An Ounce of Prevention

By October 21, 2011Contract
By Paule, Camazine & Blumenthal, P.C. of Paule, Camazine & Blumenthal, P.C. posted in Contract on Friday, October 21, 2011.

By Frederick B. Kruger

Your signature is important!  We all sign documents every day, most of which we understand.  Most of the time, when signing a document, we have good reasons for thinking that our signature is appropriate and that after we sign something, what happens is what we expect to happen.  It is important to remember, however, that the decision to sign or not sign a document is often the last simple opportunity to correct or avoid a mistake.  Signatures can and do have unintended consequences.  For example, when signing a credit card to pay for a meal at a restaurant, that may be the last easy opportunity to correct an error in the bill.  Signing a document that you do not understand can have undesired consequences that are difficult or impossible to correct.  In some cases, documents may even be written in a way to encourage misunderstanding.  This is equally true for individuals and small businesses.  For example, consider the person who is submitting a business credit application on behalf of a small business.  What that person may not realize is that often they are personally guaranteeing the debts of that business.  It is quite common for suppliers and other business creditors to include a personal guarantee on their small business credit application.  Sometimes it is obvious and sometimes it is not, but a quick check with an attorney could give certainty to this question.

A recent case concerns the 51% owner of a small business who would have liked to tell the court that he thought he was only signing a credit application for his business.  In Warren Supply Co. v. Lyle’s Plumbing, L.L.C., 74 S.W.3d 816 (Mo. Ct. of Appeals, W.D., 2002), Mr. Dean Clegg signed an application for credit for his business, Lyle’s Plumbing.  He signed as “Dean Clegg, Member.”  Unfortunately, the credit application also contained a personal guaranty.  Because the court found the document “clear on its face,” it enforced the personal guaranty against Mr. Clegg, holding him responsible for the debts of the business.  It did not allow him to testify that he misunderstood the document because there was no “label” or caption setting off the guaranty from the credit application.  Since he signed as “Member,” a technical term referring to an owner of an LLC, he also wanted to testify that he was signing on behalf of the business, and not himself.  But again, because he signed it and the document was clear on its face, no conflicting evidence was permitted, and by his signature Mr. Clegg was held personally liable.  Checking with an attorney before signing was the last chance to avoid this mistake.

Here is an example of a credit application currently being used in Missouri by a large national supplier of home and small business products.  It is called a “Commercial Credit Application” and most of the document concerns itself with the credit history and records of the small business applicant, but buried in the middle of the page there is this.

“If credit is granted, I/We understand that the terms of the sale are …. Company may charge interest on any past due balance at the rate of 1½ % per month (i.e. 18% per annum) or the maximum rate allowed by law….

In consideration of Company extending credit to the above business, I/We do hereby agree, jointly and individually, to pay for all goods, wares and merchandise supplied to any of us or the above business.  In the event the account is assigned to a third party for collection, I/We agree to pay all costs including reasonable attorneys fees, court costs and finance charges….

The signature line on this credit application contains places for two signatures, and even though the word “guaranty” is not used, there is no question about the legal effect:  “I/We do hereby agree, jointly and individually, to pay for all goods, wares and merchandise supplied to any of us or the above business.”  The “I/We” have in effect guaranteed the debts of the “above business” whose name is on the credit application.  If you are wondering if you should sign a document like this, please ask an attorney first.  It is a little bit of time now or a potentially big headache later.

Unfortunately, there are too many cases in Missouri that are based on documents where people signing them had doubts, but failed to get legal clarity and suffered as a result.  In Cowbell, LLC v. Borc Building and Leasing Corp., 328 S.W.3d 399 (Mo. Ct. of Appeals, W.D., 2010), at least seven different individuals signed an auction contract with a broker to sell by auction three undeveloped pieces of land.  The broker contract specified that the auction was “without reserve.”  There was conflicting evidence at trial as to the market value of the property, with numbers ranging from $115,000 to $785,000.  However, because it was sold at auction, the court enforced the sale of the land to the highest bidder for $27,500, obviously far less than any reasonable value for the land.  The highly disappointed sellers attempted to argue that they did not understand how risky a “no reserve” auction could be, but the court rejected that.  By signing the contract, the parties were legally presumed to know its contents.  Several of the parties who signed the contract admitted they had not read it, which caused the court to observe that the “alleged failure to read the contract is not a defense.”  Adding to the pain, the court enforced a contract clause awarding attorney fees to purchaser.  Again, before signing, the sellers should have talked to someone who could explain what the auction contract meant.

The moral of these unfortunate cases is that the time for questions to an attorney is before you sign a contract and not afterwards.  An ounce of prevention can save much pain and expense later on.

Disclaimer

Fredrick B. Kruger

Fredrick B. Kruger

Prior to his work at The Firm, attorney Fred Kruger served as in-house counsel for Anheuser-Busch Companies, Inc. Mr. Kruger has been a practicing attorney for the past 30 years and currently serves as an Adjunct Professor at Washington University School of Law, and teaches a class on drafting commercial contracts.
Fredrick B. Kruger

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