Sparkman, Shepard & Morris, P.C.

Frequently Asked Litigation Questions

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Is there a time limit for me to sue a business associate for fraud on our contract?

Yes. The general Alabama statute for torts (like fraud and bad faith) is two years. The time limit to file suit for fraud is two years from when the fraud was discovered or from when a reasonable person should have been put on notice. Also, fraud claims that are not filed before the plaintiff dies do not survive and cannot be pursued by the estate or the heirs. The time limits for other types of lawsuits are generally much longer in Alabama; for instance, the deadline to file a breach of contract complaint is six years.

A customer I sold to recently sued my company. Can he add me personally to the lawsuit?

Yes. Some states recognize a "corporate shield" or "fiduciary shield" doctrine that protects corporate agents from liable for their acts in the scope of their employment. However, in Alabama a person is personally liable for all civil wrongs he commits (such as fraud, conversion, negligence) even if he acted as an agent or employee or under the direction of someone else. The fact that you were doing your job will not protect you if you committed a civil wrong. On the other hand, employees who simple pass along the customer’s paperwork or perform tasks not directly related to the civil wrong probably will not become personally liable.

What is the difference between actual fraud and constructive fraud?

Actual fraud in a business transaction can occur with significant misrepresentations on which the other party relies or with concealing important facts from the other party. These wrongful acts show fraudulent intent. On the other hand, constructive fraud is found in certain circumstances where the intent is not important. For example, if a man with numerous creditors makes a gift of all of his valuable property to his wife or his children, an Alabama court may void the gift under a theory that the man committed constructive fraud against his creditors even if he did not specifically intend to do so. Proof of his actual intent or that he knew his creditors would suffer may not be necessary.

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Contract Issues

Can restrictive provisions in contracts be enforced in Alabama state courts?

Yes. Alabama, Georgia and many other Southern states have provisions in their state constitutions that prohibit restraint of trade, such as business agreements to fix prices, stifle competition or monopolize the production or sale of any commodity. Alabama law contains a criminal penalty for offenders and allows anyone injured by an unlawful combination or monopoly to file a civil law suit. However, most dealer agreements and exclusive supplier contracts are allowed if the terms are reasonable. An agreement between the buyer and seller of a business that the seller will not compete with the business after the sale is also enforceable if it is reasonably limited in time, subject matter and location. Finally, reasonable restrictions in contracts and leases on the use of real property are allowed in Alabama.

Can the way I write my contracts help protect me from potential lawsuits?

Yes, if you disclose, disclose, disclose! Full and specific disclosure in a contract of all the pitfalls of the transaction will generally make you less susceptible to a claim of misrepresentation or fraudulent suppression, even if the other party did not read the contract. However, a general disclaimer clause may not help because such clauses are not favored in Alabama. The theory is that if an agreement is obtained by misrepresentations, it is void and of no effect. The fact that the agreement contains a general disclaimer clause does not prevent the complaining party from showing in court oral misrepresentations that were not contained in the agreement.

Can I avoid lawsuits in Alabama with an arbitration clause in my agreements?

Probably not. A contract provision requiring that disputes between the parties be resolved by an arbitrator rather than a state court is enforceable for matters covered by federal law, such as collective bargaining agreements, but Alabama courts generally will not enforce arbitration provisions in business contracts which are governed by state law. For instance, a claim of deceit or misrepresentation on a business contract may be tried before a jury in state court even though the contract clearly requires arbitration to resolve contract disputes. However, the Alabama Legislature may soon consider statutory changes to this general rule.

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Litigating in Alabama

My Arizona business solicits by mail nationwide for customers. Can we be sued in Alabama?

Yes. Any soliciting (direct mail, media advertising, etc.) in Alabama may cause an out-of-state company doing business in Alabama to be named in a tort (civil wrong) lawsuit by an affected Alabama resident, even if the company does not have an office in Alabama and the alleged wrong took place in another state.

Are there important legal concerns for out-of-state companies doing business in Alabama?

Yes. For instance, a "foreign" corporation that fails to register may be unable to enforce its contracts and agreement in the state courts. Moreover, Alabama, Georgia and other Southern states have trademark infringement, unfair competition and trade secrets laws that carry criminal and civil liability for offenders. Becoming familiar with the state business statutes is a good way for both in-state and out-of-state companies to minimize their chance of becoming involved in a law suit in Alabama.

Is my company liable in Alabama for my employee’s acts outside the scope of his employment?

It may be. Alabama courts have recognized negligent hiring and negligent supervision of employees as viable theories by which a company can be held liable for the torts (civil wrongs like fraud and conversion) committed by an employee, even if the employee was acting outside the scope of his employment and without the employer’s knowledge. One key question is whether the employee had a history or a tendency toward committing such wrongful acts, which the company knew about or should have known about but took no corrective action.

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Employment Issues

Can I use applicants' credit reports when I make hiring decisions for my business?

Yes, but first you should be aware that the Fair Credit Reporting Act includes a requirement that an employer must obtain a job applicant's written permission before obtaining a credit report. Any employer who denies employment because a credit report also must provide the applicant with a copy of the credit report before making the adverse decision, rather than just a post-denial notice that the report contributed to the denial. Moreover, there can be significant civil and criminal liability for anyone who uses a credit report for an improper purpose, such as to prepare for a lawsuit with a former employee.

Can I discharge an employee who has just filed bankruptcy?

No, not for the bankruptcy filing. Section 525 of the federal Bankruptcy Code prohibits private employer discrimination against persons who file bankruptcy. However, many courts will award damages for discharge in this area only if the debtor can prove that his bankruptcy was the reason for his discharge. An employer's best defense is to plan ahead -- document the employee's poor job performance and keep copies of any written reprimands so that you can show that you had non-bankruptcy justification for the discharge.

Can I discharge an employee because of her debt garnishments?

Federal and state law may make you liable if you discharge for this reason. A federal statute makes it a criminal offense to fire an employee for the first garnishment of his wages by a creditor. Many states, including Alabama, have laws prohibiting discharge of an employee because of her garnishments for child support or criminal restitution. As with the previous question, an employer should document the employee's poor job performance and keep copies of any written reprimands so that you can show that you had other justification for the discharge.

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© 2004 Sparkman, Shepard & Morris, P.C., Attorneys at Law. This site last modified August 10, 2004.