The Five Commandments of Equine Sales Contracts

Horses sell every day, but when it comes right down to it, most people involved in a horse sale are not sure what facts the seller must disclose. Likewise, there are certain rules that govern a buyer’s conduct, most importantly being the buyer’s duty to ask relevant questions. The law creates a fine line between a seller’s duty to disclose versus right to remain silent, and a buyer’s duty to ask. The general rules are as follows:

Rule No. 1: Thou Shalt Not Lie or Mislead a Buyer.

A seller cannot lie or mislead a buyer. However, sellers do not have to disclose every known fact regarding a transaction. A seller generally does not commit fraud by remaining silent about most aspects of a horse sale. Most courts around the nation hold that, with some exceptions, silence will not amount to fraud, especially where the defect or problem could be readily discovered by the buyer through a routine inspection. However, failure to disclose information may amount to fraud in the following circumstances:

  1. If the seller agrees in the purchase agreement to disclose all relevant facts, then the seller must disclose such known facts to avoid fraud. Silence will not serve as protection to fraud in this situation.
  2. If the seller and buyer have a confidential or fiduciary relationship, the seller has a duty to disclose all relevant facts. Thus, a trainer has a duty to disclose to his or her customer all relevant facts regarding the transaction; otherwise the trainer could be liable for fraud.
  3. Where the seller knows the buyer is mistaken to certain facts, the seller must correct the mistaken belief. An example is when the potential buyer of a mare states that they intend to breed the mare next year but the seller knows that the mare is not able to carry a foal due to a problem not discernible from a normal veterinarian examination. Under these circumstances, the seller must clear up the mistaken belief of the buyer in order to avoid fraud.
  4. If a seller knows the buyer wishes to purchase a horse for a particular purpose, the buyer must disclose all facts relevant to whether the horse can meet that purpose. For example, take the family seeking a horse for their 8 year old daughter to ride at horse shows. If the seller knows that the horse is hard to control, and thus potentially dangerous at horse shows, they must disclose this fact in order to avoid fraud or other liability.
  5. When the buyer asks a seller a question, the seller has a duty to give a correct response. An incorrect or misleading response may constitute fraud. If the buyer asks the seller if the horse has had any illness in the past, the seller must give a truthful answer.

Rule #2: Thou Shalt Be Specific In Thy Contract.

Sellers can limit themselves, to a certain extent, by including an “as is” statement in the purchase agreement. This statement typically says that the buyer takes the horse as it is, without any warranties. 

The seller may protect themselves from certain statements made prior to the sale by including a merger clause in the purchase agreement. A merger clause says that anything intended to be in the agreement is contained in this agreement, and this agreement contains all provisions of the sale. Things not expressly included will not be considered part of the agreement. Take for example the instance where there is a merger clause in the purchase agreement, and the seller has represented to the buyer that the stallion purchased is breeding sound. If the buyer wishes this to be a warranty of breeding soundness, the buyer should have the warranty specifically included in the purchase agreement.

Rule #3: Thou Shalt Accept Responsibility for Thyself. 

Buyers should be aware that they too have duties. Buyers must conduct a reasonable inspection of the horse they purchase. A reasonable inspection varies depending on the value and the intended use of the horse. If you purchase a high dollar show horse, you arguably have a duty to secure a detailed veterinarian inspection of the horse, including x-rays. If you purchase an expensive mare for breeding purposes, you should secure a veterinarian examination which includes palpation and other fertility tests to ascertain the mare’s breeding capacity. However, if you purchase a pleasure riding horse intended only for recreational use, your duty to inspect will be much lower. The amount of inspection required will vary depending upon the custom in your breed or sport, and the intended use.

Rule #4: Thou Shalt Protect Thyself. 

Self-protection in horse sales is no different from other forms of self-protection. View the transaction as an educational experience — if you don’t consummate the deal, you’ve educated yourself and the negotiation partner, and you’ve employed good business practice. However, if you follow certain guidelines, you should be able to capably thread your way through the negotiations in flying colors: 

As the Buyer:

  1. Ask questions. Document the answers to these questions.
  2. Tell the seller what you intend to use the horse for and ask if the horse would be suitable for such use. 
  3. Specifically ask if there are any known physical conditions which would hamper the horse’s performance in this capacity.
  4. Always use a written purchase agreement.
  5. If there’s something that is vital to the sale, such as soundness, breeding capacity, etc., be sure to have it included in the contract. 
  6. If there is a “sold as is” clause or merger provision in the purchase agreement, make sure that all important statements or guarantees made by the seller are included in the purchase agreement.
  7. Properly inspect the horse. The level of inspection depends upon the intended use, breed and sport standards. If you are not sure what type of inspection is necessary contact a professional breeder, trainer or equine veterinarian in your area.
  8. Test the horse’s suitability for its intended use.

As the Seller: 

  1. Answer all questions truthfully.
  2. Inform the buyer, especially if the buyer is inexperienced, that they have the option to obtain a veterinarian exam of the horse if they desire.
  3. Always use a written purchase agreement.
  4. Include in the contract “sold as is” language and merger provisions. 
  5. If the buyer requests to have guarantees or statements included in the contract, determine if you want to be held to those guarantees or statements. If you are willing to be held to such guarantees, include them in the purchase agreement and complete the sale.

Rule #5: Thou Shalt (And Must) Use A Written Contract For Any Horse Sale Exceeding $500

In our contract negotations, we are all constrained by a legal policy called the “Statute of Frauds”. Part of each state’s Uniform Commercial Code, this policy requires any contract for sale of goods exceeding $500 to be in writing in order to be enforceable. What does that mean? If you sell a horse for $501 without a written contract, either party may rescind (that is, refuse to honor the contract, return the horse, and/or demand the return of either the horse or the money). In other words, a verbal contract enables the parties to return to the position they each occupied before the contract was entered.

CONCLUSIONS: FOLLOW THE RULES. Adhering to the above policies will not only keep you out of trouble, but maximize your ability to close the best deal for all concerned. 

© Denise E. Farris, Esq. (January 25 2022) This article may not be reprinted or reproduced in any manner without the consent of the author. Contact: Denise Farris, Farris Legal Services LLC. Email: [email protected]. Telephone: (913) 220-6203

DISCLAIMER
This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication does not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

Shut Your Mouth – And Computer: Defamation in the Internet Age

You’ve heard the old adage – “Telegraph, Tell-a-Farrier”. While intended as a joke, the equine world is famous for rapid transmission of gossip. While much of this is harmless, occasionally gossip spreads damaging, unfounded rumors specifically aimed at individuals or their businesses. The rise of Facebook and the prevalence of negative postings is creating entirely new case law on what constitutes internet defamation.

The following article covers the general elements of internet defamation in the hopes that the equine business world will sit down, take note, and most importantly – “SHUT UP” – at least as to publishing non-investigated negative accusations against business figures in the equine world.

Terminology

First, understand the terminology. While governed by – and thus varied by – state law, the following general definitions and principals apply.

  1. Defamation: a false and unprivileged statement of fact that is harmful to someone’s reputation”, and published “with fault,” i.e. either negligently or maliciously.
  2. Libel: a written defamation;
  3. Slander: a spoken defamation.

In addition to the above, there is also “libel per se”, that is, a written defamation that is so obviously negative and false that it requires little additional evidentiary proof. The following are often found to be libelous per se, i.e. a statement that falsely:

  • Charges any person with crime, or with having been indicted, convicted, or punished for crime;
  • Imputes in him the present existence of an infectious, contagious, or loathsome disease;
  • Tends directly to injure him in respect to his office, profession, trade or business, either by imputing to him general disqualification in those respects that the office or other occupation peculiarly requires, or by imputing something with reference to his office, profession, trade, or business that has a natural tendency to lessen its profits;
  • Imputes to him impotence or a want of chastity.

Proving a Defamation Claim

To prove defamation, a claimant must establish each of the following elements: 

  1. A publication;
  2. Of a false statement of fact;
  3. Tending to harm the reputation of the claimant, and
  4. Proof of damages.

An individual need not be named “specifically” for this defamation to occur. A plaintiff only needs to be reasonably identifiable; i.e. if you post a statement about a “certain saddleseat trainer at XX facility”, and there’s only one such trainer at that facility, the person has been identified with sufficient specificity to have his or her reputation at stake.

Defenses: Truth, Opinion, Retractions and Intermediary Publications

  1. Truth
    Truth is an absolute defense to a defamation claim. However, proving “truth” after publication of a statement can be costly and also hard to prove. Better to avoid being sued in the first place by not publishing anything defamatory or potentially defamatory in the first place!
  2. Opinion
    Also there is a distinction between expressing an opinion, which can be negative without being defamatory, and asserting a “verifiable fact”. A verifiable fact is a fact which is capable of being proven true or false when viewed in light of the context of the statement. While some courts have held that statements made in the context of an Internet bulletin board or chat room are highly likely to be opinions or hyperbole, and thus NOT defamation, they can rise to slander when appearing to assert negative “verifiable facts” which are later proven untrue. For example, an internet posting might get away with accusing a trainer of not being very “good” with clients (ie poster’s opinion), but might not be able to get away with accusing the trainer of being charged with abuse of animals in his or her care (a verifiable fact capable of proof – or not).
  3. Retractions
    Oftentimes posters who later discover their statements were not true attempt to remedy the harm by a written retraction. Some states permit “retractions” as a partial defense or an element of damage reduction in defamation claims. While this may or may not be helpful in a particular case, this oftentimes is the “skunk in the jury box” scenario. You might remove the skunk (ie retracting the statement), but the scent – and the damage – linger long afterwards. This is particularly true on internet postings where a retraction may never be viewed by all persons negatively influenced by the statements posted.
  4. Intermediary Postings
    Generally, anyone who repeats someone else’s statements is typically held equally responsible for any defamatory content as the original speaker – if they knew, or had reason to know, of the defamation. However, developing case law related to internet defamation and and on-line postings resulted in Congress passing Section 230 of the Communications Decency Act, which provides some liability protection to Internet “intermediaries” who merely republish speech by others.

Conclusion

The status of these exposures, defenses and statutory protections are currently playing out in cases nationwide. This leads to a certain amount of legal uncertainty as to what is actionable, and what is not. Rather than taking a chance, the wiser course is to refrain from any negative publication unless reasonable due diligence reveals verification of the basis of the claims being raised in the publication.

© Denise E. Farris, Esq. (January 25 2022) This article may not be reprinted or reproduced in any manner without the consent of the author. Contact: Denise Farris, Farris Legal Services LLC. Email: [email protected]. Telephone: (913) 220-6203.

DISCLAIMER
This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication does not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

Disclosure Requirements in a Horse Sale

Horses sell every day, but when it comes right down to it, most people involved in a horse sale are not exactly sure what facts the seller must disclose. The law creates a fine line between a seller’s duty to disclose and a seller’s right to remain silent. The general rules are summarized as follows: 

  • A seller cannot lie or mislead a buyer. However, sellers do not have to disclose every known fact regarding a transaction. A seller generally does not commit fraud by failing to disclose, or remaining silent, about most aspects of a horse sale. Most courts around the nation hold that, with some exceptions, silence will not amount to fraud, especially where the defect could be readily discovered by the buyer or through a routine inspection. However, failure to disclose information may amount to fraud in the following circumstances: 
  • If the seller agrees in the purchase agreement to disclose all relevant facts, then the seller must disclose such facts to avoid fraud. Silence will not serve as protection to fraud in this situation. 
  • If the seller and buyer have a confidential or fiduciary relationship, the seller has a duty to disclose all relevant facts. Thus, a trainer has a duty to disclose to his or her customer all relevant facts regarding the transaction, otherwise the trainer could be liable for fraud. 
  • Where the seller knows the buyer is mistaken to certain facts, the seller must correct the mistaken belief. An example is when the potential buyer of a mare states that they intended to breed the mare next year but the seller knows that the mare was not able to carry a foal due to a problem not discernible from a normal veterinarian examination. Under these circumstances, the seller must clear up the mistaken belief of the buyer in order to avoid fraud. 
  • If a seller knows the buyer is purchasing a horse for a particular purpose, the buyer must disclose all facts relevant to whether the horse can meet that purpose. Take for example where a family is considering buying a horse for their 8 year old daughter to ride at shows. If the seller knows the horse acts up and is dangerous at shows, they must disclose this fact in order to avoid fraud. 
  • When the buyer asks a seller a question, the seller has a duty to give a correct response. An incorrect or misleading response constitutes fraud. If the buyer asks the seller if the horse has had any illness in the past, the seller must give a truthful answer. 

Sellers can limit themselves, to a certain extent, by including an “as is” statement in the purchaseagreement. This statement says that the buyer takes the horse as it is, without any warranties. 

The seller may protect themselves from certain statements made prior to the sale by including a merger clause in the purchase agreement. A merger clause says that anything intended to be in the agreement is contained in this agreement, and this agreement contains all provisions of the sale. Things not expressly included will not be considered part of the agreement. Take for example the instance where there is a merger clause in the purchase agreement, and the seller has represented to the buyer that the stallion purchased is breeding sound. If the buyer wishes this to be a warranty of breeding soundness, the buyer should have the warranty specifically included in the purchase agreement.

Buyers should be aware that they too have duties, and must conduct a reasonable inspection of the horse they purchase. A reasonable inspection varies depending on the value and the intended use of the horse. If you purchase a high dollar show horse, you will probably have a duty to have a detailed veterinarian inspection of the horse, possibly including x-rays. If you purchase an expensive mare for breeding purposes, you should have a veterinarian examine the mare for her breeding capacity. However, if you purchase a pleasure riding horse intended only for recreation use, your duty to inspect will be much lower. The amount of inspection required will vary depending upon the custom in your breed or sport, and the intended use.

How Buyers Can Protect Themselves: 

  • Ask questions. Document the answers to questions. 
  • Tell the seller what you intend to use the horse for and ask if the horse is suitable for such use. Ask if there are any known conditions which would hamper the horse’s performance in this capacity. 
  • Use a written purchase agreement. 
  • If there’s something that is vital to the sale, such as soundness, breeding capacity, etc., be sure to have it included in the purchase agreement. 
  • Properly inspect the horse. The level of inspection depends upon the intended use, breed and sport standards. If you are not sure what type of inspection is necessary contact a professional breeder, trainer or equine veterinarian. 
  • Test the horse’s suitability for its intended use. 

How Sellers Can Protect Themselves: 

  • Answer questions truthfully. 
  • Inform the buyer, especially if the buyer is inexperienced, that they have the option to obtain a veterinarian exam of the horse if they desire. 
  • Always use a written purchase agreement. 
  • Include “as is” and merger provisions in the contract. If the buyer requests to have guarantees or warranties included in the contract, determine if you want to be held to those guarantees or warranties. 

© Denise E. Farris, Esq. (January 25 2022) This article may not be reprinted or reproduced in any manner without the consent of the author. Contact: Denise Farris, Farris Legal Services LLC. Email: [email protected]. Telephone: (913) 220-6203

DISCLAIMER
This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication does not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

Equine Business Questionnaire

The following questions are designed to identify the details of your equine business concept, permitting us to most efficiently identify the legal and practical steps necessary for formation, day to day management, and risk management.

  1. Name of Equine Business Owners: (List all). If you operate as a separate business entity (i.e. Limited Liability Company or S or C Corporation), list the name of your business as it appears on your Articles of Operation or Incorporation!
  2. Address, Phone, Fax and Email addresses for all owners:
  3. Address (including county) where equine business is to be located:
  4. Land is ____ Developed _____ Undeveloped
    • Have you cleared any zoning or other land development issues?
    • Existing Buildings include:
    • Planned new buildings will include:
    • Will property be developed as an equine-specific community residential development and if so, do you want restrictive covenants on the equine activities (i.e. covenants that attach to the land regarding equine use of the property)?
  5. Is land for equine business owned by a separate entity or parties and if so, will you require a lease-back agreement between equine business and property owner? (Example: Land owned by husband and wife but used by Equine Business LLC, also owned by husband and wife).
  6. Have you advised your equine liability carrier of all of the above intended activities or of your plans to add activities to ensure they are fully covered under your Equine Commercial General Liability Policy?
  7. Have you priced out the required insurance coverages you should consider carrying?
    ___ Equine Commercial General Liability (CGL) (not covered by your homeowners if you are operating as a business; ie receiving value for your services through cash or barter).
    ___ Care, Custody and Control (separate from CGL)
    ___ Premises Liability (separate from CGL)
    ___ Fire and Casualty (separate from CGL)
    ___ Other:________________________________________________
  8. Horse breeds or disciplines you are wanting to attract?
  9. Which of the following services will you provide? Estimated charges for each?
    • Pasture board – and when supplemental hay and feed will be given
    • Stall board with daily turnout; stall cleaning services
    • Dry lot board; food water and cleaning services
    • Exercise and grooming – details and costs
    • Arena usage – for boarders only or available to trainers and clinicians?
      • How will this interfere with your boarders usage and limitations?
      • What insurance requirements will you demand from independent contractors and clinicians?
      • What special arena rules will be required
      • Can boarders use indoor arenas for turnout in winter or inclement weather?
    • Special feeds, supplements and medical care administration costs
    • Winter blanketing, heated buckets, summer fans and costs
    • Trail riding (owner and horses only) or (public using Stable horses?)
    • Training: Stable trainer or independent contractor and costs
      • Will trainer by your employee or an independent contractor?
      • Will you allow various independent contractors to teach on your premises
    • Lessons: Stable instructor or independent contractor and costs
    • Competitions on site and off site
    • Transportation services: Medical emergencies, competitions, other & costs
    • Clinics
    • Summer day camps for children
    • Girl / Boy Scout clinics
    • Metropolitan Community College classes – equine
    • Stable parties? Details and costs.
    • Hay rides? Horse or tractor drawn, details and costs. 
    • Breeding Services. Will you provide short term mare care or long term mare care with foaling services?
    • On site or AI?
      • Who will be handling the AI (collection or insemination or both?)
      • What are the AI terms and conditions?
      • What are the Live Foal Guarantee conditions?
      • Will you be standing studs owned by others?
  10. Other? ___________________________________________________
  11. What is your short and long term vision for the business on a 1 year, 5 year, 10 year and 20 year plan?
  12. Do you envision using your horses or leased horses in the lesson programs? 
  13. Will you be willing to lease client’s horses for lessons? How much per lesson? How do you envision keeping accurate usage and accounting records? Who will insure the horse (ie CGL, Major Medical and Mortality). What if a client’s horse is injured in a lesson? What if a student is injured on a client’s horse during a lesson?
  14. What farm equipment will be owned? Purchase or Lease?
  15. What Insurance coverages do you need?
    • Landowners Liability Protection or Umbrella Coverage
    • Vehicle and/or Farm Equipment
    • Fire and Casualty
    • Care Custody and Control
    • Equine Commercial General Liability
    • Equine Mortality; Major Medical on horses you ow
    • Equine mortality, major medical on horses you lease
    • Other:
  16. What forms do you envision requiring based on the activities you have listed above?
  17. Will Stable activities be limited to state of Stable’s location or multiple states? Is there a need for a multi-state waiver compliant with various states EALA statutes?
  18. Will you be allowing the premises to be used by independent contractors (ie to provide training or lessons) and if so, what are the terms and conditions related to their use of those premises? What are you charging them for same? How are records kept and who is responsible for keeping those records? Is the trainer/ instructor going to be required to carry separate liability insurance naming you as an additional insured or are you carrying the coverage? 
  19. List all other information relevant to your business plan. Attach a copy of your business plan (if available). 

© Denise E. Farris, Esq. (January 25 2022) This article may not be reprinted or reproduced in any manner without the consent of the author. Contact: Denise Farris, Farris Legal Services LLC. Email: [email protected]. Telephone: (913) 220-6203

DISCLAIMER
This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication does not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

Equine Business Health Check-up

Am I Using Appropriate Contracts?

A written contract can maximize your legal protection. The wrong right contract could expose you to needless and potentially devastating liability. Use of professionally drafted contracts may result in insurance premium savings. Not only is it important to use such contracts, they must be executed and used properly. 

If you are not currently using written contracts, you may worry about how your customers will react. If contracts are presented in the proper manner and with a positive approach, most people will respond in kind. A contract creates the opportunity to clarify each party’s understanding of the terms and conditions. Use of contracts will often assure the customer that the stable is a well-managed and professional business. 

Practical Example: An equine client implemented a new boarding contract which required the owner to specifically authorize and establish the parameters of acceptable emergency medical care for the horse in the owner’s absence. The boarder was thus forced to consider, before an accident occurred, exactly what her instructions would be with respect to this previously unanticipated but extremely common situation.

Does my contract language track my state’s Equine Activity Liability Act?

Most states, which have passed some form of the Equine Activity Liability Act, require special warning language in all contracts used by the equine business. The language must track the language of the statute. It warns participants of the inherent risks of equine activities. If your state requires this contractual warning, and you do not include it, you will most likely be unable to take advantage of the special liability protections provided by the statute.

Practical Example: An equine boarding stable included a participant warning which did not exactly track the language of the statute. A participant was injured and sued. The stable’s attempts to dismiss the suit under the Equine Activity Limited Liability Act failed, because there existed an issue as to whether the contract warning language strictly complied with the statutory warning requirements.

Have I trained my employees to properly execute contracts?

Contracts must be signed by every customer or participant. If anyone is under the age of 21, their parent or legal guardian must also sign. Make sure that your customers understand the terms of the contract. Honestly answer any questions they may have. Be sure all blanks are filled in. Never hand a contract to a customer and ask them to immediately sign. Sufficient time should be allowed to give them time to thoroughly read and understand the agreement. When the signed contract is returned, ask if they read and understood the contract. DO NOT DOWNPLAY THE CONTRACT FORMALITIES. Your contracts are there to protect you. 

Review the signed contract to ensure that it is completed fully. Areas that require special attention should immediately be noted and resolved. Return a copy of the executed agreement to the customer and retain the original for a minimum of five years. 

Practical Example: An equine business owner permitted the trainer to handle execution of all contracts. The trainer reviewed only the last page signature line, but did not review all pages of the contract. Following a serious accident, the owner discovered that the contract forms had all been turned in without signatures next to the liability waiver, rendering the waiver useless.

Do I regularly update my contracts?

All contracts should be reviewed annually. An updated contract should be executed each year to account for changed circumstances, language update to comply with statutory changes, stable procedure changes, and/or new fee schedules.

Practical Example: An equine business owner required execution of an original boarding contract that granted a security interest in the horse for unpaid board. The horse was subsequently traded for a new horse, but the Stable did not require the owner to execute a new contract. When the owner fell behind in board payments, the Stable subsequently found it had no contractual grounds for perfecting and foreclosing on its security interest where the old contract was inapplicable to the new horse.

Do I include a security interest clause in my contracts?

When a horse’s board remains unpaid, you remain obligated to pay ongoing maintenance costs until the payment dispute is resolved. A good contract will notify your clients of your intent to claim an agister’s lien and perfected security interest in the horse, permitting you to sell the horse to collect unpaid board and training fees. Even if never intend to sell the animal, a well worded letter, enclosing the contract language which permits you to do so, is generally sufficient to compel payment of the debt.

Practical Example: An equine client provided training to a green hunter/jumper. That particular state’s agister lien permitted liens based upon “stipulated fees.” Following extensive training, the horse began to successfully compete at the Grand Prix level, but the owners were seriously delinquent in payment of board and training fees. Where the training was provided under a verbal contract, and where there was no express agreement as to “stipulated fees” for the training, the trainer was unable to establish a lien against the horse. The owner was able to remove it from the Stable and sell it at a greatly appreciated value without first compensating the trainer for the time and expense invested.

Do I maintain the appropriate detailed business records?

All businesses should keep detailed records. It is recommended that you keep copies of all executed contracts and liability waivers FOR AT LEAST 5 YEARS. This includes any old contracts, even if they have been updated by new contracts. 

In addition, implementation of certain additional forms may assist in speedily resolving a lawsuit under your particular state’s Equine Activity Liability Act. These forms should include:

  1. Horse Evaluation Forms. Should be completed for every lesson horse. Forms should be updated at least twice a year, or as required by circumstances. The form serves as evidence as to a horse’s character and or known propensities. 
  2. Rider Evaluation Forms. This form should be filled out before the rider’s first lesson. It should include information provided by the rider as to their experience and include the instructor’s evaluation of the rider’s ability following their first ride. It should be updated at least twice a year, or as required by additional lessons or an incident. Such records should be kept confidential.
  3. Tack Identification and Maintenance Forms. All tack used by a stable should be inventoried with maintenance and cleaning dates documented. This is to limit the stable’s liability for injuries resulting from broken or defective tack. Many states liability statutes provide that a stable WILL BE LIABLE for injuries resulting from faulty tack which the stable “knew or should have known about.” Keeping adequate records of your tack, showing that you check and clean the tack on a regular basis and make repairs as needed, can show that you did not know and could not have known of any faulty tack. Tack should be checked, cleaned, evaluated and repaired on a regular basis. A separate Tack Identification and Maintenance Record should be used for each piece of tack.

Practical Example: A green rider represents on the Rider Evaluation Form a much higher experience level than is warranted. The rider is accordingly given a more advanced horse. The rider fails to adequately fasten the girth and is injured when the saddle slips. The stable avoids a lawsuit by: 1) showing the stable’s reasonable assignment of the horse based upon the rider’s own representations as to skill, and 2) showing that the saddle slip could not have occurred due to faulty tack, where the girth had been cleaned and checked the prior week.

6. Have I recently inspected and safeguarded the premises?

Approximately every six months, a comprehensive review of the farm should be made. A “Premises Inspection Report” should be filled out in order to document such inspections. The inspection should examine and record inspection results for the following: 

  1. Fire Extinguishers. Fire extinguishers should be placed in several places throughout the barn and all outbuildings. The fire extinguishers should be checked frequently to ensure they are in proper working condition.
  2. Stalls. All horse stalls should be closely scrutinized to ensure safety for all people and horses. Stalls should be lined with wood in order to prevent exposure to metal surfaces. Make sure all boards are secure and no nails or screws are protruding. All feed troughs/bins and water buckets should be checked for safety. Light fixtures should be high enough so that the horse cannot reach or otherwise interfere with them. Stall latches should be adjusted in order to prevent injuries to horse or tack damage when moving through doorway. If a horse presents any danger to people, the stall should be properly reinforced to prevent such exposure to the public. Any stalls occupied by problem horses (biting, kicking, charging) should have a warning sign clearly identifying the dangers presented.
  3. Aisle/Alley Ways. All aisle or alleyways should be kept clear of obstructions at all times. Make sure there are no protrusions that could potentially injure a passing horse or rider. All ties and cross-ties should be checked for safety and replaced as needed. Any dangerous areas or areas where people and/or horses are not permitted should be clearly marked. Alleyway surfaces should be appropriate, with no slick surfaces.
  4. Tack Rooms. Ensure that tack rooms are in good condition. All tack rooms should have a fire extinguisher near the door. All special instructions should be noted by posting signs.
  5. Feed/Hay Areas. Such areas should be well ventilated. Feed and hay areas should be secured, so as to prevent entry of horse if horse becomes free. Obviously, all feed and hay areas should be designed “NO SMOKING” areas. In fact, the stable, as a whole, should be designated a “NO SMOKING” area.
  6. Arenas. All arenas should have a fence or barrier high enough to accommodate the use intended. It is recommended that all arena partitions be AT LEAST 3’ 6” high, and constructed out of materials suitable to create an adequate barrier. All fences and barriers should be checked for protruding nails. Arenas should be of an adequate size to accommodate the number of horses, riders, and riding styles utilizing the premises. Arenas should be clear and free of obstructions and hazards. Footing should be appropriate for the use intended. Check for any rocks and holes in arena and repair as necessary.
  7. Trails. If applicable, check all riding trails to ensure they are properly cleared and safe to ride through. Footing should be checked, and any dangerous conditions remedied. Any areas which present hidden or concealed hazards should be identified by posting a warning sign or marking with yellow caution ribbons.
  8. Fences. Where applicable, fences should be of an appropriate height and material for the intended use. All fences should be checked for safety, sturdiness and protruding nails, and repaired or replaced as necessary.
  9. Driveways. Driveways should be kept clear of all obstructions. Parking areas should be clearly marked and enforced. Trailer parking areas should also be clearly marked and enforced.
  10. Electrical Wiring. Routinely check all wiring for safety. Any areas which present a potential danger should be tended to and repaired immediately.
  11. Emergency Procedures. Make sure that emergency numbers are clearly posted near all telephones. The stable staff should also be trained in emergency procedures, including emergency evacuation procedures and standard procedures for handling accidents and injuries.
  12. Dogs and Pets. Vicious or noisy dogs or other pets must not be allowed to roam freely when visitors are on premises. Dogs and lesson horses are not a good mix.
  13. “Attractive Nuisances.” Vicious or unpredictable horses should not be housed or turned out into pens that are highly visible or accessible to the public, where innocent children who cannot read warning signs may be attracted to them. This includes stallions, mares with foals and horses with known dangerous tendencies.
  14. Dangerous Horses. Do not keep dangerous horses in a public section of a stable. Harboring a known dangerous or vicious horse can make you liable for damages if the horse harms someone. If such a horse is kept on the premises, be sure that the horse is properly enclosed and that adequate warning signs are posted.

Congratulations! You have just completed a much needed health check of your equine business. Now measure your results and determine what additional treatment is necessary!

RESULTS:

  1. If you answered “Yes” to 5 or more of the above questions, you receive: AN EXCELLENT BUSINESS HEALTH RATING. Prescription: Keep up the good work!
  2. If you answered “Yes” to between 3 to 4 of the above, you receive: AN AVERAGE BUSINESS HEALTH RATING. Prescription: Better spend some time fine tuning some of your business practices to avoid future illness.
  3. If you answered “Yes” to 2 or less of the above, you receive: A SERIOUSLY ILL HEALTH RATING. Prescription: Time to: (1) take some drastic remedial action, (2) get out of the business, or (3) begin saving for your own self-funded insurance to cover that lawsuit lurking just around the corner.

© Denise E. Farris, Esq. (January 25 2022) This article may not be reprinted or reproduced in any manner without the consent of the author. Contact: Denise Farris, Farris Legal Services LLC. Email: [email protected]. Telephone: (913) 220-6203

DISCLAIMER
This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication does not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

Cases Clarify Compounding Liability

As an equine veterinarian, you need to manage your risks and exposure if you use compounded products in your veterinary practice.

Veterinary compounding – preparing a multi-ingredient drug from generic or tradename pharmaceuticals – is a time-honored practice. Veterinary patients run the gamut from carnivores to reptiles to food-producing animals. With different systems and different end purposes, there are no FDA-approved animal drugs available to treat all conditions in all animals.

Because of this, many veterinarians demonstrate a blasé attitude toward legal compliance with federal and state compounding regulations. The relative “newness” of the regulations, coupled with the complexity of jurisdictional issues between federal and state regulations, doesn’t help.

Finally, the law is not self-enforcing. It can be “on the books” but is evident only when educated plaintiffs’ lawyers begin suing under it. Prior to 2014, there was no case law incentive demanding accountability for improper compounding practices.

That’s no longer the case.

The public is now more educated, thanks to highly visible cases such as the 2009 deaths of the polo ponies in Florida, or the 2010 human deaths from spinal meningitis arising from contaminated vials of joint injections. Recent cases and disciplinary actions alert veterinarians that a better-educated public is now holding practitioners accountable for compounds gone bad. The savvy practitioner must know applicable rules and regulations and employ a more mindful attitude toward the use of compounded products.

General Rules and Regulations

What is “compounding”? Compounding is defined broadly by the AVMA as: “Any drug that is manipulated based on a licensed practitioner’s prescription, but not in accord with an FDA-approved label, to meet the medical needs of a specific patient.” (Go to AVMA.org and search for “compounding definitions” on the website.)

By contrast, the AVMA defines “FDA-Approved Drug” as: “A drug whose manufacturer has demonstrated safety, efficacy and product quality to the U.S. Food and Drug Administration for the labeled indication. Both ‘pioneer brand-name’ drugs and generic drugs are FDA-approved.”

When is compounding justified? According to the International Academy of Compounding Pharmacists, justifiable instances include:

Discontinued products – when commercial medications have been discontinued for reasons other than safety or effectiveness and are unavailable.

Product integrity – where using a commercially available, finished product as the compounding ingredient source adds unnecessary expense, increases the risk of contamination or yields a product with insufficient concentration.

No alternative therapy – where there’s no commercial alternative to treat the disease or condition, or an FDA-approved drug is temporarily unavailable.

Patient compliance – where a medication must be altered to enable a patient to take it, such as adding flavoring or changing the dosage form.

Other examples are more subtle, such as combining two injectable medicines into one syringe.

In recent developments, you might see a Veterinary Medical Device (VMD) – such as an equine surgical lavage – improperly used off-label as a joint injection treatment. (For more information on this topic visit AAEP.org, log in, and search for “medical devices.”)

Legal compliance is based on two primary factors:

  1. scale of the “production” and “use” of the compounded product
  2. documentation of the justified use of the compounded product

Compounding sanctions rarely apply when a unique alteration is employed under a documented VCPR (vet/client/patient relationship) for a single patient with unique needs not met by an existing FDA-approved drug. This is the essence of “traditional compounding,” and by statute, is not regulated by the Food and Drug Administration. Where compounded products are not tested for potency, purity, efficacy, sterility and shelf life compliance, this limited production is key.

But when a product is mass manufactured without oversight, issues arise. Many mass produced compounded products

  1. arrive in contaminated containers;
  2. contain too little active ingredient – i.e., they do not reach the therapeutic threshold for treatment;
  3. contain too much active ingredient – i.e., they may present a toxicity issue;
  4. contain active ingredients prohibited for therapeutic use in particular animals;
  5. contain active ingredients harmful to human handlers;
  6. contain active ingredients prohibited in food-producing animals;
  7. contain active ingredients contraindicated in breeding animals; or
  8. are not accurately or appropriately labeled.

Thus, the production and sale of one large batch of bad product can be catastrophic, as evidenced in the deaths of the polo ponies and the humans who developed meningitis.

Federal Regulations

Federal standards require all “new animal drugs” intended for interstate sale to pass FDA testing and approval. Under the 1938 Food, Drug and Cosmetic Act (FDCA), an “animal drug” is defined as a drug “intended for use in the mitigation, treatment or prevention of disease in animals” (Section 201(g) (1)(B) Federal Food, Drug and Cosmetic Act (the FDCA) [21 U.S.C. § 321(g)(1)(B)].)

Under the FDCA, made applicable to animal drugs under the 1994 Animal Medicinal Drug Use Clarification Act (AMDUCA), drugs intended for use in animals require an approved new animal drug application (NADA) unless they are generally recognized as safe and effective. This requires extensive research and testing to ensure consistent potency, purity, efficacy, sterility and stable shelf life before FDA approval is granted.

If a drug is mass produced and sold without this testing, it is by federal regulations deemed “unsafe” under section 512(a) (1)of the FD&C Act [21 U.S.C.§ 360b(a)], and “adulterated” under section 501(a)(5) of the FD&C Act [21 U.S.C.§351(a)(5) and (c)]. Sale of such products is a violation of sections 512(a) (1) of the FD&C Act [21 U.S.C.§ 360b(a)], Section 501(a)(5) of the FD&C Act [21 U.S.C.§ 351(a)(5)], and is expressly prohibited under section 301(a) of the FD&C Act [21 U.S.C. § 331(a)].

FDA sanctioning is typically focused on the compounding manufacturer and not on the veterinarians. However, recent rule-making actions by the FDA indicate discretionary authority toward players in the stream of commerce when warranted. This, in turn, can lead to more civil actions.

In a “negligence per se” context, a plaintiff need only prove the existence of a federal or state statute – and a defendant’s violation of that statute, plus harm – to win his or her case.

A veterinarian’s provision of illegally compounded product could also constitute a violation of the federal Lanham Act, 15 U.S. Code § 1125, which prohibits misrepresentations in a commercial context. A veterinarian’s representation that a compounded drug is as efficient as an FDA-approved product would be a violation under the Lanham Act, possibly subject to injunctive relief (i.e., an order to cease and desist) coupled with treble damages (i.e., three times the actual damages).

State Applications

State violations, which run on top of federal violations, can include veterinary and pharmaceutical board sanctions plus common law actions for misrepresentation, ordinary and professional negligence, or fraud.

Many state veterinary or pharmaceutical board regulations prohibit the use of a compounded product where an FDAapproved drug exists. Nearly all state boards require evidence that “informed consent” guidelines have been met, yet very few veterinarians document informed consent compliance relative to compounded drugs.

Where poor recordkeeping is rampant, veterinarians using compounded product without documentation of the reasons and proof of informed consent from clients are legally vulnerable. Violations can include administrative sanctions (i.e., fines, reprimands, temporary suspensions and permanent license loss), as well as civil actions (i.e., court actions awarding monetary damages).

Recent Cases

Until 2014, there were no reported cases involving veterinary liability related to improper use of a compounded product. However, in 2014 a number of valuable Thoroughbred racehorses in Florida and Kentucky were improperly treated with a compounded EPM product manufactured by Wickliffe Pharmacy, even though an FDA-approved EPM product, Marquis, was available.

The horses either died or were permanently disabled. Testing revealed that death resulted from toxic levels of pyrimethamine.

The FDA imposed sanctions against Wickliffe, and the owners filed suit, cross-suits and counter-suits against Wickliffe, the stables, the trainers and the administering veterinarians under theories of general and professional negligence. While the Florida cases were confidentially settled, the Kentucky cases remain active, including claims for actual and punitive damages.

In 2016, the Florida Veterinary Board administered sanctions against a Florida equine veterinarian for, among other acts, compounding and record-keeping violations. The practitioner treated several horses for lameness issues, with deteriorating conditions that resulted in euthanasia. Records revealed the horses were given a “cocktail injection” with no other detail provided.

They were treated with Previcox, an unjustified, off-label use of an FDA-approved drug labelled for osteoarthritis treatment in dogs, as well as given compounded omeprazole versus GastroGard, with no written documentation as to why the compound was used. Sanctions included a monetary fine, a one-year probation and ongoing educational requirements.

Practice Suggestions

  1. Understand and apply the rules. Review the federal and state regulations at your regular practice group meetings. Contact your state Veterinary and Pharmaceutical Boards to request a presentation on state regulations and their basic application. Watch for state-specific “special labeling” requirements. Understand the basic protocols expounded by both the AVMA and AAEP on the use of compounded products, which can be found on the AVMA website (avma.org and search for “compounding FAQs”) and the AAEP website (AAEP.org and search for “compounding guidelines”).
  2. Review and implement practice protocols on written “informed consent.” Print client handouts explaining the difference between FDA-approved, generic and compounded drugs, and when and why you use the compounds. If you deviate from using an FDA-approved product in favor of a compound, document why. Remember, cost savings is not a justification under applicable law.
  3. Keep Detailed Records!
  4. Check with your insurance carrier to verify whether compounding exposures are “covered” under your professional liability policy.
  5. Work with your state and national veterinary associations for educational articles and seminars relative to developments in this complex arena.

Your attention to these simple protocols will put you way ahead of the game in managing your compounding exposures and risks.

Denise E. Farris practices equine, insurance and veterinary law in the Kansas City, Kansas, area. “AV” rated in Martindale- Hubbell, she has been named in “Best of the Bar,” “SuperLawyers,” Preeminent Women Lawyers, Top 100 Lawyers Kansas, Top 50 Female Lawyers Kansas and EQUUS magazine’s “Leaders in Equine Law.” In addition to writing numerous articles, Denise has been a featured speaker at local, state and national symposiums, including the National Equine Law Practitioner’s Conference, the AAEP Hambletonian Conference, the National Farrier’s Convention, the National Multiple Trail Users Conflict Symposium and the North American Trail Ride Conference. She is an avid equestrian who competes in endurance and competitive trail riding events.

DISCLAIMER: his article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication do not intend this article to be viewed as rendering legal advice or service. If legal advice is needed or required, the services of a competent professional should be sought. The author and publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication. For more information about the author, contact the Farris Law Firm, LLC, 20355 Nall Avenue, Stilwell, KS 66085; 913-766- 1262; [email protected] 

COVID-19: A Business Law Update

In October the Firm published an article addressing various business implications resulting from the Covid 19 pandemic, including a “heads up” warning that most business interruption policies would NOT cover losses related to a biological pandemic due to an exclusionary clause now found in most ISO standard form insurance contracts.  Since that time, there have been several legal updates impacting this and other business aspects.

I. Business Interruption Insurance

August 2020 witnessed the first known legal decision permitting a Plaintiff’s insurance claim for Covid 19 related business interruption damages to proceed to trial.  In K.C. Hopps vs The Cincinnati Insurance Company, Judge Stephen Bough, federal judge for the Western District of Missouri, ruled against the insurer’s Motion to Dismiss by concluding sufficient allegations existed that COVID 19 had deprived K.C. Hopps of its property by making it unsafe and unsuitable for customers to use, allowing the dispute to proceed to trial for a final decision.  While policy and fact specific, this case represents one of the first cases in the nation to open a chink in insurers’ policy defenses against COVID 19 related claims and should be watched carefully for final resolution.

II. COVID 19 Impact on Standard Form Construction Contracts

The Firm’s August 2020 article additionally addressed the legal doctrine of “force majeure” under the pandemic factors.  As a reminder, “force majeure” contract clauses typically excuses a party’s performance where the event is :  (i) unforeseeable, and (2) outside a party’s control. As such, these clauses allocate risk of natural and unavoidable catastrophes that affect contract performance. In the commercial construction world, the term “force majeure” may not appear in standard AIA or Consensus Docs but instead appears through remedial clauses such as modification for delay and time extension relief. 

As always, the parties must start with review of their existing contract language.  If their force majeure or related remedial clause identifies “epidemic”, “pandemic”, “outbreak of disease”, or other similar terms, then the COVID 19 delays would be covered under that clause.  However, other contracts may limit relief to more generalized triggers such as nature (e.g. severe floods or earthquakes). Often the courts will strictly construe such remedial clauses to exclude events not specifically named in the contract, making COVID 19 delays less likely to be covered.  Also state by state case law may govern, where some states strictly identify “acts of nature” to exclude pandemics, while others permit it.  And even if the clause permits a remedy, most often that remedy is limited to a time extension versus both time and damage recovery.

A. AIA A201-2017 General Conditions

This document, used by many contractors in the industry, does not specifically address “force majeure” delays but in Section 8.3.1 Delays and Extensions of Time includes a broad catch-all terminology that permits excusable time extensions for various events “outside the Contractor’s control”. This standard contract form also permits a contractor to terminate a contract if that contractor is prevented from performance for a period of 30 consecutive days “through no fault of the Contractor for “an act of government, such as declaration of national emergency, that requires all Work to be stopped”. 

B. ConsensusDocs

ConsensusDocs is less ambiguous on COVID 19 delays, where Form 200-2017 Standard Agreement, Article 6.3 between a Contractor and Owner specifically identifies “epidemics” as an excusable delay and permits the contractor right to an equitable extension of time. 

C. DBIA

DBIA form which incorporates the Standard Form of General Conditions (DBIA 535, 2010 Version) specifically mentions force majeure and defines it as events beyond the contractor’s control, “including epidemics”.  Section 8.2 of the DBIA form (delays to work) carves out force majeure events, prohibiting price adjustments for these events but allowing a back door approach to time and cost recovery by characterizing the claim event as related to “differing site conditions” and “hazardous conditions”.

D. Federal, State, Local Construction Contracts

While federal contracts do not address “force majeure” claims, FAR 52.249-14 (Excusable Delays) lists specific examples of recoverable delays including:  “epidemics” and/or “quarantine restrictions”.  However, the contractor is not excused from meeting their burden of proof related to accuracy of delay impact documentation. 

State and local public contracts should be carefully reviewed to identify either force majeure clauses or treatment of other “excusable” delays.

III. Other Doctrines

Finally, if you discover your contract is silent as to either “force majeure” or the other related delay clauses above, the common law doctrine of “commercial impracticability” may apply to offer relief. While not recognized by all states, it is a concept included in the Uniform Commercial Code adopted by most states, as well as the Restatement  (Second) of Contracts which outlines various contract construction standards utilized by both courts and attorneys.

IV. Suggested Strategies 

As a review to the prior article, suggested strategies include the following:

1. Review your Forms

If you have not already done so, now is the time to review both your insurance policy for business interruption coverage (i.e. does it specifically exclude coverage for pandemics or related terms); and your standard form construction contracts (i.e. how does it address either “force majeure” or delays beyond a contractor’s control).

2. Record Impacts and Mitigate Damages 

If you’re experienced delays or interruptions related to COVID 19 events, it is important to immediately review your cost accounting mechanisms to isolate and track COVID 19 specific impacts, delays and extra costs.  The contractor then has a duty to identify modifications to means and methods sufficient to reduce or eliminate factors under the Contractor’s control.  This might include work at home orders, changes in scope sequence to permit certain safer scopes of work to be performed while completing other, more high risk exposure scopes at a later date. The contractor should also start an open communication line with all players to coordinate the response, while additionally watching and recording any governmental actions, orders or legislation and their applicable dates and impact on the project and the contractor’s performance. 

3. Submit timely written notices of delay

Again, as driven by the specific contract language, be sure to submit timely and accurate notices of delay as specified within the contract document.When drafting these notices, be mindful of whether it is precise and fact based versus emotional.  Consider how the wording will be received and how it might appear to a third party judge or jury at a later time.  The more fact specific and documented, the stronger its basis for a claim.

In summary, we are living in a brave new world where many standard clauses and methods of addressing business interruption have been flipped on their head.  Case law remains unsettled, but utilizing common sense in conjunction with the above principles and suggestions should pave the way for working through the COVID 19 pandemic. 

Link to Prior Article:  Contract Obligations And Defenses under Covid-19

© Denise E. Farris. (December 3, 2020). This article may not be reprinted or reproduced in any manner without the consent of the author. This article is not intended to be the provision of legal advice. For fact-specific questions, refer to an attorney licensed in your state. Contact: Denise Farris, Farris Legal Services, LLC. [email protected].

Contract Obligations and Defenses under COVID 19

In this Orwellian time of global pandemic, worldwide commercial interruption and governmental indecisiveness, business owners and employers are scrambling to implement emergency plans against an unknown and largely unforeseeable future. Given the emergency nature of this pandemic and its unprecedented impact on businesses worldwide, few owners have had the luxury of a focused look at how COVID 19 will impact previously settled areas of contract law. This article attempts to provide a brief outline of consideration points.

I. Force Majeure

A. Don’t Assume Force Majeure Is Applicable to Your Situation

A force majeure clause is a contract provision which excuses one (unilateral) or both (bilateral) parties’ performance when circumstances arise beyond the parties’ foreseeable control, thus making performance of the contract impractical or impossible. Its wording identifies the triggering events invoking the clause. Assuming your contracts contain a force majeure clause, contract performance may be excused based upon those events itemized in the clause, typically including acts of God, labor shortages, strikes, or governmental orders.

To effectively use a Force Majeure clause, it must:

a. Be included in the contract and interpreted according to its specific language
b. Identify specific applicable triggering events
c. Be narrowly applied by the courts and strictly construed against its specific contract language, 
d. Be supported by:

i. facts showing performance has become impossible, not merely more difficult or expensive, and
ii. facts establishing the triggering event directly caused the inability to perform. 

Thus a key issue in determining whether a party can successfully invoke its protection under the COVID19 scenario is whether your contract clause lists “epidemic”, “pandemic”, or “emergency actions” as a triggering event. In addition, listing “government acts” as a triggering event may also apply. However, where these clauses are narrowly construed by the courts, lacking such verbiage you may have a problem claiming a force majeure defense. 

Additionally, force majeure clauses typically require prompt and specific form of notice by you or your company to all other parties to the contract that a triggering event may have occurred, even before the total impact of the event is known. Failure to appropriately comply with the form and timing of your contract’s notice requirements may render your force majeure defense useless. 

Finally, even the best structured force majeure clause will not excuse you from your own negligence or failure to anticipate foreseeable risks and take appropriate measures to avoid same.

II. Uniform Commercial Code and Equity Defenses 

Lacking a force majeure defense, the business owner should also consult with legal counsel regarding the defensive impact of other statutory or common law defenses. These include the statutory defense of “impracticability of performance” under each state’s Uniform Commercial Code, and/or the common law doctrines of impossibility or impracticability of performance. 

A. Uniform Commercial Code (UCC)

Section 2-615 of the Uniform Commercial Code, adopted in some manner and form by most states, is a specific statutory code which applies to the sale of goods and some services, and which excuses a seller’s performance where “that performance has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made”. While not a total defense to non-performance, the clause permits a reallocation of performance among customers “in any manner which is fair and reasonable”. 

B. Common Law Impossibility or Impracticability of Performance

The common law “impossibility of performance” defense applies where there is literally no possible way for a party to perform its contract duties. An example would be the delivery of alcohol at the time prohibition was implemented, where such delivery was made illegal by legislative authority. By analogy, certain manufacturing operations or other similarly situated businesses deemed “non-essential businesses” under the COVID19 situation could claim an “impossibility of performance” defense based upon government ordered shutdowns prohibiting employees from working.

In comparison, the common law defense of “impracticability” applies where performance is still possible, but would be extremely burdensome for the party whose performance is due. Therefore, “impossibility” of performance can be determined objectively, while “impracticability” is a subjective and fact detailed analysis requiring proof: 

  1. There was the occurrence of a condition, the nonoccurrence of which was a basic assumption of the contract, 
  2. The occurrence made contract performance extremely expensive or difficult
  3. The difficulty was not anticipated by the parties to the contract

III. Insurance Coverages 

Many business owners may be currently relying on the mistaken belief that their economic losses created by COVID19 impacts will be covered by their Business Interruption / Loss of Income insurance policies. While this analysis will be policy specific, such reliance is most like misplaced. 

Business interruption coverage is defined by the policy, and typically is “triggered” only after the occurrence of “a direct physical loss or damage” of some type. Only when that occurs is “actual loss of business income” covered during the suspension of operations while restoring the property. While state and fact specific, the “physical loss or damage” requirement” typically does NOT exist under the COVID 19 scenario, lacking arguments of product damage, spoilage or contamination which can be directly tied to COVID 19 delays or disruptions.

In addition, following the SARS and H1N1 flu outbreaks earlier in this decade, many insurers contractually limited their risk exposures by inserting “virus and bacteria” exclusion clauses to their policies, thus explicitly refusing to cover losses related to viral or bacterial causes.

Recognizing the potentially devastating impact of this exclusion under COVID 19, various members of the House Small Business Committee on March 18, 2020, asked the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, the Independent Insurance Agents and Brokers of America, and the Council for Insurance Agents and Brokers to make financial losses related to COVID 19 and other infectious disease related losses covered under existing commercial business interruption policies. The Associations immediately replied by letter indicating that their commercial insurance policies, vetted and approved by state regulators, defined applicable exposures and thus “do not, and were not designed to provide coverage against communicable diseases such as COVID 19”.

IV. Risk Management Suggestions 

i. Review and Protect Any Force Majeure Defenses

a. Immediately review your contract clauses with legal counsel
b. Be sure to provide all applicable third parties with notice of force majeure triggering events, in the time and manner required by contract;
c. Keep written communication lines open with all third parties, including agreements as to mutually acceptable substituted performance terms and conditions, extended performance deadlines, contingencies, etc.
d. Keep detailed records in a centralized location related to non-performance, including but not limited to:

i. Timeline of events leading to non performance
ii. Relevant government orders and pronouncements
iii. Progression of Force Majeure events (dates and description)
iv. Efforts to avoid the event or to find alternative means for performance,
v. Negotiation efforts to find mutually acceptable solutions, and
vi. If applicable, detailed records of damages or losses incurred specifically related to the COVID 19 non-performance issues.

ii. Consider Impossibility or Impracticability of Performance Defenses

a. Consult with legal counsel regarding facts and documentation supporting this approach
b. Be sure to provide all applicable third parties with notice of potential triggering events making performance impossible or impracticable, in the time and manner required by contract;
c. Keep written communication lines open with all third parties, including agreements as to mutually acceptable substituted performance terms and conditions, extended performance deadlines, contingencies, etc.
d. Keep detailed records in a centralized location related to non-performance, including but not limited to:

i. Timeline of events leading to non performance
ii. Relevant government orders and pronouncements
iii. Progression of Force Majeure events (dates and description)
iv. Efforts to avoid the event or to find alternative means for performance, 
v. Negotiation efforts to find mutually acceptable solutions, and
vi. If applicable, detailed records of damages or losses incurred specifically related to the COVID 19 non-performance issues.

iii. Consult with your insurance agent or broker about existing coverages

iv. For immediate concerns, consider submission of any contract issue to mediation for a stipulated contract modification solutions, or alternatively file for a declaratory judgment action in court

V. Other Legal Issues

Other legal issues currently discussed under the COVID 19 scenario is the interference with real and personal property owners’ access to property under the current governmental restrictions and social distancing orders. In particular, those establishments offering bailment services (i.e. storage facilities, animal and equine training and boarding stables) have been subject to government restrictions to access, public gathering limits or, in some circumstances, orders to completely bar access by owners to their personal property for the duration of government ordered closures. Thus we find many players in a fundamental conflict between: (1) owners’ rights to real and personal property, versus (2) governmental exercise of police power. How does this shake out?

A. Conversion

Owners prevented from access to their property may argue that the facility barring their access has committed “conversion” of their property. Conversion is defined as an intentional tort involving the “taking with the intent of exercising over the chattel [property] an ownership inconsistent with the real owner’s right of possession”. A civil court cause of action, “conversion” is similar to larceny or theft in criminal law. Negligence or mistaken belief is not an excuse, and conversion is subject to both actual and punitive damages.

However, a defense to conversion is any interference with property which arises under the “authority of law”. In the COVID 19 situation, the bailor (that person controlling the property) may argue that the exercise of police power in governmental restriction orders provides a total defense to their actions. While all situations will be fact specific, it’s likely this defense will hold.

B. Exercise of Police Powers

Under the U.S. Constitution, “police power” is defined as the capacity of states, and derivatively local governments, to regulate behavior and enforce order within their territory for the betterment of the health, safety, morals and general welfare of their constituents. These powers are defined in each jurisdiction by the legislative body, which determines the public purposes that need to be served by legislation.

Governmental entities thus have the power to compel obedience to these laws through whatever measures they see fit, provided these measures do not infringe upon any of the rights protected by the federal or state constitutions AND those laws are not unreasonably arbitrary or oppressive. Methods of enforcement can include restrictions, legal sanctions, and other physical means.

In the vast majority of cases addressing police power conflicts with individual rights and freedoms, the courts typically honor the existence and exercise of police power more frequently than attempting to mark boundaries or prescribe limits to its exercise. Typically, if the government can identify a legitimate legislative purpose with regulations applied equally to all under like circumstances, the exercise of that power will withstand judicial challenge.

While fact specific, property access restrictions arising under government ordered COVID 19 limits will most likely be legally supported given the extremely contagious nature of the coronavirus and the various orders restricting, limiting or barring the activities of citizens to minimize and contain exposure.

© Denise E. Farris. (April, 2020). This article may not be reprinted or reproduced in any manner without the consent of the author. This article is not intended to be the provision of legal advice. For fact-specific questions, refer to an attorney licensed in your state. Contact: Denise Farris, Farris Legal Services, LLC. [email protected].

Charitable Contributions Under the 2018 Tax Code

Many equine businesses and their supporting equine associations traditionally rely heavily on tax benefits for charitable contributions. The quickly enacted revisions to the existing tax code in late 2017 left donors and their respective charities scrambling to take advantage of last minute itemized deduction credits for fiscal 2017, with resulting head-scratching over how those same donations would be treated in 2018.

The following addresses the most prevalent questions concerning charitable donations under the new tax code.

1. When do the new tax laws kick in?

The new code applies to ALL charitable donations given after January 1, 2018.

2. Does the new tax law increase or decrease charitable donations?

The answer depends on who you ask. A July 2017 study from the Indiana University Lilly Family School of Philanthropy estimated the code’s higher standard deductions in 2018 would equate to a 4.6% decrease in charitable giving in 2018. In a similar report, the Brookings Institute Tax Policy Center estimated this decline might be as high as 6.5%, equating to a reduction of $10 to $20 billion in 2018.

On the other hand, an article by financial law professor James Russell addresses how the 2018 tax law actually increases charitable giving deductions depending on the sophistication of the donor and the manner in which the donations are treated. In summary, if handled correctly, donation benefits for high wealth, high income individuals is higher. The average family taxpayer, on the other hand, may find it difficult to generate donations exceeding the $24,000 standard deduction and therefore eliminate charitable gifts as part of their tax strategy, while still electing to donate solely from a social support basis.

3. How does the new tax code treat charitable giving?

First, the new code does NOT eliminate deductions for charitable giving. Instead, it nearly doubles the amount of the standard deduction, leaving taxpayers with a decision whether to: (a) take the standard deduction, or (b) itemize their deductions, including those for charitable donations. Under the prior law, the standard deduction was $6500 for single taxpayers and $13,000 for married taxpayers filing jointly. The 2018 code raises this to $12,000 single taxpayer and $24,000 married filing jointly. Thus for many average to lower wealth taxpayers, it will be more advantageous to take the standard deduction and forego itemized deductions including charitable contributions. 

Proponents of the change argue charitable giving will NOT be negatively impacted where taxpayers, receiving double the deduction previously given, will use some of that extra income to support their charities. They additionally argue that the new law creates various new benefits for higher wealth supporters that INCREASE incentives to donate as follows:

  1. Incentives to gift appreciated investments, such as stock shares. This allows the donor to deduct the investments’ full market value, subject to certain limitations, without having to pay capital gains tax on any appreciation. For example, if a donor does not wish to change her current investment portfolio, she simply takes the cash she would have donated and uses it to immediately buy stocks, bonds or other assets as a replacement of the ones donated. The portfolio doesn’t change, but the new assets now have a 100% basis which – in normal speak – means no capital gains taxes will be paid on any past appreciation. This creates a donation incentive which goes towards “big bucket” donations rather than smaller donations funded from monthly disposable income. (See Professor James Randall article above, “How the 2018 Tax Law Increases Charitable Giving).
  2. Contributing directly through Individual Retirement Accounts (IRA’s): For donors age 70.5 years or older, direct asset contributions of up to $100,000 can be counted toward their required yearly IRA distributions and would not be treated as “taxable income”. This would NOT apply to Roth IRA’s and is subject again to regulatory restrictions.
    Here’s another example. Your wealthy supporter under the old tax law received a charitable deduction benefit of 50% of income. They own a $1 million home, a $1 million dollar IRA, and a $1 million stock brokerage account invested in growth stocks. All assets increase by 10% in value in that tax year, growing from $3 million to $3.3 million, but how much income do those assets generate? None, unless they are sold. But now your wealthy supporter spends $100,000 which he’s taken from a fully taxable ordinary income distribution from his IRA. His regular donations previously amounted to 1.5% of his wealth, or $50,000, and he’s considering making an additional $10,000 gift. Under the old tax code, he would receive no charitable giving benefit for the additional $10,000 (i.e., tax benefits were maxed out at 50% of income). The new tax law raises the limit to 60%, and permits unused deductions to be carried over year to year up to five years. The higher wealth the donor, the more advantageous treatment this change brings to high dollar contributions.
    Here’s another example. You have a married couple who has supported your organization for several years. That couple has $23,500 of itemized expenses, including a $2,000 donation to your qualified charity. If the couple donated an additional $1,000 to your group, they now surpass the $24,000 standard deduction and may claim the itemized charitable deductions. This serves as an incentive to those on the bubble of the standard deduction to give more.
  3. Create and Donate thru a Donor Advised Fund. Charitable giving can also be handled through a donor advised fund. This method allows you to create, and then contribute cash, appreciated assets or investments that have been held for a year or more to this Donor Advised Fund without paying capital gains taxes. You can then take one large deduction in the year you make the contribution, and then spread out distributions to the charities of your choice over multiple future years or when it makes sense to you. 
  4. Making numerous substantial gifts. For donors whose total contributions in a year exceed $24,000, it makes sense to bypass the standard deduction and instead itemize your deductions. Some tax strategists recommend alternating years – taking the standard deduction in one year while planning to maximize contributions and itemizing in the following. 

4. How can my organization effectively plan for charitable giving with the new laws in place?

While change is always uncomfortable, it can also be the basis for positive growth. The law is in place, so organizations must deal with it. This could be an excellent opportunity to examine your current practices on soliciting donor support with your board and your tax accountant or advisor. What old practices still work and will benefit your group, and what new approaches should be considered and implemented?

This also presents an outreach opportunity unique to your high wealth donors. Organize a special event just for them, including a summary of your organization’s history, growth and charitable support, and their important role in the organizations future. Include a presentation from a tax advisor on how these supporters can utilize the new Code to benefit both themselves and their favorite charities. 

Most importantly, don’t despair. In many instances, supporters who have traditionally supported an organization with goods or money gifts strongly believe in that organization. That support doesn’t disappear with the code change, and many supporters will continue their support. But at the same time, many organizations have higher wealth supporters who may or may not truly understand the tax benefits of higher giving. The organizations who become proactive in education and outreach will be the organizations most benefitting under the new law.

So study this article, and then pull out your pencil and schedule a meeting with your accountant and membership chairs to plan this important Member Support Outreach event! You may be pleasantly surprised at the results.

© Denise E. Farris. (August, 2018). This article may not be reprinted or reproduced in any manner without the consent of the author. This article is not intended to be the provision of legal advice. For fact-specific questions, refer to an attorney licensed in your state. Contact: Denise Farris, Farris Legal Services, LLC. [email protected].