fraud — The BUSKLAW Newsletter

I'm a big fan of the "mechanics" profession. From the mechanic who keeps your vehicle from breaking down amidst a polar vortex to the HVAC person who makes sure that your home stays cool in the summer and warm in the winter, honest mechanics prevent unpleasant circumstances.

The same is true for the "mechanical" aspects of contracts, including the proper choice of the contracting party and ensuring that the right party signed the final version of the contract that was then signed by the other party, with both parties keeping a signed and dated version of the same contract. When contract mechanics are "dissed," litigation is likely, with a judge or jury having to sort things out - with far from predictable results.

Two recent court cases illustrate this point: the Texas appeals court case of Austin Tapas, LP, d/b/a Malaga Tapas & Bar and Greg Schnurr v. Performance Food Group, Inc. and the Delaware case of Stacey Kotler v. Shipman Associates, LLC.

Let's examine the Tapas case first. Performance Food Group (PFG) supplied goods to the Malaga Bar, the bill for which wasn't paid, so PFG sued. The contract consisted of a "Customer Account Application" that identified the Bar as Austin Tapas, LLC, not Austin Tapas, LP and incorrectly listed the Bar's general partner as Mr. Schnurr. Despite these discrepancies, the lower court concluded that the "LP" and Schnurr were jointly and severally liable to PFG, so an appeal followed.

Defendants argued that the trial judge erred in finding the LP and Schnurr liable to PFG, pointing to the incorrect information on the Customer Account Application, but the appellate court disagreed, finding that Texas law on unnamed/misnamed proper parties applied, i.e., the law on misnomers. The court found that a misnomer in a contract may be corrected where (1) the unnamed/misnamed proper party to the contract wasn't misled by the misnomer; (2) the identity of the unnamed/misnamed proper party is apparent from the contract; and (3) the parties intended the unnamed/misnamed party to be the contracting party. And it didn't help Defendants when Mr. Schnurr testified that putting "LLC" instead of "LP" on the contract was an error and that the "LP" in fact owed PFG for the goods.

Contrast the finding of an enforceable contract in Tapas with the opposite result in Kotler. Stacey Kotler worked for a profitable cosmetics retailer, theBalm.com, as a "highly effective salesperson." Eventually, she asked for a stock option agreement, and Balm's management was receptive. So Kotler and Balm hired lawyers who began drafting and exchanging stock warrant agreements over the course of eight months. But shocking as it may be, the parties paid little attention to a key provision in the agreement until the very end of circulating drafts: a post-employment non-compete provision that would have prevented Kotler from competing with Balm after she left the company. Including this provision was essential from Balm's perspective but unacceptable to Kotler. From the sketchy facts in the case, it appears that Kotler signed a version of the agreement with no non-compete, Balm signed a version with the non-compete, but neither party bothered to get a completely signed copy of either version. Kotler left the company and immediately started competing with Balm. She then sued Balm to enforce her version of the agreement without the non-compete.

The Delaware court did a heroic job of sorting out what happened based on witnesses' hazy recollection of the facts (Kotler couldn't recall the name of her attorney or the law firm who worked on the agreement), the inconclusive agreement drafting history, and ambiguous circumstances surrounding who signed what version of the agreement when. In the end, the court found that Kotler's production of the "wet ink" fully-signed agreement resulted from Kotler attaching the signature page of Balm's version with the non-compete to the signature page of Kotler's version without that provision. (Apparently, the signature pages were separate from the body of the contract, something that transactional lawyers should avoid!) As a result, Kotler failed to demonstrate an essential element of a contract: a meeting of the minds. Poof, no contract! (Note: The court decided that it wasn't necessary to determine if Kotler committed fraud.)

These two cases show what can happen when contract mechanics are disrespected. Sometimes you end up with an enforceable contract, sometimes you don't. But the companies involved must always spend their own time as the litigation evolves - and pay their lawyers big bucks to fight the courtroom battle.

Have you checked "under the hood" of your contracts recently? A bit of "preventive maintenance" now can avoid a costly breakdown later!

If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!

If you work with contracts, it's just a matter of time before a contract with an "unreasonable" provision is sitting on your desk. Perhaps this happened because your company didn't have enough bargaining leverage to get the other party to change the unreasonable provision, but your senior management directed you to proceed anyway. Or maybe the unreasonable provision snuck in during the heat of contract negotiation and wasn't noticed until months later. In any event, you're thinking about going to court and arguing that the unreasonable provision should be disregarded (or even invalidate the contract). What are your chances?

In Michigan, you'll have an uphill battle, as the plaintiffs found out in the case of Rory v Continental Insurance Company CNA that was decided by the Michigan Supreme Court in 2005 and, to my knowledge, is still good law. The contract at issue was an auto insurance policy issued by Continental to Rory. (Yes, an insurance policy is a contract.) The contract contained a provision that all claims must be filed within one year after an auto accident. Rory filed his claim after one year, and Continental denied it for that reason. Rory sued to have the court throw out the one-year limitation as "totally and patently unfair."

The trial court judge agreed with Rory, and so did the Michigan Court of Appeals. But the Michigan Supreme Court reversed, and so ensued a lengthy discussion of the reasonableness contract doctrine. I'm pleased to pull that apart for you.

The Court found that there is no such thing as an "unreasonable" contract or on the flip side, that a contract must be "reasonable" to be enforceable. The Court affirmed the bedrock principle that the parties are free to contract as they see fit. And courts must enforce their agreement as written absent some highly unusual circumstance such as a contract in violation of law or public policy.

But what about the argument that Rory had no bargaining leverage with Continental? Continental wouldn't have changed the one-year contractual limitation on filing a claim in their standard-form auto policy even if Rory had asked for it. So because the insurance policy was presented to Rory on a "take it or leave it" basis, isn't it an unenforceable "adhesion" contract? This sounds like a plausible argument, but the Court balked at rejecting the insurance contract on that basis, holding that an adhesion contract "is simply a type of contract and is to be enforced according to its plain terms just as any other contract."

So if unreasonable and adhesion contracts are enforceable in Michigan, what legal grounds can be used to negate a contract? According to the Court, a contract will be unenforceable under the following typical grounds:
• If a party was fraudulently induced to sign the contract.
(Example: Seller, an art dealer, represents that he has the original de Grebber “King David in Prayer” oil painting, so you sign a purchase agreement for that painting. Unknown to you, it’s hanging in the London Gallery and not for sale.)
• If a party entered into the contract under duress.
(Example: You're persuaded to sign a contract with a gun pointed at you.)
• If the contract is against public policy or illegal.

(Example: You sign a contract for the sale of an illegal drug.)
OR
• If a party to a contract is a minor (under 18).

The Court noted that Rory didn't assert any of these reasons for invalidating the insurance contract. Supporting the Court's decision (but not determinative of the result) was the Court's finding that the one-year limitation on filing a claim was acceptable because the Michigan Insurance Commissioner, who is charged with approving all form insurance contracts used in Michigan, approved the Continental policy containing that provision.

Lesson: You are probably stuck with your "unreasonable" contract if it's governed by Michigan law. If you need to get out of it, seek legal counsel to ~~excavate for loopholes~~ discuss your options.

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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. Thanks!