Pro Done, Inc. v. Teresa Basham & a.

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THE SUPREME COURT OF NEW HAMPSHIRE
___________________________
Merrimack
No. 2018-0060
PRO DONE, INC.
v.
TERESA BASHAM & a.
Argued: October 11, 2018
Opinion Issued: May 3, 2019
Rath, Young and Pignatelli, P.C., of Concord (Michael S. Lewis, Kenneth
Bartholomew, and R. Terry Parker on the brief, and Mr. Lewis orally), for Pro
Done, Inc.
Shaheen & Gordon, P.A., of Concord (William E. Christie, Timothy J.
McLaughlin, and Alexander W. Campbell on the brief, and Mr. McLaughlin
orally), for Teresa Basham, Individually and as Non-Independent Trustee of the
Paul R. Hooper 1998 GST Exempt Trust, Terrence Lee Hooper, and Timothy
John Hooper.
Ransmeier & Spellman, P.C., of Concord (Biron L. Bedard), for John C.
Ransmeier, Trustee of the Paul R. Hooper 1997 Trust, joined in the brief of
Teresa Basham, Terrence Lee Hooper, and Timothy John Hooper.
HANTZ MARCONI, J. The plaintiff, Pro Done, Inc., appeals an order of
the Superior Court (Kissinger, J.) dismissing its amended complaint against the
defendants, Teresa Basham, individually and as non-independent trustee of
the Paul R. Hooper 1998 GST Exempt Trust, Terrence Hooper, Timothy Hooper,
and John Ransmeier, trustee of the Paul R. Hooper 1997 Trust,1 for breach of
contract, tortious interference with contractual relations, and civil conspiracy.
Specifically, the plaintiff challenges the trial court’s ruling that an alleged
violation of a certain contractual provision does not provide a basis for the
plaintiff’s claims. We reverse and remand.
The plaintiff’s amended complaint alleges the following facts. Upon their
father’s death in 2009, Teresa Basham, Timothy Hooper, and Terrence Hooper
(sibling defendants) each received a portion of their father’s one-third
ownership interest in three companies known as the Pro-Cut entities, to be
held in trust by John Ransmeier. In 2012, the sibling defendants negotiated
with Joseph Willey, another owner of the Pro-Cut entities, to sell their
ownership interests. They eventually agreed upon a sale price, and in
November 2013, Ransmeier, on the sibling defendants’ behalf, executed fifteen
Securities Redemption Agreements (SRAs) with the Pro-Cut entities, the terms
of which were stated to be binding upon “the heirs, personal representatives,
successors and assigns of the parties.” Ransmeier also executed on behalf of
the sibling defendants a document attached to each SRA entitled “Release,”
which states, in pertinent part:
Other than as set forth in the Agreement, the Seller hereby fully,
finally and forever releases, discharges, quit claims and covenants
not to sue and otherwise agrees not to enforce any claim, cause of
action, right, title or interest . . . against, the Company, its
respective officers, directors, managers, members, employees,
agents, and representatives as well as their successors and assigns
. . . of, from, and with respect to any and all claims . . . in
connection with any prior ownership interest in the Company by
the Seller, including but not limited to any claim based on any
future transaction that the Company or any unit holder may enter
into in relation to the equity of the Company.
Each sibling defendant received approximately $750,000 as a result of the
transactions.
After these transactions, one of the Pro-Cut entities, Brake Solutions,
Inc., acquired another Pro-Cut entity. It then changed its name to Pro-Cut
International, Inc. In May 2014, three unrelated companies, collectively known
1The complaint also named as a defendant Bank of America, N.A., as trustee of the Paul R.
Hooper 1998 GST Exempt Trust. Bank of America was dismissed from this lawsuit following a
settlement agreement with the plaintiff and is not a party to this appeal.
2
as Snap-on, purchased the Pro-Cut entities for approximately $41.3 million.
Pro-Cut International, Inc. was then renamed Pro Done, Inc. Pro Done, Inc.,
the plaintiff in this case, alleges it is a resulting company, successor, or
assignee of the Pro-Cut entities that were parties to the SRAs.
After Snap-on’s purchase of the Pro-Cut entities, the sibling defendants
filed a lawsuit, with the assistance of Ransmeier, in the United States District
Court for the District of New Hampshire against Willey and trustees of trusts
that were members of the Pro-Cut entities at the time of the Snap-on
transaction. Although the plaintiff is not a party to the federal action, the
defendants have served subpoenas on the plaintiff and Snap-on entities as part
of that lawsuit. Snap-on has also asserted rights to indemnification against
the plaintiff.
The plaintiff subsequently filed this action in superior court against the
defendants, asserting claims of breach of contract, and, in the alternative,
tortious interference with contractual relations and civil conspiracy. The
plaintiff’s amended complaint sought “any and all such damages as it has
sustained or will sustain by reason of Defendants’ conduct, including any
consequential damages,” as well as a permanent injunction barring the
defendants from participating in any action against the plaintiff and its
affiliates, exemplary and punitive damages to deter future illegal conduct, and
reasonable attorney’s fees and costs in litigating the present action.
The defendants moved to dismiss the plaintiff’s action, arguing, inter
alia, that the release agreements, including the covenant not to sue contained
therein, do not give rise to a cause of action for breach of contract. In
dismissing the plaintiff’s amended complaint, the trial court, relying on Kaye v.
Wilson-Gaskins, 135 A.3d 892, 906-07 (Md. Ct. Spec. App. 2016), concluded
that a covenant not to sue functions only as an immediate release, rather than
a promise of future forbearance that may be breached, unless the agreement
clearly demonstrates that the parties intended for the obligee to recover
consequential damages incurred as a result of the obligor’s failure to honor the
covenant. See Kaye, 135 A.3d at 904, 906-07. Finding “no clear indication in
the Releases that the parties contemplated consequential damages to be
award[ed] as a result of their breach,” the trial court concluded that the release
agreements operated as releases rather than covenants not to sue, and
therefore a violation of the release agreements could not constitute a basis for a
breach of contract action. The trial court also concluded that the plaintiff’s
alternative claims of tortious interference with contractual relations and civil
conspiracy were “not reasonably susceptible of a construction that would
permit recovery” because those claims “rest on a theory that the parties . . . to
the Releases maintained a contractual relationship that imposed ongoing
duties to the Plaintiff.”
3
The plaintiff moved for reconsideration. The trial court denied the
plaintiff’s motion, and this appeal followed.
In reviewing the trial court’s grant of a motion to dismiss, our standard
of review is whether the allegations in the plaintiff’s pleadings are reasonably
susceptible of a construction that would permit recovery. Slania Enters. v.
Appledore Med. Grp., 170 N.H. 738, 741 (2018). We assume that the plaintiff’s
pleadings are true and construe all reasonable inferences in the light most
favorable to the plaintiff. Id. We then engage in a threshold inquiry that tests
the facts alleged by the plaintiff against the applicable law, and if the
allegations constitute a basis for legal relief, we must hold that it was improper
to grant the motion to dismiss. Id.
On appeal, the plaintiff makes numerous, yet related, arguments
challenging the trial court’s dismissal of its breach of contract claim. Its
central arguments may be distilled into one contention: the trial court’s order
ignored express terms of the release agreements — in which the defendants
“covenant[ed] not to sue and otherwise agree[d] not to enforce any claim”
against the plaintiff — and denied the plaintiff the opportunity to seek
consequential damages for breach of the contract, contrary to New Hampshire
law.
The defendants argue that, as a matter of law, a covenant not to sue
operates only as a release. Therefore, they argue, the act of suing in violation
of a covenant not to sue does not give rise to a breach of contract action unless
the covenant “include[s] language evidencing an intent that a breach of the
covenant would entitle the non-breaching party to recover consequential
damages.” Based upon this principle, the defendants contend that the trial
court properly concluded that the plaintiff failed to state a cause of action for
breach of contract.
The parties’ arguments present a question of first impression for this
court: whether New Hampshire law recognizes a cause of action for breach of
contract based upon a covenant not to sue where the contract does not
expressly provide that the non-breaching party is entitled to consequential
damages for breach of the covenant. We hold that it does.
Because the release agreements are part of a contract, we apply the
general rules of contract interpretation. See McDonough v. McDonough, 169
N.H. 537, 541 (2016); Moore v. Grau, 171 N.H. 190, 194 (2018). When
interpreting a written agreement, we give the language used by the parties to
the agreement its reasonable meaning, considering the circumstances and the
context in which the agreement was negotiated, and reading the document as a
whole. Town of Pembroke v. Town of Allenstown, 171 N.H. 65, 70 (2018). We
give an agreement the meaning intended by the parties when they wrote it.
Found. for Seacoast Health v. Hosp. Corp. of America, 165 N.H. 168, 172
4
(2013). Absent ambiguity, we determine the parties’ intent from the plain
meaning of the language used in the contract. Id. The interpretation of a
contract is ultimately a question of law for this court to decide. McDonough,
169 N.H. at 541. Accordingly, we review a trial court’s interpretation of a
contract de novo. Id.
Under New Hampshire law, “[a] breach of contract occurs when there is a
failure without legal excuse to perform any promise which forms the whole or
part of a contract.” Lassonde v. Stanton, 157 N.H. 582, 588 (2008) (quotation
and brackets omitted). Pursuant to the release agreements here, the sibling
defendants agreed to several terms relating to any current or future claims they
may have against the Pro-Cut entities — they agreed to “fully, finally and
forever release[], discharge[], quit claim[] and covenant[] not to sue and
otherwise agree[] not to enforce any claim” relating to the sibling defendants’
ownership interests against the Pro-Cut entities and its respective officers,
directors, managers, members, employees, agents, representatives, successors,
and assigns. The plaintiff argues that the words “covenant[] not to sue” and
“agree[] not to enforce any claim” constitute promises separate and distinct
from a mere “release[].”
We have recognized a release or discharge of a claim as an absolute
extinguishment of a debt or obligation. See Durell v. Wendell & al., 8 N.H. 369,
372 (1836); see also Stateline Steel Erectors v. Shields, 150 N.H. 332, 338
(2003). We have also recognized a covenant not to sue as distinct from a
release. See Stateline, 150 N.H. at 338 (“Unlike a release, a covenant not to
sue does not relinquish a right or claim, or extinguish a cause of action.”
(quotation omitted)). A covenant not to sue constitutes an agreement or
promise of future forbearance from suing the other party on certain claims. Id.
(“[T]he party making the covenant not to sue agrees only not to assert any right
or claim based upon the obligation.” (quotation omitted)); see also Black’s Law
Dictionary 443 (10th ed. 2014) (defining “covenant” as “[a] formal agreement or
promise, usu. in a contract or deed, to do or not do a particular act”). Thus,
instead of extinguishing a claim, a covenant not to sue “recognizes the
continuation of the obligation or liability.” Stateline, 150 N.H. at 338. Based
upon the plain meaning of the terms of the release agreements, see Seacoast
Health, 165 N.H. at 172, the covenant not to sue constitutes a promise not to
bring an action against the Pro-Cut entities or their respective officers,
directors, managers, members, employees, agents, representatives, successors,
and assigns, which, in the absence of legal excuse, may be breached. See
Lassonde, 157 N.H. at 588.
Despite the express terms in the release agreements, the defendants
contend that the covenant not to sue in the release agreements does not
provide a basis for a breach of contract action in the absence of language
expressly allowing for the non-breaching party to recover consequential
damages. The defendants point to no authority in New Hampshire that
5
requires a contract to contain such language in order to sustain a valid breach
of contract claim. Cf. Audette v. Cummings, 165 N.H. 763, 770 (2013) (a party
claiming damages for breach of contract must show, by a preponderance of the
evidence, that the damages were caused by the defendant’s alleged wrongful
act and the extent and amount of such damages). Nevertheless, the
defendants contend that the covenant not to sue carries the same meaning as
a release in the absence of express contractual language demonstrating that
the parties intended otherwise. Because, according to the defendants, a
release cannot be breached because complete performance is tendered at the
moment a release is effectuated, the defendants contend that neither a
violation of a release nor a violation of a covenant not to sue can provide the
basis for a breach of contract action. See Kaye, 135 A.3d at 904; see also
Restatement (Second) of Contracts § 284(2), at 392 (1981) (“The release takes
effect on delivery . . . and, subject to the occurrence of any condition,
discharges the duty.”).
To support their assertion that a covenant not to sue operates merely as
a release, the defendants point to general principles in early common law to
assert that a covenant not to sue is now, essentially, legally obsolete. Relying
on the historical context of releases described in Corbin on Contracts, the
defendants assert that covenants not to sue: (1) carried legal significance only
in early cases involving joint obligors; and (2) are no longer recognized as
contractual promises in order to avoid the problem of the “circuity of action”
that arose in litigation between parties to the covenant. See 13 Sarah Howard
Jenkins, Corbin on Contracts § 67.14, at 143-45 (rev. ed. 2003).
In circumstances involving joint obligors, courts at early common law
construed the release of one joint obligor as a release of all other joint obligors.
Jenkins, supra at 143; see also, e.g., Durell, 8 N.H. at 372 (explaining that if
the contract “operates as a release of one of the signors of the note, it
discharges the whole”). Because a release “is a defense in any action by the
claimant to enforce[] the right previously released,” Jenkins, supra § 67.9(1), at
77, a joint obligor could ostensibly utilize a release as an affirmative defense to
a lawsuit brought by the releasing party, even if the joint obligor was not a
party to the release. Cf. Durell, 8 N.H. at 372; Parker v. Holmes, 4 N.H. 97, 98-
99 (1827). Nevertheless, where a release of one joint obligor “expressly
reserv[ed] all rights against the other joint obligors,” courts interpreted the
release “as a mere contract not to sue the one rather than a release” as to all.
Jenkins, supra § 67.14, at 143. This construction enabled the injured party to
settle with one joint obligor while still maintaining its ability to pursue claims
against the remaining joint obligors. See id.
However, unlike a release, which could be raised as an affirmative
defense to a lawsuit brought by the party who released the claim, courts
initially did not recognize a covenant not to sue as an affirmative defense to a
lawsuit brought in violation of the covenant. Bellefonte Re Ins. Co. v. Argonaut
6
Ins. Co., 586 F. Supp. 1286, 1287 (S.D.N.Y. 1984), aff’d, 757 F.2d 523 (2d Cir.
1985). In lawsuits involving the two parties to the covenant, where a party
sues the other party in violation of the covenant, the refusal of courts to
recognize the covenant as an affirmative defense resulted in a “circuity of
action”: because the defendant could not plead a covenant not to sue as an
affirmative defense, the defendant’s only remedy was to bring a countersuit
against the breaching party to recover the damages the breaching party might
obtain in the original, unlawful lawsuit. See Jenkins, supra at 145 (describing
the “unnecessary and highly undesirable circuity of action”).
For this reason, many courts, including this court, came to allow parties
to a covenant not to sue to plead the covenant as an affirmative defense, just
as they would a release. See Durell, 8 N.H. at 372 (“[T]o avoid circuity of action
such a covenant may be pleaded as a release, but it can be so pleaded only
betwixt the actual parties to the contract . . . .”); Parker, 4 N.H. at 98 (“[W]hen
the obligee covenants not to sue the obligor at all, such covenant may to avoid
circuity of action be pleaded as a release.”); see also Moore, 171 N.H. at 194-95
(applying law that recognizes a release as an affirmative defense to terms that
“read[] as a covenant not to sue”); Bellefonte, 586 F. Supp. at 1287 (“The
obvious inefficiency of this two step process led the courts of equity to enjoin
suits prohibited by a covenant not to sue, and the law courts eventually came
to allow the covenant to be pleaded as a bar.”).
Based upon the circumstances in which courts allow covenants not to
sue to be pled in the same manner as releases, the defendants contend that, in
the absence of joint obligors, “common law courts began to treat covenants not
to sue as releases” in general. According to the defendants, it is because of
“this evolution over time” that “courts now require that . . . a covenant not to
sue . . . include language evidencing an intent that a breach of the covenant
would entitle the non-breaching party to recover consequential damages” in
order for the covenant to give rise to an action for breach of contract.
The defendants draw too broad an inference from this precedent. Our
early cases established that a covenant not to sue one joint obligor allowed the
injured party to maintain claims against the other joint obligors. See Durell, 8
N.H. at 372 (explaining that “where there are two or more obligors, or
promissors, a covenant not to sue one is never construed as a release, as that
would discharge the other signers”); see also Colby v. Walker, 86 N.H. 568, 570
(1934) (explaining that if a settlement agreement contains “a reservation of
rights against third parties, or if the document takes the form of a covenant not
to sue,” the agreement does not bar subsequent claims against another
tortfeasor); Snow v. Chandler, 10 N.H. 92, 93 (1839) (“[A] covenant not to sue
one of several debtors will not operate to discharge all the debtors . . . .”).
These cases also established that, conversely, a release of one joint obligor
7
would extinguish the claims against all other joint obligors.2 See, e.g., Durell,
8 N.H. at 372. In distinguishing covenants not to sue from releases, we
focused on the intent of the parties as evidenced by the language in the
agreements. See, e.g., Snow, 10 N.H. at 93 (“[I]t cannot be inferred from such a
covenant [not to sue one of several debtors] that it was the intention to
discharge the debt.”); Durell, 8 N.H. at 372 (explaining that construing a
covenant not to sue against a joint obligor as a release “would directly conflict
with the manifest intention of the parties”).
It is true that, in cases distinguishing covenants not to sue from releases,
we predominantly dealt with situations involving joint obligors who were not
parties to the release or covenant. See, e.g., Durell, 8 N.H. at 371-72.
However, we have not limited our recognition of the distinction between
covenants not to sue and releases solely to disputes between a party to the
covenant and joint obligors who are not parties to the covenant. See Stateline,
150 N.H. at 333-34, 338-39 (recognizing the distinction between the legal effect
of a covenant not to sue and the legal effect of a release on the parties to the
covenant). Nor have we supplanted an action for breach of a covenant not to
sue with its assertion as an affirmative defense. Thus, our recognition that a
covenant not to sue may be raised as an affirmative defense by a party to the
covenant does not, by itself, foreclose a breach of contract action based upon a
violation of the covenant.
Nevertheless, relying on a principle set forth in Corbin, the defendants
contend that courts now construe “a contract never to sue” generally as
“indicat[ing] an intention to discharge the obligor in any case not involving a
joint obligor” as a result of the problem created by the “circuity of action.” See
Jenkins, supra at 144. Because this assertion set forth in Corbin is not
supported by citations to any authority, case law or otherwise, the scope of this
principle is unclear. See id. Moreover, this principle stands in sharp contrast
with our rules of contractual interpretation which instruct us to give the words
of a contract their reasonable meaning to determine the parties’ intent,
Seacoast Health, 165 N.H. at 172, including all parts of a contract wherever
reasonably possible, Robbins v. Salem Radiology, 145 N.H. 415, 419 (2000).
When language to the agreement contains an express promise not to sue, we
cannot presume, contrary to the meaning of the language in the agreement,
that the parties instead intended this promise to constitute a release. See
Seacoast Health, 165 N.H. at 172.
Additionally, in permitting parties to plead covenants not to sue as an
affirmative defense, we cited a policy reason for doing so — avoiding the
2 We note that the enactment of RSA 507:7-h (2010) altered this common law rule as applied to
releases “given in good faith to one of 2 or more persons liable in tort for the same injury,” such
that a release under these circumstances “does not discharge any other person liable upon the
same claim unless its terms expressly so provide.”
8
“circuity of action” problem. See Durell, 8 N.H. at 372; Parker, 4 N.H. at 98.
We did not adopt this permissive rule by construing the legal effect of an
express covenant not to sue as that of a release. See Durell, 8 N.H. at 372;
Parker, 4 N.H. at 98. Instead, we have continuously recognized the distinction
between an express covenant not to sue and a release, even as we have allowed
covenants not to sue to be raised as an affirmative defense. See Stateline, 150
N.H. at 338 (explaining that, “[u]nlike a release, a covenant not to sue does not
relinquish a right or claim, or extinguish a cause of action,” but instead
“recognizes the continuation of the obligation or liability” (quotation omitted));
see also Moore, 171 N.H. at 194-95 (permitting a provision which “read[] as a
covenant not to sue” to be raised as an affirmative defense, but noting the
discussion in Stateline, 150 N.H. at 338, regarding the distinction between a
covenant not to sue and a release).
Furthermore, as a practical matter, a breach of contract action based
upon a covenant not to sue does not create the “circuity of action” problem
where, as here, the plaintiff seeks consequential damages that have resulted
from the defendants’ alleged violation of the covenant, rather than solely the
amount of any judgment obtained by the defendants in the original lawsuit.
See Drop Anchor Realty Trust v. Hartford Fire Ins. Co., 126 N.H. 674, 678
(1985) (“Consequential damages are reasonably foreseeable losses that flow
from a breach of contract.”). Consequential damages for defending the action
brought in violation of an express covenant fall squarely within the goal of
contract damages in New Hampshire — putting the non-breaching party in the
same position it would have been in if the contract had been fully performed.
See Audette, 165 N.H. at 770. Thus, under these circumstances, an action
based upon a breach of a covenant not to sue does not create a circuity of
action; rather, it permits the non-breaching party to pursue remedies
necessary to put itself in the same position it would have been in had the
breaching party adhered to its promise. See id.; see also Kaye, 135 A.3d at
906-07 (acknowledging the distinction between damages in the form of the
award the breaching party obtained by violating the covenant not to sue and
consequential damages incurred as a result of defending the action brought in
violation of the covenant). Therefore, the policy reason for allowing a party to
plead a covenant not to sue as an affirmative defense does not command that
we foreclose a breach of contract action seeking consequential damages for a
violation of a covenant not to sue.
Based upon our clearly established case law that has consistently
recognized the distinction between an express covenant not to sue and a
release, see Stateline, 150 N.H. at 338, and our canons of contract
interpretation, we decline to adopt a rule that would “run contrary to our
longstanding principle that all parts of an agreement are to be given a meaning
whenever reasonably possible.” Robbins, 145 N.H. at 419 (quotation omitted).
9
The defendants rely on the ruling of the Maryland Court of Special
Appeals in Kaye, which held that an agreement “never to pursue a claim” will
be given “the effect of a discharge unless the parties clearly express that they
intend for the oblig[ee] to recover consequential damages as a result of the
oblig[or]’s failure to honor” that agreement. Kaye, 135 A.3d at 907. We
acknowledge that the Maryland Court of Special Appeals found the discussion
in Corbin persuasive. See id. (quoting Jenkins, supra at 144-45). However,
the agreement at issue in Kaye contained only the terms “[r]elease and forever
discharge,” rather than an express promise not to sue. Id. at 902-03. Thus,
the Maryland Court of Special Appeals addressed a different question —
whether a release and discharge of present and future claims was sufficient to
constitute an implied promise not to sue, thereby providing a basis for the
plaintiff’s breach of contract claim. See id. To that extent, the Kaye court
construed an express release as having the effect of a release; it did not
construe an express covenant not to sue as having the effect of a release, which
the defendants ask us to do here. See id. at 903, 907.
Furthermore, in reaching its conclusion, the Maryland Court of Special
Appeals focused on the intent of the parties based upon the meaning of the
terms of the agreement. See id. at 906-07. On this basis, it “decline[d] to
impose a bright-line rule that may, in some circumstances, undermine an
objective understanding of the parties’ intent.” Id. at 907. In doing so, the
court appears to have left open the question of whether an agreement
containing an express covenant not to sue would be sufficient to demonstrate
the parties’ intent to impose consequential damages for failure to honor the
covenant. See id. (“[I]n construing the parties’ contract, we aim to discern what
a reasonable person in the position of the parties would have meant at the time
it was effectuated to determine whether the parties sought a release, a
covenant not to sue, or both.” (quotation omitted)). Thus, not only do we
disagree with the defendants that the holding in Kaye is equally applicable to
the facts here, we are unconvinced that the court would necessarily have
reached the same conclusion if the agreement in Kaye contained an express
covenant not to sue. See id. at 903, 906-07; see also Cook v. SCI Md. Funeral
Servs. Inc., No. 14-3770-GLR, 2016 WL 4536291, at *4 (D. Md. Aug. 31, 2016)
(unpublished magistrate recommendation) (recommending, under Maryland
law, that the court “decline to interpret the contract,” which contained both a
release and a covenant not to sue, “in a manner that is contrary to its plain
meaning and which would render superfluous the express ongoing promise not
to litigate,” distinguishing Kaye). Therefore, we disagree with the defendants
that Kaye supports their position.
We recognize, however, two other lines of cases that reject breach of
contract claims based upon a violation of a covenant not to sue that does not
include an express provision for damages. See Artvale Inc. v. Rugby Fabrics
Corp., 363 F.2d 1002, 1006-08 (2d Cir. 1966); Bunnett v. Smallwood, 793 P.2d
157, 163 (Colo. 1990) (en banc). For the reasons that follow, we conclude that
10
the reasoning of these decisions is inconsistent with the law in New
Hampshire, and we therefore decline to follow them.
In Artvale, the United States Court of Appeals for the Second Circuit
declined to permit a claim for damages in the form of attorney’s fees and costs
incurred in defending an action brought in violation of a covenant not to sue.
Artvale, 363 F.2d at 1008. It reached this conclusion because the agreement
contained no express provision providing for such damages and there was no
evidence demonstrating that the lawsuit was filed “in obvious breach or
otherwise bad faith.” Id. Courts in a number of jurisdictions have used this
approach, though many of these cases involve the application of New York law,
which the Second Circuit interpreted, in part, in Artvale. See id. at 1006-08
(concluding the result would be the same under both federal and New York
law); Dallas Gas Partners, L.P. v. Prospect Energy Corp., 733 F.3d 148, 158-59
(5th Cir. 2013) (decided under New York law); Lubrizol Corp. v. Exxon Corp.,
957 F.2d 1302, 1305-07 (5th Cir. 1992) (decided under New York law);
Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 527, 529 (2d Cir.
1985) (decided under New York and California law); Cefali v. Buffalo Brass Co.,
Inc., 748 F. Supp. 1011, 1026-28 (W.D.N.Y. 1990) (decided under New York
law); Borbely v. Nationwide Mut. Ins. Co., 547 F. Supp. 959, 966 n.12, 980-81
(D.N.J. 1981) (decided under New Jersey law); Quill Co., Inc. v. A.T. Cross Co.,
477 A.2d 939, 944 (R.I. 1984).
Artvale provides little discussion of the Second Circuit’s reasoning for
adopting this rule. See Artvale, 363 F.2d at 1008. However, it concludes that
“it is not beyond the powers of a lawyer to draw a covenant not to sue in such
terms as to make clear that any breach will entail liability for damages,
including the most certain of all — defendant’s litigation expense.” Id. It
further notes that “distill[ing] all this out of the usual formal covenant would be
going too far” because the “primary function” of the covenant not to sue “is to
serve as a shield rather than as a sword, often being employed instead of a
release to avoid the common law rule with respect to the effect of a release on
joint tort-feasors.” Id. In setting forth this reasoning, the Second Circuit
appears to construe the purpose of a covenant not to sue as generally
equivalent to that of a release. See id. Yet, the exceptions to its holding —
suits brought in bad faith or in obvious breach — suggest that it recognizes the
covenant as a promise that may be breached. See id.
As discussed previously, we reject the contention than an express
covenant not to sue should be construed merely as a release. See Stateline,
150 N.H. at 338-39. Nor have we held that contracts must expressly provide
for damages in order for an injured party to bring a breach of contract claim.
We see no reason why we should treat parties who suffer damages as a result
of a breach of an express promise not to sue differently from those who suffer
damages for a breach of other types of contractual terms. Finally, we know of
no case in which we have required a party to allege “bad faith” or an “obvious
11
breach” of express terms in a contract to maintain a breach of contract action.
Rather, we have said that “[a] breach of contract occurs when there is a failure
without legal excuse to perform any promise which forms the whole or part of a
contract.” Lassonde, 157 N.H. at 588 (quotation and brackets omitted).
Therefore, we conclude that the rule set forth in Artvale is inconsistent with
New Hampshire law, and we decline to adopt it.
The cases that follow Bunnett, on the other hand, allow a party forced to
litigate in violation of a release or agreement not to sue to recover
consequential damages in the form of attorney’s fees and costs only when there
is “contractual, statutory or rule authorization for such an award.” Bunnett,
793 P.2d at 163; see, e.g., Shumate v. Lycan, 675 N.E.2d 749, 751, 754-55
(Ind. Ct. App. 1997). In Bunnett, the Colorado Supreme Court did not rely on
the distinction between the legal effect of a release and that of a covenant not
to sue.3 See Bunnett, 793 P.2d at 161-63. Rather, it rejected the claim for
damages because (1) a party’s position as a defendant in a lawsuit brought in
violation of a release “is no different from that of any other defendant who
prevails in a lawsuit and does not have a successful counterclaim for
damages,” and (2) permitting attorney’s fees under these circumstances as an
“exception” to the American Rule would expand the rule without any
“principled way to contain [it].” Id. at 161; see Jesurum v. WBTSCC Ltd.
P’ship, 169 N.H. 469, 482 (2016) (explaining that, under the American Rule,
parties pay their own attorney’s fees absent statutorily or judicially-created
exceptions).
Numerous jurisdictions have adopted Bunnett or similar rules in cases
involving releases and covenants not to sue. See Bukuras v. Mueller Group,
LLC, 592 F.3d 255, 265-67 (1st Cir. 2010) (decided under Massachusetts law;
release); In re Weinschneider, 395 F.3d 401, 404 (7th Cir. 2005) (decided under
Illinois law; release and covenant not to sue); Child v. Lincoln Enterprises, Inc.,
200 N.E.2d 751, 752-54 (Ill. App. Ct. 1964) (referring to the specific agreement
signed by the plaintiff as a “Covenant Not to Sue,” but referring to such
agreements generally as a “release”); Shumate, 675 N.E.2d at 751, 754-55, 754
n.4 (release and agreement not to sue); Dodge v. United Services Auto. Ass’n,
417 A.2d 969, 970-71, 975-76 (Me. 1980) (oral agreement to settle an
insurance claim). However, based upon our canons of contract interpretation
and our breach of contract doctrine, we are unconvinced that this reasoning
should apply to covenants not to sue under the law in New Hampshire.
3 The Colorado Supreme Court framed the question presented in Bunnett as follows: “whether the
prevailing party in a lawsuit can recover attorney fees and costs for breach of an agreement not to
sue.” Bunnett, 793 P.2d at 159. However, the court noted that the parties used the words
“release,” “covenant not to sue,” and “settlement agreement” interchangeably and stated that it
would use the word “release” to refer to the relevant contractual provision for the purposes of the
opinion. Id. at 159 n.2.
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First, a party’s position as a defendant in a lawsuit brought in violation
of a covenant not to sue, who brings a counterclaim for breach of that
covenant, is different from the position of defendants in other lawsuits who
prevail in defending against the lawsuit but do not have a counterclaim for
damages. See Bunnett, 793 P.2d at 161. Unlike defendants in other lawsuits,
a defendant in an action brought in violation of a covenant not to sue
bargained to receive, and exchanged consideration for, the opposing party’s
promise that it would forbear from bringing suit. Under these circumstances,
the lawsuit itself is the object that the bargain intended to prohibit. Therefore,
unlike defendants in other types of lawsuits, a defendant in a lawsuit brought
in violation of a covenant not to sue loses the benefit of the bargain with no
recourse if it is prohibited from bringing an action for breach against a party
who violated an express term of a contract.
Second, an action for consequential damages caused by a breach of an
express covenant not to sue does not create an untenable exception to the
American Rule. See id. While we follow the American Rule in New Hampshire
and recognize the statutory and common law exceptions, see Jesurum, 169
N.H. at 482, consequential damages resulting from a breach of a covenant not
to sue may include, but are not limited to, attorney’s fees and costs in
defending the action. See Drop Anchor Realty, 126 N.H. at 678. Moreover,
when a party requests attorney’s fees and costs in defending the action as
consequential damages for breach of a covenant not to sue, this request does
not seek an award of attorney’s fees within the meaning of the American Rule.
Rather, under these circumstances, attorney’s fees and costs help to put the
non-breaching party in the position it would have been in had the breach not
occurred. See Audette, 165 N.H. at 770; Microsoft Corp. v. Motorola, Inc., 795
F.3d 1024, 1049 (9th Cir. 2015) (noting the “critical factor” that the attorney’s
“fees at issue here were incurred not in the current breach of contract action
but in defending against the . . . action found to have breached the . . .
agreement”); Anchor Motor Freight, Inc. v. Intern. Broth. of Teamsters, 700
F.2d 1067, 1071-72 (6th Cir. 1983) (determining that the American Rule did
not apply where the defendant’s claim for attorney’s fees was “a measure of the
actual damages which [the defendant] incurred in defending against the
lawsuit which [the plaintiff] instituted purportedly in violation of the covenant
not to sue”). Therefore, by recognizing a breach of contract action for
consequential damages in these circumstances, we are not creating a new
exception to the American Rule; rather, we are permitting a party to pursue a
claim for damages pursuant to ordinary contractual principles. See Audette,
165 N.H. at 770.
Furthermore, we disagree with the Colorado Supreme Court that the
statutory and rule-based exceptions to the American Rule would “adequately
protect the non-breaching party.” Bunnett, 793 P.2d at 162. Similar to
Colorado law, see id., New Hampshire law permits trial courts to award a
prevailing party attorney’s fees and costs for suits brought in bad faith. See
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Frost v. Comm’r, N.H. Banking Dep’t, 163 N.H. 365, 377-78 (2012). These
exceptions provide no recourse, however, for parties seeking relief in addition to
attorney’s fees and costs. Further, even when the party seeks only attorney’s
fees and costs in defending the unlawful action, the party may receive those
fees and costs only if the trial court finds that the circumstances fall within a
recognized exception. See, e.g., Frost, 163 N.H. at 378 (explaining that an
award of attorney’s fees is appropriate under the bad faith litigation exception
where one party has acted in bad faith, vexatiously, wantonly, or for oppressive
reasons, where the litigant’s conduct can be characterized as unreasonably
obdurate or obstinate, and where it should have been unnecessary for the
successful party to have brought the action). Thus, unlike a damages award
for a successful breach of contract action, an award of fees and costs under an
exception to the American Rule may not provide complete relief to a party who
has been injured by a breach of a covenant not to sue.
We recognize that a party bringing suit in contravention of a covenant
not to sue may do so in good faith, where, for example, the party believes the
covenant not to sue is void ab initio or otherwise unenforceable. See, e.g.,
Syncom Indus. v. Wood, 155 N.H. 73, 82-83 (2007) (finding contract
unenforceable where there was no meeting of the minds on an essential term).
Other jurisdictions have pointed to such lawsuits, where the plaintiff
challenges in “good faith” the existence or validity of the covenant not to sue, as
grounds for rejecting claims for consequential damages for breach of a
covenant not to sue. See, e.g., Wolcott v. Ginsburg, 697 F. Supp. 540, 547
(D.D.C. 1988) (“When parties challenge in good faith the very existence or
validity” of a covenant not to sue, “they [cannot] be penalized for so doing.”);
see also Bunnett, 793 P.2d at 163 (“[W]here, as here, the nature and scope of
the agreement itself is ambiguous, [an] award of attorney fees and costs in the
absence of an express contractual provision would be unfair.”); Winchester
Drive-In Th. v. Warner Bros. Pictures Dist. Corp., 358 F.2d 432, 436 (9th Cir.
1966) (concluding that each party should bear its own costs where the
appellant disputed in good faith the existence of the covenant not to sue). We
therefore note that a successful challenge to the validity of a covenant not to
sue would preclude a claim for breach. Absent this, however, we find no basis
to depart from our view that, “as a matter of efficiency and freedom of choice,
parties should be able to contract freely about their affairs.” Barnes v. N.H.
Karting Assoc., 128 N.H. 102, 106 (1986). If parties do not wish to bear the
risk of liability for another party’s consequential damages, they are free to
contract accordingly. However, we see no reason why we should shield the
parties from the consequences that may result from the breach of an express
term of a contract to which they agreed. See id.
Accordingly, we decline to adopt the approach taken by the courts in
Artvale and Bunnett and join instead those courts that permit a breach of
contract claim for consequential damages based upon an express covenant not
to sue. See, e.g., Anchor Motor, 700 F.2d at 1072; Paper, Allied, Chemical v.
14
Slurry Explosive Corp., 107 F. Supp. 2d 1311, 1331 (D. Kan. 2000). Thus, we
conclude that the trial court erred in dismissing the plaintiff’s breach of
contract claim. In reaching this conclusion, we express no opinion about the
merits of the plaintiff’s claim or any defenses the defendants may raise.
The plaintiff’s remaining claims of tortious interference with contractual
relations and civil conspiracy allege that the defendants interfered, and
conspired to interfere, with contractual relations in order to cause the breach
of contract, which, as alleged in the amended complaint, is the breach of the
release agreements. After determining that the “Releases . . . operated as
releases” and could not be grounds for a breach of contract action, the trial
court concluded that the plaintiffs’ remaining claims were not reasonably
susceptible to a construction that would permit recovery because they “rest[ed]
on a theory that the parties . . . to the Releases maintained a contractual
relationship that imposed ongoing duties to the Plaintiff.” Because we have
determined that an express covenant not to sue constitutes a promise that may
be breached, the trial court’s dismissal of the plaintiff’s claims of tortious
interference with contractual relations and civil conspiracy in reliance on its
erroneous conclusion was also error.
In light of our decision, we need not address the parties’ remaining
arguments. We therefore reverse and remand for further proceedings
consistent with this opinion.
Reversed and remanded.
LYNN, C.J., and HICKS, BASSETT, and DONOVAN, JJ., concurred.
15