Tag: consideration

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.

 

 

 

Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.

 

 

Zero Dollars Settlement Still in ‘Good Faith’ In Corporate Embezzlement Case – IL 1st Dist.

Upon learning that its former CEO stole nearly a million dollars from it, the plaintiff marketing firm in Adgooroo, LLC v. Hechtman, 2016 IL App (1st) 142531-U, sued its accounting firm for failing to discover the multi-year embezzlement scheme.

The accounting firm in turn brought a third-party action against the plaintiff’s bank for not properly monitoring the corporate account and alerting the plaintiff to the ex-CEO’s dubious conduct.

When the bank and plaintiff agreed to settle for zero dollars, the court granted the bank’s motion for a good-faith finding and dismissed the accounting firm’s third-party complaint.  The accounting firm appealed.  It argued that the bank’s settlement with the plaintiff deprived it (the accounting firm) of its contribution rights against the bank and that the settlement was void on the basis of fraud and collusion.

The appeals court affirmed the trial court and discussed the factors a court considers in deciding whether a settlement is made in good faith and releases a settling defendant from further liability in a lawsuit.

The Joint Tortfeasor Contribution Act (740 ILCS 100/1 et seq.) tries to promote two policies: (1) encouraging settlements, and (2) ensuring that damages are assigned equitably among joint wrongdoers.  The right of contribution exists where 2 or more persons are liable arising from the same injury to person or property.  A tortfeasor who settles in good faith with the injured plaintiff is discharged from contribution liability to a non-settling defendant.  740 ILCS 100/2(c).

Here, the underlying torts alleged by the plaintiff were negligence, breach of fiduciary duty, fraud and civil conspiracy.

A settlement is deemed not in good faith if there is wrongful conduct, collusion or fraud between the settling parties.  However, the mere disparity between a settlement amount and the damages sought in a lawsuit is not an accurate measure of a settlement’s good faith.

Illinois courts note that a small settlement amount won’t necessarily equal bad faith since trial results are inherently speculative and unpredictable.  The law is also clear that settlements are designed to benefit non-settling parties.  If a non-settling party’s position is worsened by another party’s settlement, then so be it: this is viewed as “the consequence of a refusal to settle.”  (¶¶ 22-24).

A settling party bears the initial burden of making a preliminary showing of good faith.  Once this showing is made, the burden shifts to the objecting party to show by a preponderance of the evidence (i.e. more likely than not), the absence of good faith.  The court applies a fact-based totality of circumstances approach in deciding whether a settlement meets the good faith standard.

For a settlement to meet the good faith test, money doesn’t have to change hands.  This is because a promise to compromise a disputed claim or not to sue is sufficient consideration for a settlement agreement.

Here, the fact that plaintiff’s corporate resolutions required it to indemnify the bank against any third-party claims, subjected the plaintiff to liability for the third-party bank’s defense costs.  The bank’s possible exposure was a judgment against it for the accounting firm.  As a result, the marketing company and bank both benefited from the settlement and there was sufficient consideration supporting their mutual walk-away.

Take-aways:

This case sharply illustrates the harsh results that can flow from piecemeal settlement.  On its face, the settlement seems unfair to the accounting firm defendant: the plaintiff settled with the third-party defendant who then gets dismissed from the lawsuit for no money.  However, under the law, a promise for a promise not to sue is valid consideration in light of the inherent uncertainty connected with litigation.

The case also spotlights broad disclaimer language in account agreements between banks and corporate customers as well as indemnification language in corporate resolutions.  It’s clear here that the liability limiting language in the deposit agreement and resolutions doubly protected the bank, giving plaintiff extra impetus to settle.