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Contracts: Say What You Mean
Two recent Connecticut court cases remind
us of the importance of careful drafting
of contracts and attention to detail in executing
them. While the decisions are not groundbreaking
or otherwise surprising, each one
holds an important lesson.
Who Are You?
It may sound simple, but you'd better get it
right or it could cost you! Individuals have it
easy. They can sign their legal name and bind
themselves to a contract. Entities, such as partnerships,
limited liability companies and corporations,
need to be much more careful.
In particular, officers of corporations, and
managers and members of limited liability
companies and partnerships, can avoid personal
liability for most entity obligations by following
certain well-defined procedures. Perhaps
the most critical of these is that the individual
clearly act on behalf of the entity in the
individual's authorized capacity, such as "XYZ
Corporation by John Jones, its President, duly
authorized." Failure to follow the formalities
associated with the execution of a contract on
behalf of an entity can have disastrous results.
In Haynes Construction vs. Dorce (CT Sup.
Ct), the defendant subcontractor, Dominique
Dorce, operated a masonry company known as
"Sunshine Masonry Construction LLC" but he
executed his masonry subcontract as "Sunshine
Masonry" by "Dominique Dorce." Mr. Dorce
failed to identify both the proper company
name and his position with the company. The
contract went bad and the court allowed a prejudgment
attachment on Mr. Dorce's personal
assets to the tune of $245,000. While the final
outcome of the case is not yet known, the lesson
to be learned is that the appropriate formalities
must be followed when executing a
contract on behalf of an entity in order to avoid
unintended personal liability.
Default and Damages
No one likes to think about a possible default
when signing a contract. Still, parties need
to understand that defaults are indeed possible
and decide what remedies are most appropriate
under the circumstances. Many form real estate
contracts contain liquidated, or specified, damages
provisions.
A liquidated damage clause normally
establishes an exclusive remedy for the nondefaulting
party. The benefit of such a clause is
that the parties have established a precise remedy
in the event of a default. However, liquidated
damages clauses can be used by a party
with a strong negotiation position to minimize
the party's exposure to damages in the event of
its default under the contract. A court will enforce
such a clause unless it is considered a
penalty.
In Detar vs. Coast Venture XXVX, Inc., (CT
App.Ct) the buyer sued the seller-builder under
a contract for the purchase and sale of a
condominium unit after the seller had unilaterally
terminated the contract. The buyer sued
for damages and was awarded some $40,000 in
damages by the trial court. The Appellate
Court, however, reversed the trial court's decision.
As the court said, "The liquidated damages
clause plainly states that it applies if the
defendant "for any reason whatsoever, including
construction delays, shall fail, or be unable to
convey title or perform its obligations under the
contract" (emphasis added by the court).
Therefore, the court invoked the liquidated
damages clause and limited the defendant's liability
to $1,000, as specified in the contract,
and the return of the plaintiff's deposit.
The court clearly did not want to reward
the defendant for unilaterally terminating the
contract but had to based upon the unambiguous
and unequivocal contract provision. The
buyer had simply signed a bad contract. Excluding
seller's unilateral action terminating the
contract from the scope of the liquidated damages
clause could have saved the buyer from
this disaster.
These two cases serve to remind us to review
carefully and understand contracts before
executing them. Any tendency to skip over the
"boilerplate" must be resisted. So, read and understand
all contracts and, of course, call us
with any questions before signing.
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