to an award of treble damages.88 However, attorneys’ fees and costs are required to be awarded to a successful claimant.89 The required award of attorneys’ fees underscores the penal nature of this statute. While it is difficult to recover under these statutes, especially in a breach of contract case, if a party is successful, the remedy could prove to be draconian.
If a conversion count is brought or is likely and you believe that it may have potential merit, consider alternatives to holding the undisputed monies such as placing the undisputed portion in an interest-bearing account, bonding off the amount, or seeking to interplead the money into court pursuant to Indiana Rule of Civil Procedure 22. The cost of doing this may well be worth avoiding the risk of treble damages and attorneys’ fees if there is merit to such a claim.90
X. PREVAILING PARTY ATTORNEYS’ FEES PROVISIONS
The Indiana Court of Appeals recently issued an opinion that discussed extensively what it meant to be a “prevailing party.”91 Originally, the Indiana Supreme Court granted transfer and vacated the opinion in its entirety without a published opinion.92 Thus, it was unclear what issue or issues the supreme court had with the rulings of the court of appeals. However, despite vacating with no opinion, the Indiana Supreme Court recently revisited that portion of the court of appeals’ decision regarding the definition of prevailing party and issued a short but important opinion in this area.93
Essentially, the Indiana Supreme Court conclusively defined what it means to be a prevailing party as the term is used in private party contracts. That is, the supreme court held that, absent some contrary or clear intent between the parties, a prevailing party must win a judgment.94 The supreme court rejected the contention that prevailing means merely to obtain some or all of the relief sought.95 Simply stated, the relief obtained must come as a result of “a trial on the merits and entry of a favorable judgment” in order for the client to be deemed to have “prevailed” for purposes of a prevailing party fee provision.96
There are other important nuances in the supreme court’s decision in Reuille. The first is that the supreme court recognized that, while a judgment is necessary to be considered a prevailing party, the judgment need not be on the entire claim or for all of the relief requested.97 This holding dovetails with the question of whether both parties to a litigation can be considered to have prevailed in the same litigation for purposes of a prevailing party fee provision. This situation would occur, for example, where certain claims that are not mutually exclusive are asserted by the parties and each obtains a judgment against the other. The supreme court’s decision in Reuille appears to answer that question in the affirmative.
The Reuille decision augments the court of appeals’ 2007 decision in Nagy v. Evansville-Vanderburgh School Corp.98 In Nagy, the plaintiff-parents obtained a judgment on their claim that an activity fee of $20 per student violated the Indiana Constitution.99 The activity fee claim was only one of several claims that the parents had asserted against the school corporation.100 Moreover, the school corporation obtained a judgment on its counterclaim that certain other fees may be assessed against students.101 The Indiana Court of Appeals held that both the parents and the school corporation were prevailing parties.102 Specifically, the court stated:
In one way or another, both sides have prevailed in some respects. The [parents] prevailed on their particular claim that the 2002-2003 activity fee was unconstitutional, but did not prevail upon their claim that no activity fee could be charged. The [EVSC] did not prevail on its claim that the 2002-2003 activity fee was permissible, but did prevail on its claim that certain educationally related expenses may be asserted against students and their parents.103
The Nagy case involved a statute which allowed only the parents to recover, therefore, the issue of the recovery of fees by the school corporation and the issue of offset did not apply in that case. That is, Nagy discussed the issue of prevailing party within the parameters of 42 U.S.C.A. § 1988.104 However, as noted above, Indiana does not seem to differentiate between what constitutes a prevailing party when interpreting a private contract and when interpreting state and federal statutes.105 Thus, the supreme court’s decision in Reuille, read in combination with the Nagy decision, lends considerable strength to the argument that the dispositive consideration in determining whether a party has prevailed in a litigation is whether that party obtained a judgment on some or all of its claim. The opinion also lends considerable strength to the argument that both parties can be considered to have prevailed and, therefore, to be entitled to fees according to the language of the attorneys’ fee provision of the contract (assuming the contract contains one).
The second important nuance of the supreme court’s opinion in Reuille is that parties to a private contract are entirely free to constrict or expand the definition of what it means to be a prevailing party within the confines of their agreement.106 The supreme court explicitly held that the definition, in this context, is entirely one of contract negotiation and interpretation. However, in Reuille, the parties chose to merely use the term prevailing party with no other language expanding or contracting its definition. As a consequence, the supreme court applied the common definition of the term prevailing as found in dictionary usage and prior case law and reasoned that a judgment was required to qualify thereunder.107 That notwithstanding, the supreme court explicitly stated that unambiguously defined fee-shifting provisions, either more narrow or more expansive, will be enforced by the courts.108
A prevailing party fee provision also has an interrelationship with a right of setoff. Specifically, when determining the final awards where there are one or more prevailing parties, the issue arises as to whether an award of fees is factored into the right to set off damages. While there appears to be no Indiana case that addresses this issue, typical contract interpretation as well as Indiana Rule of Civil Procedure 13 seem to militate in favor of a finding that, regardless of whether the client has a contractual or counter-claim right to setoff, an award of fees would be an additional judgment under the contract and, thus, would be added to the client’s total judgment. This total judgment could then, in the aggregate, be setoff against the plaintiff’s judgment.109 The net difference would then be awarded to the party who obtained the greater total amount.110
In sum, a party will be entitled to an award of attorneys’ fees, if it is successful on some or all of its claims and if a prevailing party fee provision exists in the contract or by statute.111 As such, the argument that the client is a prevailing party entitled to a full award of fees should focus on the fact that the client was successful in obtaining a judgment on a significant issue in the litigation and achieved some of the benefit it sought in bringing its claim. This argument should prove true even if the plaintiff’s judgment on its claims exceeds the defendant’s claims.112
The foregoing underscores the fact that an attorneys’ fee provision can be an extremely powerful weapon in litigation. This benefit can also be particularly useful in settlement negotiations. For example, if the client has a viable entitlement to fees, each dollar the client spends defending the plaintiff’s claim necessarily diminishes the plaintiff’s potential recovery by that amount. Over time, this diminution of the plaintiff’s claim may be so significant that it will completely vitiate the plaintiff’s entitlement to recover after the client’s setoff. This concept can prove very effective in getting the plaintiff to the settlement table early.
XI. CONCLUSION
Defending a commercial contract dispute can involve many considerations. Developing a definitive form of analysis addressing the various areas of law potentially involved is crucial to a complete formulation of a litigation strategy. While the foregoing discussion is certainly not exhaustive, it highlights the fundamental concepts involved, their significance, and, most important, their interplay with one another. Obviously, different contracts necessarily trigger issues in several areas of law; however, the above review should prove applicable in most contractual litigation disputes and can be augmented by one’s particular practice and the experience.
1 See Indiana Rule of Civil Procedure 36(A) and INDIANA RULE OF EVIDENCE 901(A).
2 These defenses are routinely raised primarily to preserve them without regard to whether any factual basis for them exists. However, in practice, they serve merely to result in additional time spent trying to support weak defenses when answering the plaintiff’s discovery requests. They tend to protract needlessly discovery and direct attention away from the more germane issues.
3 The best practice is to establish a rapport with the client where the original file is provided for independent copying and collation. That practice significantly reduces the risk that not all of the file was copied and provided by the client.
4 www.myspace.com
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6 Because different disputes will invoke different laws, it is impossible to cover each possible application herein. Suffice it to say that close scrutiny should be applied to this analysis in the initial stage of the litigation. Of further importance is the discussion set out below regarding the possibility that the contract at issue may have a choice-of-law provision that may cause the laws of a state other than Indiana to apply. These choice-of-law questions should be one of the first issues addressed.
7 See UNIFORM COMMERCIAL CODE—SALE, Ind. Code § 26-1-2-105(1) for the definition of good.
8 The following analysis will, for clarity, assume Indiana law is the applicable law under the contract and that the contract is mixed. As mentioned, not all contracts will involve goods, services, or a combination of the two. This analysis applies to those that do.
9 Insul-Mark Midwest, Inc. v. Modern Materials, Inc., 612 N.E.2d 550, 554 (Ind. 1993); Baker v. Compton, 455 N.E.2d 386 (Ind. App. 1983).
10 Insul-Mark Midwest, 612 N.E.2d at 553-54; see also Ind. Code § 26-1-2-102.
11 Insul-Mark Midwest, 612 N.E.2d at 554.
12 Id. at 554
13 Id. at 555
14 Id. at 554
15 Id.
16 Id. at 554-55 n.7.
17 The examples given here are not meant to be exhaustive. A careful review of the particular contract will reveal which, if any, condition precedents to suit are contained therein.
18 Take advantage of this provision. It can be a very useful presuit tool to obtain information and substantiation documents. A substantiation clause can give good insight into what the plaintiff believes the scope of the contract to be. This can be analyzed against the backdrop of independent investigation to verify or refute the same.
19 BLACK’S LAW DICTIONARY 665 (7th ed. 1999).
20 A much more detailed discussion concerning issues surrounding arbitration as well as litigating in federal court is set out below. See Section VII. FORUM SELECTION, infra.
21 The nuances of an arbitration provision will be discussed more fully below.
22 Venue is defined as “the proper or a possible place for the trial of a lawsuit, usually because the place has some connection with events that have given rise to the lawsuit.” BLACK’S LAW DICTIONARY 1553 (7th ed. 1999).
23 Such a clause may be in the contract as a result of one party having a slightly more advantageous bargaining position during negotiations. However, the provision may run afoul of Indiana Rule of Civil Procedure 75 among others. Also, be aware that, even if none of the parties raises a venue concern, the court may raise the issue sua sponte. In a complex litigation, to have a case moved to a new court and/or judge after litigation has pended could pose a significant detriment to the client. Thus, if the venue is incorrect, give serious consideration to raising the issue with the court early even if the venue mandated by the contract is desirable.
24 A choice-of-law provision is a “contractual provision by which the parties designate the jurisdiction whose law will govern any dispute that may arise between the parties.” BLACK’S LAW DICTIONARY 234 (7th ed. 1999).
25 This analysis dovetails with the discussion above regarding mixed contracts. Give special attention initially to determining which state’s law applies, since this may drastically and fundamentally alter the analysis as well as the client’s rights and remedies.
26 Utopia Coach Corp. v. Weather Wax, 379 N.E.2d 518, 522 (Ind. App. 1978) (holding that where a contract is silent as to choice of law, the laws of the state with the closest relationship to the contract govern).
27 The contract should be thoroughly reviewed for each of the following as any one may have a very serious impact on litigation strategy and on the client’s potential recoveries. Further, if more than one provision applies in any given litigation, this combination of clauses may have an even greater impact on the client’s case.
28 What it means to be a prevailing party will be discussed in more detail below.
29 Why this is important legally, tactically, and also how it affects the client’s status as a prevailing party will be discussed, infra.
30 Arguments to the contrary should be made if the fee provision is not in the client’s favor. In this case, consider arguments that may be used to diminish or vitiate an award of fees altogether including, but not limited to, unreasonableness of the fee request, unconscionablity, and the traditional adherence by Indiana to the American Rule where each party bears its own respective costs and fees.
31 BLACK’S LAW DICTIONARY 1376 (7th ed. 1999).
32 In the event that the contract has an attorneys’ fee provision, keep in mind how such a setoff right may affect the client in the context of what it means to be a prevailing party.
33 Like the attorneys’ fees and arbitration provisions, this clause is raised here to provide a more cogent outline of analysis in contract review. Its impact and interrelation with other principles of law will be discussed more fully below.
34 Liquidated damages is defined as a fixed sum used as a measure of damages upon breach regardless of whether it exceeds or falls short of actual damages. BLACK’S LAW DICTIONARY 3951 (7th ed. 1999).
35 A liquidated damage provision could also be used as a penalty provision in that damages continue to accrue unless and until the breaching party cures the breach. Id.
36 Such standards may be general standard operating procedures or very specific requirements such as ANSI or ASTM. Standards will vary depending on the subject matter of the contract.
37 One very important condition of a contract that bears mention is a potential obligation that the plaintiff obtain insurance that may provide defense and indemnification for the plaintiff’s claim and/or coverage for some or all of any counterclaim that the client may assert. The concept and importance of insurance is discussed in greater detail below.
38 BLACK’S LAW DICTIONARY 387 (7th ed. 1999).
39 Id. at 812.
40 Parol evidence is oral evidence, otherwise known as extrinsic evidence, that is not specifically written into the contract at issue. Id. at 579. An integration clause invokes the parol evidence rule generally prohibiting the introduction of parol evidence to alter or modify unambiguous provisions of a written contract. I.C.C. Protective Coatings, Inc. v. A.E. Staley Mfg. Co., 695 N.E.2d 1030, 1036 (Ind. App. 1998).
41 BLACK’S LAW DICTIONARY 608 (8th ed. 2004).
42 If the contract is esoteric, the client may need to retain a nontestifying consultant to assist in understanding the case. Remember that unless and until the client classifies that consultant as a testifying expert witness, never disclose the consultant to the plaintiffs’ counsel. This may subject the consultant to having his file turned over and to being deposed. In any event, ensure that expert disclosure deadlines are calendared and monitored so they are met.
43 Make note of whether the client is an insured as defined by the policy or whether the client is listed as an additional insured on the declaration sheet. This distinction can be very significant as it relates to the insurer’s obligations to the client.
44 Federal Ins. Co. v. Stroh Brewing Co., 127 F.3d 563 (7th Cir. 1997).
45 Amerisure, Inc. v. Wurster Constr. Co., Inc., 818 N.E.2d 998 (Ind. App. 2004) (coverage under a CGL is for tort liability for physical damage to others and not for contractual liability of the insured for economic loss); R.N. Thompson & Assocs., Inc. v. Monroe Guar. Ins. Co., 686 N.E.2d 160 (Ind. App. 1997).
46 There may be unique requirements that notice come directly from the insured as opposed to retained counsel, for example.
47 In re Grand Jury Subpoenas, 89-3 & 89-4, John Doe 89-129, 902 F.2d 244, 248 (4th Cir. 1990).
48 Id.
49 Reginald Martin Agency, Inc. v. Conseco Med. Ins. Co., 460 F. Supp. 2d 915, 919 (S.D. Ind. 2006) (citing Corll v. Edward D. Jones & Co., 646 N.E.2d 721, 725 (Ind. App. 1995)).
50 United States v. Gotti, 771 F. Supp. 535, 545 (E.D.N.Y. 1991); In re Grand Jury Subpoenas, 89-3 & 89-4, 902 F.2d at 249.
51 Reginald Martin Agency, Inc. v. Conseco Med. Ins. Co., 460 F. Supp. 2d 915, 918 (S.D. Ind. 2006) (citing BASF Aktiengesellschaft v. Reilly Indus., Inc., 224 F.R.D. 438, 442 (S.D. Ind. 2004)).
52 Katharine Traylor Schafzin, An Uncertain Privilege: Why the Common Interest Doctrine Does Not Work and How Uniformity Can Fix It, 15 B.U. PUB. INT. L.J. 49, 81 n.118 (2005).
53 See Section III. ANALYZING THE CONTRACT, supra.
54 See 9 U.S.C.A. § 1, et. seq.
55 Norwood Promotional Prods., Inc. v. Roller, 867 N.E.2d 619, 623 (Ind. App. 2007). 56 Southland Corp. v. Keating, 465 U.S. 1, 16, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984).
57 MPACT Constr. Group, LLC v. Superior Concrete Constr., Inc., 802 N.E.2d 901, 904 (Ind. 2004). Whether the litigation you are defending involves interstate commerce will depend entirely on the facts of your particular case. However, it should be noted the definition of interstate commerce is becoming broader, making this analysis more prevalent.
58 LaSalle Group, Inc. v. Electromation of Delaware County, Inc., 880 N.E.2d 330, 333 (Ind. App. 2008).
59 Id. (citing with approval KKW Enters., Inc. v. Gloria Jean’s Gourmet Coffees Franchising Corp., 184
F.3d 42, 50-51 (1st Cir. 1999)).
60 Miller Brewing Co. v. Best Beers of Bloomington, Inc., 608 N.E.2d 975 (Ind. 1993).
61 See 28 U.S.C.A. §§ 1331-1369 for all jurisdictional requirements.
62 See 28 U.S.C.A. § 1332(a) for the current $75,000 minimum amount in controversy requirement. However, whenever faced with diversity jurisdiction, always refer to the federal code to ensure that the amount in controversy requirement is met as it may have been raised by the time it applies to your litigation.
63 See 28 U.S.C.A §§ 1441-1453 and Fed. R. Civ. P. 81.
64 See 28 U.S.C.A §§ 1391-1413.
65 See Ind. R. Civ. P. 76(C).
66 See Ind. R. Civ. P. 76(B).
67 Id.
68 Lake County Juvenile Detention Ctr. v. J.M.D., 704 N.E.2d 149 (Ind. App. 1999).
69 Id. at 150.
70 Id.
71 Criminal conversion and the crime victim relief statute are discussed more fully in this section, infra.
72 See Ind. R. Civ. P. 13(C).
73 Id.; Complete Elec. Co., Inc. v. Liberty Nat’l Bank & Trust Co., 530 N.E.2d 1216 (Ind. App. 1988).
74 Id.; Complete Electric, 530 N.E.2d at 1220. This right to a judgment is critical to the analysis of what it means to be a prevailing party as will be discussed extensively below.
75 See IND. CODE § 35-43-4-3.
76 Id. The knowing or intentional unauthorized control element of the statute is disjunctive. Thus,
either knowing or intentional unauthorized control constitutes conversion. 77 See IND. CODE § 35-41-2-2(b).
78 See IND. CODE § 35-41-2-2(a).
79 See Ind. Code § 35-43-4-1.
80 Harco, Inc. v. Plainfield Interstate Family Dining Assocs., 758 N.E.2d 931, 945 (Ind. App. 2001). Also note that, while Indiana Code § 35-43-4-3 provides for the definition of criminal conversion, Indiana case law provides for tortious conversion, or civil conversion. Essentially, the primary difference between criminal conversion and civil conversion is that mens rea is not an element of the latter. Computers Unlimited, Inc. v. Midwest Data Sys., Inc., 657 N.E.2d 165 (Ind. App. 1995). See also Fillmore LLC v. Fillmore Mach. & Tool Co., 783 N.E.2d 1169 (Ind. App. 2003).
81 Yeager & Sullivan, Inc. v. Farmers Bank, 317 N.E.2d 792, 797 (Ind. App. 1974) (In an action for conversion, it is as necessary for the plaintiff to establish its amount of loss as it is permissible for a defendant to put forth a defense in mitigation of damages.).
82 NationsCredit Commercial Corp. v. Grawel Enters., Inc., 703 N.E.2d 1072, 1079 (Ind. App. 1998) (Courts are not as inclined to criminalize bonafide contract disputes.).
83 Id. at 1078 (A contract is ambiguous when it is reasonably susceptible of different construction. Ambiguity and a reasonable interpretation of the contract preclude a finding of the required mens rea.).
84 See Indiana Code § 34-24-3-1 for Indiana’s crime victim relief statute.
85 Id.
86 Id.
87 Harco, 758 N.E.2d at 945.
88 Id.
89 Browning v. Walters, 616 N.E.2d 1040, 1045-46 (Ind. App. 1993).
90 Of course, part of an analysis should include a determination of whether the client has a claim for criminal conversion against the plaintiff and, therefore, an entitlement to recover under Indiana’s crime victim relief statute. The same analysis of proof and potential merit as set out immediately above is identical regardless of the claimant.
91 Reuille v. E.E. Brandenberger Constr., Inc., 873 N.E.2d 116 (Ind. App. 2007).
92 Reuille v. E.E. Brandenberger Constr., Inc., 2008 Ind. LEXIS 231.
93 Id. at 482.
94 Id. at *1.
95 Id. at *3-6.
96 Id. at *4.
97 Id.
98 Nagy v. Evansville-Vanderburgh School Corp., 870 N.E.2d 12 (Ind. App. 2007). This augmentation is important in that Nagy, while an Indiana decision, dealt with a federal statute and not an Indiana contract.
99 Id. at 18.
100 Id.
101 Id.
102 Id.
103 Id. at 17.
104 Id.
105 See supra.
106 Reuille, 2008 Ind. LEXIS at *6.
107 Id. at *6-7.
108 Id. at *2-3, 6-7. The supreme court even gives some examples of more expansive prevailing party fee provisions that would allow one party to be considered to have prevailed in circumstances where a judgment was not recovered, such as a settlement.
109 See IND. R. CIV. P. 13, 54, and 58.
110 See IND. R. CIV. P. 13(C); see also Complete Electric, 530 N.E.2d at 1220.
111 Salcedo v. Toepp, 696 N.E.2d 426, 436 (Ind. App. 1998) (Prevailing party denotes a party who successfully prosecutes its claim or asserts its defense. A prevailing party is a party in whose favor a judgment is rendered, regardless of the amount of damages awarded.)
112 See Nagy v. Evansville-Vanderburgh School Corp., 870 N.E.2d 12 (Ind. App. 2007).
