How to Argue the Plain Language of a Contract

Judge Dillard and the Court of Appeals walked through contract analysis in a detailed manner to hold that the plain language of a contract allowed for the recovery of over $5 million to a former chief executive officer. SPI Holdco, LLC, et al v. Mookerji, A21A0922, A21A0923, 2021 WL 4785580 (Oct. 14, 2021).

It is well established that the construction of a contract is “a question of law for the court, involving three analytical steps.” Copeland v. Home Grown Music, Inc., 358 Ga. App. 743, 748 (1), 856 S.E.2d 325 (2021); accord Shields v. RDM, LLC, 355 Ga. App. 409, 413 (1), 844 S.E.2d 297 (2020).

The first step is to decide whether the language of the contract is clear and unambiguous. Id. If so, the contract is enforced according to its plain terms, and the contract alone is looked to for meaning. Id. Second, if the language of the contract is ambiguous in some respect, the rules of contract construction must be applied by the court to resolve the ambiguity. Id. And finally, if ambiguity remains after applying the rules of construction, the issue of what the ambiguous language means and what the parties intended must be resolved by a jury [or the trial court at a bench trial]. Id.

Significantly, the cardinal rule of contract construction is “to ascertain the intention of the parties, as set out in the language of the contract.” Id. And when the language of the agreement is ambiguous in some respect, the rules of contract construction must be applied by the court to resolve that ambiguity and ascertain the intent of the parties. See Yash Sols., LLC v. New York Glob. Consultants Corp., 352 Ga. App. 127, 140, 834 S.E.2d 126 (2019); Board of Comm'rs of Crisp Cty. v. City Comm'rs of City of Cordele, 315 Ga. App. 696, 699, 727 S.E.2d 524 (2012). Significantly, when the language of a contract is plain and unambiguous, “judicial construction is not only unnecessary but forbidden.” Fid. & Deposit Co. of Maryland v. Lafarge Bldg. Materials, Inc., 312 Ga. App. 821, 823, 720 S.E.2d 288 (2011); accord Abdulkadir v. State, 279 Ga. 122, 123 (2), 610 S.E.2d 50 (2005).

The dispute revolved around a former CEO's incentive compensation amount. Section 3.3 of the agreement between the company and the former CEO broadly provides that Mookerji was to receive an incentive payment of 0.5 percent of SPI Holdco's TEV (“total enterprise value”) determined at the time the company was sold, and the payment is earned for each year SPI Holdco meets or exceeds the projected Adjusted EBITDA number. SPI Holdco, LLC, et al v. Mookerji, 2021 WL 4785580 at *6. The appellants argued that the trial court erred in concluding that the methodology used to calculate “Adjusted EBITDA” for purposes of Section 3.3 of the employment agreement includes revenue attributable to acquisitions SPI Holdco made after that agreement was executed in May 2015. Id. at *2.

“Adjusted EBITDA” was defined as “at any date of determination, an amount equal to the consolidated net income or loss of [SPI Holdco] and its Subsidiaries plus the following to the extent deducted in calculating such consolidated net income or loss (without duplication): (a) all interest, premium payments, debt discount, fees, charges and related expenses in connection with borrowed money (including capitalized interest), in each case to the extent treated as interest in accordance with GAAP, (b) the provision for federal, state, local and foreign income taxes payable, and (c) depreciation and amortization expense, as adjusted consistent with the methodology used to calculate 'Adjusted EBITDA' in the management projections set forth in the Agent Presentation.” Id. at *4.

The parties stipulated that if revenue from businesses acquired is counted in calculating the Adjusted EBITDA then Mr. Mookerji's incentive compensation would have been met for 2015 and 2016. If the revenue from businesses acquired is not counted in calculating the Adjusted EBITDA, the threshold would not be met. Id.

The Court of Appeals decided that adopting the appellants reading of the contract that businesses acquired were not included would go beyond construing the contract and revising it. Id. at *6. If the language of a contract is plain and unambiguous, “judicial construction is not only unnecessary but it is forbidden.” Fid. & Deposit Co. of Maryland, 312 Ga. App. at 823, 720 S.E.2d 288; accord Abdulkadir, 279 Ga. at 123 (2), 610 S.E.2d 50; Six Flags Over Ga. v. Kull, 276 Ga. 210, 211, 576 S.E.2d 880 (2003); Bibler Masonry Contractors, Inc. v. J. T. Turner Constr. Co., Inc., 340 Ga. App. 490, 492, 798 S.E.2d 19 (2017). So, in the absence of “words of limitation, words in a [contract] should be given their ordinary and everyday meaning.” Kull, 276 Ga. at 211, 576 S.E.2d 880; accord Seals v. Hygrade Distribution & Delivery Sys., Inc., 249 Ga. App. 574, 576-77, 549 S.E.2d 412 (2001).

It is the function of this Court to “construe the contract as written and not to make a new contract for the parties.” Rec.Town, Inc. v. Sugarloaf Mills Ltd. P'ship of Ga., 301 Ga. App. 367, 370, 687 S.E.2d 640 (2009); Roquemore v. Burgess, 281 Ga. 593, 595, 642 S.E.2d 41 (2007).

As such, the Court of Appeals decided no term or provision was ambiguous because the entire section and the definition of Adjusted EBITDA did not specify that any revenue is excluded from the calculation. Id. Therefore, the Court cannot add exclusions into the calculation because had the parties intended to exclude certain revenue, they would have stated that in Section 3.3 or some other part of the agreement. Id. at *7.

Market Value At Time Of Breach Is Value Used to Determine Damages On Convertible Note

The Court of Appeals of Georgia held that a liquidated damages provision in a convertible note was a penalty and therefore unenforceable when the damages under the contract included a "Failure to Deliver Daily Penalty,: and Default-Conversion and Make-Whole provisions, which recalculated shares owed under the note into a cash value based on a predetermined formula. J.P. Carey Enterprises, Inc. v. Cuentas, Inc., A21A0703, 2021 WL 4738600 (Oct. 12, 2021).

Specifically, the note was for $70,000.00 at 8%. Id. at *1. Under paragraphs 4 (a) and (b) of the note, Cuentas was to either pay JPC $70,000 plus eight percent interest by August 2, 2017, or issue JPC stock in Cuentas equal to the principal plus then-accrued interest within three days of a demand by JPC to convert the note to shares. Id.

The note outlines two specific remedies in the event Cuentas fails to deliver shares within three days of JPC issuing a Notice of Conversion. First, the note imposed what it characterized as a “penalty” of $250 per day beginning on the fourth day after notice and increasing to $500 per day upon the tenth day. Id. at *2. Paragraph 8 then provides that upon default “interest shall accrue at a default interest rate of 24% per annum.” Id. Second, the note includes what it terms a “Make-Whole for Failure to Deliver Loss” remedy which provides:

At [JPC's] election, if [Cuentas] fails for any reason to deliver to [JPC] the conversion shares by the 3rd business day following the delivery of a Notice of Conversion to [Cuentas] and if [JPC] incurs a Failure to Deliver Loss, then at any time [JPC] may provide [Cuentas] written notice indicating the amounts payable to [JPC] in respect of the Failure to Deliver Loss and [Cuentas] must make [JPC] whole as follows: Failure to Deliver Loss = [(High trade price at any time on or after the day of exercise) x (Number of conversion shares)]. [Cuentas] must pay the Failure to Deliver Loss by cash payment, and any such cash payment must be made by the third business day from the time of [JPC's] written notice to [Cuentas]. Id. at *2.

Georgia law provides that “[i]f the parties agree in their contract what the damages for a breach shall be, they are said to be liquidated and, unless the agreement violates some principle of law, the parties are bound thereby.” O.C.G.A. § 13-6-7. Further, under Georgia law, “[i]n deciding whether a contract provision is enforceable as liquidated damages, three factors must exist.” AFLAC, Inc. v. Williams, 264 Ga. 351, 354 (2), 444 S.E.2d 314 (1994) accord MMA Cap. Corp. v. ALR Oglethorpe, LLC, 336 Ga. App. 360, 363 (1), 785 S.E.2d 38 (2016). Specifically, “[t]he injury must be difficult to estimate accurately, the parties must intend to provide damages instead of a penalty, and the sum must be a reasonable estimate of the probable loss.” Williams, 264 Ga. at 354 (2), 444 S.E.2d 314 (punctuation omitted); accord MMA Cap. Corp., 336 Ga. App. at 363 (1).

In addition, the party who defaults on the contract has “the burden of proving the liquidated damages clause is an unenforceable penalty.” Ultra Grp. of Cos., Inc. v. S&A 1488 Mgmt., Inc., 357 Ga. App. 757, 759 (1), 849 S.E.2d 531 (2020). But the defaulting party can carry this burden by “proving any of the three factors is lacking.” Id. at 760. Ultimately, the enforceability of a liquidated-damages provision in a contract is “a question of law for the court.” MMA Cap. Corp., 336 Ga. App. at 363. And in cases of doubt, the courts “favor the construction [of a contract] which holds the stipulated sum to be a penalty, and limits the recovery to the amount of damage actually shown, rather than a liquidation of the damages.” Fortune Bridge Co. v. Dep't of Transp., 242 Ga. 531, 532, 250 S.E.2d 401 (1978); see Ultra Grp. of Cos., Inc., 357 Ga. App. at 760 (1), 849 S.E.2d 531 (noting that “[i]n close cases involving a liquidated damage clause, the Georgia Supreme Court has advocated interpreting the clause as a penalty”).

Whether Damages Are Difficult to Estimate

Georgia law has been clear for over 100 years that “[i]n [the] case of a nondelivery of stock in accordance with [a] contract, if the purchase-price has been paid, the general measure of damages is the actual or market value of the stock at the time when delivery should have been made, or, in other words, at the time of the breach of the contract.” Brandt v. Buckley, 27 Ga. App. 515, 519-20, 109 S.E. 692 (1921). In fact, the Court of Appeals stated in Brandt that “[t]he claim of the buyer for damages for the failure of the seller to make delivery is ordinarily a claim for unliquidated damages....” Id. at 519. And when the buyer has paid the purchase price, and stands on the contract, as by suing for its breach, he “must be content if the law places him in the position he would have occupied if the contract had been performed.” Id. at 520.

As a matter of first impression, the Court of Appeals looked to New York law addressing convertible notes and liquidated damages. Those New York courts have held when “the breach involves the deprivation of an item with a determinable market value, the market value at the time of the breach is the measure of damages.” LG Cap. Funding, LLC v. CardioGenics Holdings, Inc., 16-CV-1215, 2018 WL 1521861, at *7 (II) (C) (1) (E.D. N.Y. Feb. 20, 2018), rev'd on other grounds by 787 Fed.Appx. 2 (2d Cir. 2019); accord Sharma v. Skaarup Ship Mgmt. Corp., 916 F.2d 820, 825 (2d Cir. 1990). Thus, the damage award resulting from a breach of an agreement to purchase securities is “the difference between the contract price and the fair market value of the asset at the time of breach, not the difference between the contract price and the value of the shares sometime subsequent to the breach.” CardioGenics Holdings, Inc., 2018 WL 1521861, at *7 (II) (C) (1) ; accord Sharma, 916 F.2d at 825; LG Cap. Funding, LLC v. 5Barz Int'l, Inc., 307 F.Supp.3d 84, 103 (III) (B) (2) (E.D. N.Y. 2018). So, the fact that the selling entity's future share value is unknowable is “irrelevant to whether actual damages are ascertainable[.]” CardioGenics Holdings, Inc., 2018 WL 1521861, at *8 (II) (C) (1). Indeed, that the quantum is unknown “does not make the damages difficult to determine.” Id. Rather, what must be ascertainable is “the measure of actual damages.” Id.

Ultimately, the Court of Appeals relying on Brandt and the several New York cases found that at the time of the breach there was a very specific market value and that was the damages that a party would be entitled to.

Whether Default Provisions Were Intended as a Penalty

Under Georgia law, whether a provision represents liquidated damages or a penalty “does not depend upon the label the parties place on the payment but rather depends on the effect it was intended to have and whether it was reasonable.”29 And it is well established that we “ascertain the intent of the parties by first looking to the language of the contract.”30 Furthermore, although the words used by the parties are not conclusive, they are “a significant factor in determining the parties’ intent.”31 Importantly, there must be “some manifestation of the parties’ intent to agree on liquidated damages.”32

Here, the Court noted that the provisions expressly call the liquidated damages as penalties. Likewise, the provisions were called penalties in evidence and testimony.

Whether the Default Provisions Were a Reasonable Estimate of the Probable Loss

The third prong of the test “inquires whether the liquidated damage amount is a reasonable pre-estimate of the probable loss.”35 In this regard, the touchstone question is whether “the parties employed a reasonable method under the circumstances to arrive at a sum that reasonably approximates the probable loss.”36 And when the amount of liquidated damages plainly has “no reasonable relation to any probable actual damage which may follow a breach, the contractual provision will be construed as an unenforceable penalty.”37 Moreover, a term fixing unreasonably large liquidated damages is “unenforceable on grounds of public policy as a penalty.”38

The Court found that prong one allowed for a proper amount of damages as the difference between the contract price and the fair market value of the shares at the time of the breach. However, the formula under the liquidated damages provision turned a $70,000.00 convertible note into an award of more than $50 million. Obviously, the Court stated this was a penalty.

Strict Scrutiny Applies To Employment Agreement That Is Not Ancillary To Sales Agreement

The Court of Appeals of Georgia held that employment agreements, including restrictive covenants contained therein, that are not ancillary to a sales agreement, are reviewed with strict scrutiny. BB&T Insurance Services, Inc. v. Renmo et al., A21A1114, 2021 WL 4771343 (Ga. Ct. App. Oct. 13, 2021). In reviewing the at-issue employment agreement and restrictive covenants the Court further affirmed the trial court's finding that the restrictive covenants were overbroad and unenforceable. Id.

Restrictive covenants that impose an unreasonable restraint on trade are void as against public policy. Am. Control Sys., Inc. v. Boyce, 303 Ga. App. 664, 667 (1), 694 S.E.2d 141 (2010); Northside Hosp. v. McCord, 245 Ga. App. 245, 247 (2), 537 S.E.2d 697 (2000). And whether restrictive covenants are reasonable is a question of law, which courts review de novo. Vulcan Steel Structures, Inc. v. McCarty, 329 Ga. App. 220, 222, 764 S.E.2d 458 (2014).

In this regard, courts apply “different levels of scrutiny to restrictive covenants depending generally upon whether the contract at issue is an employment contract, a contract for the sale of a business, or a professional partnership agreement[.]” Swartz Invs., LLC v. Vion Pharms., Inc., 252 Ga. App. 365, 368 (2), 556 S.E.2d 460 (2001). So, traditionally, courts “divide restrictive covenants into covenants ancillary to an employment contract, which receive strict scrutiny and are not blue-penciled, and covenants ancillary to a sale of business, which receive much less scrutiny and may be blue-penciled.” Id. And courts have consistently held that “when parties execute separate contracts for the seller's sale of the business and the seller's subsequent employment and each contract contains different restrictive covenants, the restrictive covenants in the employment contract are subject to strict scrutiny.” Am. Control Sys., 303 Ga. App. at 668.

It is likewise important to note that the Georgia Restrictive Covenant Act, enacted on may 11, 2011, permitted blue penciling, in that "a court may modify a covenant that is otherwise void and unenforceable so long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties." OCGA § 13-8-53 (d). However, the relevant employment agreement at issue in the BB&T Insurance Services, Inc. case was executed in 2001, therefore the Georgia Restrictive Covenant Act does not apply. BB&T Insurance Services, Inc. v., 2021 WL 4771343 at *3 n.8.

In conducting the above analysis, courts consider the relative bargaining power of the parties and whether there is independent consideration for the restrictive covenant. Am. Control Sys., 303 Ga. App. at 667-68. Courts have reasoned that contracts of employment receive strict scrutiny because they can involve “parties of unequal bargaining power,” while contracts for sales of business interests receive less scrutiny because they are more likely to be “entered into by parties on equal footing.” Drumheller v. Drumheller Bag & Supply, Inc., 204 Ga. App. 623, 626 (1), 420 S.E.2d 331 (1992).

The Court reviewed the employment agreement and found that while it references the sales agreement, only the employment agreement contains the relevant restrictive covenants at issue. BB&T Insurance Services, Inc. v., 2021 WL 4771343 at *4. Therefore, the case is analogous to matters where two agreements contain different restrictive covenants rather than the same restrictive covenants. Id. In these situations, the contracts are considered separate with strict scrutiny applied to the employment agreement. Russell Daniel Irrigation Co. v. Coram, 237 Ga. App. 758 (1), 516 S.E.2d 804 (1999).

The Court also held that the employment agreements did not have consideration independent from Renmo's employment because Renmo was only a minority shareholder of the selling business, was not involved in the negotiation of his employment agreement (including the restrictive covenants), similar restrictive covenants were entered into by non-shareholding employees of the seller, the terms of the restrictive covenants did not relate to the seller in any way, and the terms entirely relate to BB&T including a period that begins with termination of employment with BB&T. BB&T Insurance Services, Inc. v., 2021 WL 4771343 at *5.

The Court of Appeals of Georgia affirmed the trial court's holding that the employment agreement was not ancillary to the sales agreement. Further, once reviewing the restrictive covenants, the Court of Appeals found that they were overbroad and unenforceable because (1) the non-competition provision was not limited to BB&T customers with whom Renmo had material contact with while employed by BB&T and the types of insurance products he was prohibited from selling were not limited to those that Renmo sold while at BB&T (id. at 7), and (2) the non-recruitment/solicitation provision prohibited Renmo from "supporting" any BB&T employee's personal decision to leave the company and does not protect a legitimate business interest (id. at 8).