“Mirror-Image” Contract Acceptance: 7th Circuit Finds Attorneys’ Fees Provision in Invoice Not Binding on Food Buyer

VLM Food Trading International, Inc. v. Illinois Trading Co., (http://cases.justia.com/federal/appellate-courts/ca7/14-2776/14-2776-2016-01-21.pdf?ts=1453404644) considers whether a seller can recover attorneys’ fees where the contract doesn’t provide for fees but the invoices sent after the goods are shipped do have fee-shifting language.   

The Seventh Circuit held that the invoice fee-shifting clause does not bind the buyer.

The Contract Chronology: The plaintiff foods seller would submit a purchase order to defendant that stated the product, price, quantity and delivery locus.  The defendant, in turn, would send a confirming e-mail to the plaintiff.  After that, the plaintiff shipped the goods to the defendant and later sent a “trailing” invoice to the defendant.

The first appearance of the fee-shifting language in the contracting sequence were found in the trailing invoices sent after the seller’s items were shipped to the defendant.

The main dispute centered on when the contract was formed and whether the trailing invoices’ fees provisions were part of the contract. 

An international treaty – the U.N. Convention on Contracts for the International Sale of Goods (the “Convention”) – happened to govern this dispute.  The Convention applies a derivation of the common law “mirror image” rule of contract interpretation: an acceptance must “mirror” the offer or else it’s construed as a counter-offer.  

Under the mirror image rule, any additional terms or qualifications to the offer are considered proposed modifications.  A party doesn’t have to object to a proposed modification to exclude (reject) it.  Any term not contained in the offer and acceptance simply do not bind the parties.  What’s more, one’s silence or inactivity doesn’t equal acceptance of the proposed offer changes.  A party can only accept the terms through a statement or conduct.

The Seventh Circuit held that the plaintiff’s purchase orders were the offer, and the buyer’s confirming e-mails were the acceptance.  Any terms proposed outside the scope of the purchase orders or emails were not part of the parties’ agreement.  Since the plaintiff’s trailing invoices (and their fee-shifting and interest language) were sent after the acceptance, they didn’t bind the buyer.

The Court rejected the plaintiff’s trade usage argument – that buyer assented to the fee provision by not objecting to the invoice language.  Again, under the mirror image rule, the buyer’s silence isn’t considered acceptance.  The Court also found that trade usage only applies where there is contractual ambiguity.  Here, the contract was clear and so there was no reason to consider any course of conduct or trade usage evidence.

Finally, the Court found the defendant did not manifest an intent to adhere to the invoice fee language.  The key factor on this point was the trailing invoices were sent to defendant’s generic billing address; they weren’t sent to a specific corporate decision-maker. 

Take-aways:

VLM is interesting reading to me since I’ve encountered this exact fact pattern several times through the years in my commercial litigation practice.  The case chronicles a typical multi-step goods contract involving commercial entities.  

In a case where an international treaty doesn’t govern, fee language can be considered part of the contract under the Uniform Commercial Code if it is standard practice in an industry to have after-the-fact fee provisions in invoices or the parties’ course of conduct shows an intent to hew to the invoice fee-shifting clause. 

VLM offers a useful analysis of the factors a court considers when determining whether after-the-fact contractual terms can bind the parties.

 

 

 

Material Changes to Office Lease Insulates Guarantor From Liability For Corporate Tenant Defaults – Illinois Court

The Illinois First District recently examined the reach of a corporate officer’s commercial lease guaranty in a case involving a multi-year and multi-suite office lease.  The office landlord plaintiff in Stonegate Properties, Inc. v. Piccolo, 2016 IL App (1st) 150182, sued to hold a corporate tenant’s CEO and lease guarantor liable for rental damages after the corporate tenant defaulted and declared bankruptcy.

The five-year lease was amended several times through the years – each time by the corporate tenant through its CEO and lease guarantor – culminating in an amended lease for three additional office spaces (compared to the original lease’s two spaces) in nearly triple the monthly rent amount from the original lease.

After the corporate tenant defaulted and filed for bankruptcy protection, the plaintiff landlord sued the guarantor defendant to recover nearly $1.4M in unpaid lease rental payments. The guarantor defendant successfully moved to dismiss on the basis that she was released from the guaranty since the lease parties made material changes to the lease and increased the guarantor’s risk with no additional consideration to the guarantor.

Affirming, the First District examined the scope of guarantor liability when the lease guarantor is also the corporate tenant’s principal officer.

The Court cited and applied these operative contract law principles in siding for the guarantor:

– A lease is a contract between a landlord and tenant, and the general rules of contract construction apply to the construction of leases;

– A guaranty is a promise by one or more parties to answer for the debts of another.  A clearly-worded guaranty should be given effect as written;

– A guaranty is considered a separate, independent obligations from the underlying contract.  Where a guaranty is undated, a court will still consider it as drafted contemporaneously with the underlying lease if the guaranty refers to that lease;

– A guaranty signed at the same time as the underlying contract is supported by adequate consideration.  A contractual modification – something that injects new elements into a contract – must be supported by consideration to be valid and binding.  Pre-existing obligations are not sufficient consideration under the law;

– In the context of commercial lease guaranties, a guaranty’s term is only extended if the underlying lease term is also extended in accordance with the lease terms;

– Common guaranty defenses involve changes to the underlying contract that materially increase the guarantor’s financial risk;

– Where the risk originally assumed by a guarantor is augmented by acts of the principal (the person whose debts are being guaranteed), the guarantor is released from his contractual obligations;

– Where a corporate principal signs a lease in her corporate capacity, she is not personally responsible for her corporate employer’s lease obligations.  This is because a corporation is a separate legal entity from its component shareholders.

(¶¶ 40-45, 46-55, 60-62, 65-66)

Applying these principles, the Court sided in favor of the guarantor.  The court noted that the lease addendum materially modified the underlying lease obligations and increased the guarantor’s fiscal risk. In addition, the guaranty was silent on whether it applied to material lease modifications.  Because of this, the court found that the guarantor’s consent to the lease changes was required in order to bind the guarantor to the changes.

Since the guarantor never gave her express consent to the lease changes (broadening the leased premises from two office suites to 5; tripling the monthly rent), she was immunized from further guaranty obligations once the corporate tenant and office landlord signed the lease addendum.

The Court also rejected the office lessor’s attempt to fasten liability to the guarantor under a piercing the corporate veil/alter-ego theory.  Since the plaintiff didn’t sue to pierce the corporate veil (such as under an alter-ego theory), the Court found that the guarantor’s execution of the lease addendum as an agent of the corporate tenant didn’t bind the defendant personally to the corporation’s lease obligations. (¶¶ 72-77).

Afterwords:

Stonegate provides a thorough analysis of the contours of a commercial lease guarantor’s liability.  While a guaranty is construed as written under black-letter contract law principles, if the guarantor’s principal (here, the corporate tenant) changes the underlying lease obligation so that the guarantor’s original risk is increased, the change in lease term will not be binding on the guarantor.  This is so even where the corporate agent who agreed to the material lease amendment is the lease guarantor.

False Info in Employee Time Records Can Support Common Law Fraud Claim – IL Fed Court

Some key questions the Court grapples with in Laba v. CTA, 2016 WL 147656 (N.D.Ill. 2016) are whether an employee who sleeps on the job or runs personal errands on company time opens himself up to a breach of fiduciary or fraud claim by his employer.  The Court answered “no” (fiduciary duty claim) and “maybe” (fraud claim) in an employment dispute involving the Chicago Transit Authority (CTA).

Some former CTA employees sued the embattled transit agency for invasion of privacy and illegal search and seizure after learning the CTA implanted Global Positioning System (“GPS”) technology on the plaintiffs’ work-issued cell phones. An audit of those phones revealed the plaintiffs’ regularly engaged in personal frolics during work hours.

The CTA removed the case to Federal court and filed various state law counterclaims to recoup money it paid to the ex-employees including claims for breach of fiduciary duty, fraud and conversion. The Northern District granted in part and denied in part the plaintiff’s motion to dismiss the CTA’s counterclaims.

Breach of Fiduciary Duty

Sustaining the CTA’s breach of fiduciary duty claim against the ex-employees’ motion to dismiss, the Court looked to black-letter Illinois law for guidance.  To state a breach of fiduciary duty claim in Illinois, a plaintiff must allege (1) the existence of a fiduciary duty, (2) breach of that duty, and (3) breach of the duty proximately caused damages.  The employer-employee relationship is one the law recognizes as a fiduciary one.

While the extent of an employee’s duty to his employer varies depending on whether the employee is a corporate officer, the law is clear that employees owe duties of loyalty to their employers.  Where an employee engages in self-dealing or misappropriates employer property or funds for the employee’s personal use, it can give rise to a fiduciary suit by the employer.

Here, the Court found that the employees’ conduct, while irresponsible and possibly negligent, didn’t rise to the level of disloyalty under the law.  The Court made it clear that under-par job performance doesn’t equate to conduct that can support a breach of fiduciary duty claim. (**6-7).

Fraudulent Misrepresentation

The Court upheld the CTA’s fraudulent misrepresentation claim – premised on the allegation that the plaintiffs lied to the CTA about the hours they were working in order to induce the CTA to pay them.  Under Illinois law, a fraud plaintiff must show (1) a false statement of material fact, (2) known or believed to be false by the party making the statement, (3) with the intent to induce the statement’s recipient to act, (4) action by the recipient in reliance on the truth of the statement, and (5) damage resulting from that reliance.

Under the Federal pleading rules, a fraud claimant must plead the “who, what, where when and how” of the fraud but the allegation of a defendant’s intent or knowledge can be alleged generally.

Here, the Court found that the CTA sufficiently alleged a fraudulent scheme by the employees to misrepresent the hours they worked in exchange for their paychecks.  This was enough, under Illinois fraud law, to survive the employees’ motion to dismiss.  See FRCP 9(b); (*7).

Take-aways:

1/ While an employee owes an employer fiduciary duties of loyalty, his sub-par job performance doesn’t equate to a breach of fiduciary duty.  There must be self-dealing or intentional conduct by the employee for him to be vulnerable to an employer’s fiduciary duty suit;

2/ An employee misrepresenting hours work can underlie a common law fraud claim if the employer can show it paid in reliance on the truth of the employee’s hour reporting;