Is It a New Contract Or Modification of an Existing One? Illinois Case Discusses Why It Matters

In business relationships that contemplate a series of reciprocal services, it’s at times unclear if extra services are being offered as a modification to an existing contract or are done as part of a new agreement.  Landmark Engineering v. Holevoet, 2016 IL App (1st) 150723-U examines this sometimes fine-line difference and illustrates in stark relief the importance of honoring contractual provisions that require contract changes to be in writing and signed by the parties.

The defendant hired the plaintiff under a written contract to do some engineering work including a soil study on a parcel of land the defendant was going to sell.  The plaintiff’s work would then be submitted to the governing county officials who would then determine whether the sale could go through.

The contract, drafted by plaintiff, had a merger clause requiring that all contract modifications be in writing and signed by the parties.  When the plaintiff realized the contract’s original scope of work did not satisfy the county’s planning authorities, the plaintiff performed some $50,000 in additional services in order to get county approval.

The plaintiff argued the defendant verbally authorized plaintiff to perform work in a phone conversation that created a separate, binding oral contract.  For her part, the defendant asserted that the extra work modified the original written contract and a writing was required to support the plaintiff’s additional invoices.

The defendant refused to pay plaintiff’s invoices on the basis that the extra work and accompanying invoice far exceeded the agreed-upon contract price.  Plaintiff sued and won a $52,000 money judgment at trial.

Reversing, the appeals court examines not only the reach of a contractual merger clause but also what constitutes a separate or “new” contract as opposed to only a modification of a pre-existing one.

In Illinois, a breach of oral contract claim requires the contract’s terms to be proven with sufficient specificity.  Where parties agree that a future written document will be prepared only to memorialize the agreement, that oral agreement is still binding even though the later document is never prepared or signed.

However, where it’s clear that the parties’ intent is that neither will be legally bound until a formal agreement is signed, no contract comes into existence until the execution and delivery of the written agreement.

Illinois law defines a  contractual “modification” as a change in one or more aspects of a contract that either injects new elements into the contract or cancels others out.  But with a modification, the contract’s essential purpose and effect remains static.  (¶¶ 35-36)

In this case, since the plaintiff submitted a written contract addendum (by definition, a modification of an existing agreement) to the defendant after their telephone conversation (the phone call plaintiff claimed was a new contract), and defendant never signed the addendum, am ambiguity existed concerning the parties intent.  And since plaintiff drafted both the original contract and the unsigned addendum, the ambiguity had to be construed in defendant’s favor under Illinois contract interpretation rules.

Since the unsigned addendum contained the same project name and number as the original contract, the appeals court found that the record evidence supported a finding that the addendum sought to modify the original contract and was not a separate, new undertaking.  And since defendant never signed the addendum, she wasn’t bound by it.

Afterwords:

The case serves as a cautionary tale concerning the perils of not getting the party to be charged to sign a contract.  Where one party fails to get the other to sign it yet still does work anyway, it does so at its peril.

Here, since both the original and unsigned addendum each referenced the same project name, description and number, the court found plaintiff’s extra work was done in furtherance of (and as a modification to) the original contract.  As the contract’s integration clause required all changes to be in writing, the failure of defendant to sign off on the addendum’s extra work doomed the plaintiff’s damage claims.

 

 

 

‘Integration’ Versus ‘Non-Reliance’ Clause: A ‘Distinction Without a Difference?’ (Hardly)

Two staples of sophisticated commercial contracts are integration (aka “merger” or “entire agreement”) clauses and non-reliance (aka “no-reliance” or “anti-reliance”) clauses. While sometimes used interchangeably in casual conversation, and while having some functional similarities, there are important differences between the two clauses.

An integration clause prevents parties from asserting or challenging a contract based on statements or agreements reached during the negotiation stage that were never reduced to writing.

A typical integration clause reads:

This Agreement , encompasses the entire agreement of the parties, and supersedes all previous understandings and agreements between the parties, whether oral or written. The parties hereby acknowledge and represent that they have not relied on any representation, assertion, guarantee, or other assurance, except those set out in this Agreement, made by or on behalf of any other party prior to the execution of this Agreement. 

Integration clauses protect against attempts to alter a contract based on oral statements or earlier drafts that supposedly change the final contract product’s substance.  In litigation, integration/merger clauses streamline issues for trial and avoid distracting courts with arguments over ancillary verbal statements or earlier contract drafts.here integration clauses predominate in contract disputes,

Where integration clauses predominate in contract disputes, non-reliance clauses typically govern in the tort setting.  In fact, an important distinction between integration and non-reliance clauses lies in the fact that an integration clause does not bar a fraud (a quintessential tort) claim when the alleged fraud is based on statements not contained in the contract (i.e,. extra-contractual statements). *1, 2

A typical non-reliance clause reads:

Seller shall not be deemed to make to Buyer any representation or warranty other than as expressly made in this agreement and Seller makes no representation or warranty to Buyer with respect to any projections, estimates or budgets delivered to or made available to Buyer or its counsel, accountants or advisors of future revenues, expenses or expenditures or future financial results of operations of Seller.  The parties to the contract warrant they are not relying on any oral or written representations not specifically incorporated into the contract.”  

No-reliance language precludes a party from claiming he/she was duped into signing a contract by another party’s fraudulent misrepresentation.  Unlike an integration clause, a non-reliance clause can defeat a fraud claim since “reliance” is one of the elements a fraud plaintiff must show: that he relied on a defendant’s misstatement to the plaintiff’s detriment.  To allege fraud after you sign a non-reliance clause is a contradiction in terms.

Afterwords:

Lawyers and non-lawyers alike should be leery of integration clauses and non-reliance clauses in commercial contracts.  The former prevents a party from relying on agreements reached during negotiations that aren’t reduced to writing while the latter (non-reliance clauses) will defeat one side’s effort to assert fraud against the other.

An integration clause will not, however, prevent a plaintiff from suing for fraud.  If a plaintiff can prove he was fraudulently induced into signing a contract, an integration clause will not automatically defeat such a claim.

Sources:

  1. Vigortone Ag Prods. v. AG Prods, 316 F.3d 641 (7th Cir. 2002).
  2. W.W. Vincent & Co. v. First Colony Life Ins. Co., 351 Ill.App.3d 752 (1st Dist. 2004)

 

Fraud, Economic Loss and Contractual Integration Clauses (And More): Illinois Fed Court Provides Primer

Plaintiff purchased the defendant’s nation-wide network of auto collision centers as part of a complicated $32.5M asset purchase agreement (APA).   A dispute arose when the plaintiff paid $9.5M to a paint supply company and creditor of the defendant in order to consummate the APA.  The plaintiff argued that the defendant breached the APA by not satisfying the paint supply debt and securing a release from the paint supplier before the APA’s closing date.  Plaintiff sued on various tort and contract theories.  Defendant countersued for reformation, rescission and breach of contract.  Both parties moved to dismiss.

In granting the bulk of the defendant’s motion to dismiss, the court in Boyd Group, Inc. v. D’Orazio, 2015 WL 3463625 (N.D.Ill. 2015) examines the interplay among several recurring commercial litigation issues including the economic loss doctrine as it applies to negligent misrepresentation claims, the impact of a contractual integration clause, and the pleading requirements for fraud in Illinois.

The court dismissed the breach of contract claim based on the APA’s integration clause.  Where parties insert an integration clause into their contract, they are manifesting their intent to guard against conflicting interpretations that could result from extrinsic evidence.  If a contract has a clear integration clause, the court cannot consider anything beyond the “four corners” of the contract and may not address evidence that relates to the parties’ understanding before or at the time the contract was signed.1

Here, the plaintiff’s breach of contract claim was based in part on e-mails authored by the defendant the same day the APA was signed.  Since the APA integration clause clearly provided that the APA was constituted the entire agreement between the parties, the court found that the defendant’s e-mails couldn’t be considered to vary the plain language of the APA.2.

The plaintiff’s negligent misrepresentation claim was defeated by the economic loss doctrine, which posits that where a written contract governs the parties’ relationship, a plaintiff’s remedy is one for breach of contract, not one sounding in tort.  An exception to this rule is where the defendant is in the business of providing information for the guidance of others in their business transactions.

Case law examples of businesses that the law deems information suppliers (for purposes of the negligent misrepresentation/economic loss rule) include stockbrokers, real estate brokers and terminate inspectors.  Conversely, businesses whose main product is not information include property developers, builders and manufacturers.

Here, the in-the-business exception (to the economic loss rule) didn’t apply since defendant operated car collision repair businesses.  He did not supply information for others’ business guidance.  The court found the defendant more akin to a manufacturer of a product and that any information he furnished was ancillary to his main collision repair business.3

The one claim that did survive the motion to dismiss was plaintiff’s fraud claim.  To plead common law fraud under Illinois law, the plaintiff must establish (1) a false statement of material fact, (2) defendant’s knowledge the statement was false, (3) defendant’s intent to induce action by the plaintiff, (4) plaintiff’s reliance on the truth of the statement, and (5) damages resulting from reliance on the statement.  Fraud requires heightened pleading specificity and it must be more than a simple breach of contract.  A fraud claim must also involve present or past facts; statements of future intent or promises aren’t actionable. 4

The plaintiff’s complaint allegations that the defendant factually represented to the plaintiff that he was in the process of securing the release of the paint supply contract as an inducement for plaintiff to enter into the APA were sufficiently factual to state a fraud claim under Federal pleading rules.

Afterwords:

  • The economic loss rule bars negligent misrepresentation claim where the defendant’s main business is providing a tangible product rather than information;
  • A clearly drafted integration clause will prevent a party to a written contract from introducing evidence (here, emails) that alters a contract’s plain meaning;
  • The failure of a condition precedent won’t equate to a breach of contract where the party being sued isn’t responsible for the condition precedent;
  • A plaintiff successfully can plead fraud where it involves a statement concerning a present or past fact, not a future one.

References:
1.  2015 WL 3463625, * 7

2. Id.

3. Id. at * 11

4. Id. at **8-9