November 13, 2018

How to prevent the other side from weaseling out of a contract

Posted in Commercial Litigation, Corporate Litigation by Gene Killian |

Back in the early ‘90s, when I was working as an associate at a litigation firm, I handled a case for a guy who was, it turned out, less than honest.  (I know, right?) This guy (I’ll call him Gordon Mini-Gekko) fancied himself a real estate mogul. Unfortunately, while many others were making money in the real estate market, most things that Mr. Mini-Gekko touched turned sour.  His company owed millions of dollars to a major New Jersey bank, which sued him to collect on a personal guaranty.  That seems like an open-and-shut matter, but Mr. Mini-Gekko produced a yellowing document from his file “confirming” that the Bank had agreed to forebear on the guaranty.  For some strange reason, the bank didn’t have a copy of the document in its file, and the bank officers said they had never seen it before. 

The document was nevertheless enough to get Mr. Mini-Gekko past summary judgment, and eventually (as I recall) the bank got tired of chasing him around and settled with him. I think he ended up stiffing them on the settlement too, and, not surprisingly, he also ended up stiffing the firm where I was working, to the tune of thousands and thousands of dollars in fees. (Note to any young lawyers or other professionals reading this:  If your esteemed client has screwed others, he or she is very likely to screw you, too.  Proceed with caution.)  And, of course, Mr. Mini-Gekko then moved to Florida, also known as “Debtors’ Paradise.”  (My wife and I later ran into Mr. Mini-Gekko at an expensive restaurant, which was a little awkward.  When I relayed this information to my then-boss, he suggested that I carry a summons and complaint with me wherever I go, for emergency service of process.)

It gets worse. Before he went on the lam, and after the settlement with the bank had been achieved, Mr. Mini-Gekko saw me in a hallway at the firm, and said:  “Yeah, I thought the yellowing paper was a nice touch.”  I guess I was pretty naïve at the time, because you could’ve knocked me over with a feather. I wasn’t sure what to do about his comment, but before I could do anything at all, he was long gone.

Which is a longwinded way of saying that unscrupulous businesspeople can and will go to great lengths to try to escape their contractual obligations.  One common method is to claim that the other party said that it wouldn’t strictly enforce the terms of a contract, “duping” the poor, unsuspecting rube into signing on the dotted line. 99% of the time, no such conversation actually happened. But that can lead the case right down the road to something called the “parol evidence rule,” which most lawyers last encountered on their bar exam.  Basically, the parol evidence rule says that the final written contract is the boss, and that an earlier tentative agreement, written or not, holds no water.

Fortunately, many courts are able to see through the games that dishonest debtors play.    

In Elizabeth Dev. Co. v. B.F.L.F. Land Corp., 2015 N.J. Super. Unpub. LEXIS 474 (N.J. App. Div. March 10, 2015), for example, the guarantors, following a page from the Debtor Playbook, claimed that that the lender had “assured” them that the guaranties that they signed were “mere housekeeping” and a “formality” in order to have the loan approved, and wouldn’t be enforced.  The guaranties contained an integration clause, though. That kind of clause declares that the written agreement is intended to express the complete and final agreement between the parties.  The Court told the guarantors to pay up, and wrote:  “Where…the terms of a contract are clear and unambiguous, resort to such parol evidence is improper.”  You can read the BFLF decision here.

In a much earlier case, Winoka Village, Inc. v. Tate, 16 N.J. Super. 330 (App. Div. 1951), a lessee claimed that he wasn’t liable for unpaid rents under a Lease after vacating the premises prematurely, because the lessor had allegedly told him that the term of the Lease “was nothing to worry about,” and that the lessor’s “policy” was to only “forfeit a month’s deposit in case a tenant had to move before the end of the term.”  The lessee claimed that he had been fraudulently induced to execute the Lease based upon these alleged misrepresentations, so he shouldn’t be held liable for more than one month’s rent. 

Yeah, right, said the Appellate Division, which noted that the lessee was a college graduate and an electrical engineer who “read the leases before executing them,” and who was aware of the three-year lease term.  Id.   The Court wrote:  “Defendant signed the leases with knowledge that their specific provisions bound him until December 31, 1951.  The alleged oral misrepresentations, being contradictory to the undertakings expressly dealt with by the writings, are not effectual in that circumstance to avoid the obligations he knowingly assumed. . . .The rule that a specific undertaking in a written agreement is not to be varied or contradicted by parol is a rule of substantive law and not of evidence merely.”  You can read the Winoka decision here.

Let’s take a look at one last case. In Miranda v. MarineMax, 2013 N.J. Super. Unpub. LEXIS 2419 (N.J. App. Div. October 7, 2013), Miranda claimed that he’d been fraudulently induced to sign a contract to buy a used boat. The contract said that the used boat was being “Sold As Is.”  Miranda claimed that the dealer told him the “As Is” clause was “a standard thing that we put on all used boats” and that it would “repair all the things we agreed to repair.”  Id.  After buying the boat, Miranda found out to his dismay that there was an engine problem that would cost over $36,000. 

And once again, the Appellate Division said “too bad.”  The “As Is” clause was clear and would be enforced. You can read Miranda here.

One exception to the parol evidence rule happens when one of the parties makes promises or representations on matters not covered by the terms of the contract.  If I say, for example, buy these 5000 widgets from me at the price in the contract, and later I’ll sell you a Ford F-150 at a discounted price, but then I refuse to give you the discount, you may be able to argue successfully that I fraudulently induced you to enter the first contract.

The bottom line here is pretty simple.  Include integration clauses in your contracts.  And read and understand your contracts before you sign them.