Wisconsin Court of Appeals rules that subjective intent controls contract.

Byline: David Ziemer

The meaning of "just cause" in a private employment contract, providing for liquidated damages if the employee was terminated without "just cause," depends on the parties' subjective intent, the Wisconsin Court of Appeals held on June 12.

In April 2000, James M. Kernz and J. L. French Corporation entered into a three-year employment contract. French Corporation offered language which permitted the company to terminate Kernz if he "shall be neglectful of the interest of the employer, or manage the business under his supervision badly or in a manner unsatisfactory to employer, or shall be guilty of misconduct."

During negotiations, however, Kernz requested, and Don Porritt, the French Corporation negotiator, agreed, to replace the provision with a clause permitting termination only for "just cause." However, the contract did not define "just cause."

In early 2001, Kernz was accused of committing two safety violations. In one incident, he was observed entering a secured area containing a 3,500-ton press without following the proper "lock-out" procedures. In the other, he was observed on foot in an area where pedestrian traffic was prohibited. French Corporation terminated Kernz's employment.

Kernz sued, alleging that French Corporation breached the contract by terminating him without "just cause." Kernz sought a pretrial ruling declaring the phrase "just cause" ambiguous and permitting the introduction of extrinsic evidence of the phrase's meaning.

Sheboygan County Circuit Court Judge Gary Langhoff concluded that the phrase "just cause" was ambiguous and ruled that extrinsic evidence would be permitted. French Corporation moved to prevent testimony of any witness's subjective uncommunicated belief regarding the meaning of "just cause." The trial court denied that motion.

The trial was bifurcated: the first phase was tried before a jury to determine liability; and the second phase was tried to the court to determine damages.

During the liability phase, Kernz testified that, during contract negotiations, he sought inclusion of the phrase "just cause" because "I needed something where ... [French Corporation] didn't have the option to terminate in the contract unless it was for some intentional wrongdoing."

The deposition testimony of Porritt was read to the jury. Porritt testified at the deposition that, "just cause to me would be if you intentionally do something." Porritt also provided examples of intentional misbehavior that he believed constituted "just cause," including, "fighting on company property, reporting under the influence of drugs or ... theft, ... those sorts of things that had already been outlined in the [employee] handbook."

Neither Kernz nor Porritt testified that he communicated his belief about the meaning of "just cause" to the other. The jury found that French Corporation did not have "just cause" to terminate Krenz, as set forth in the contract.

In the damages phase of the trial, the court held that the damages clause, which provided, "If employment is terminated for other than 'just cause' or mutual agreement, the Employer shall pay salary and benefits for [the] remainder of the contract," was not an illegal penalty clause, but was an enforceable stipulated damages provision.

Accordingly, the court enforced the provision and awarded Kernz $263,993 under the...