The BUSKLAW October Newsletter: Two Cases Show How Disrespecting Contract Mechanics Can Cut Both Ways!
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!