Not Reading a Contract Costs a Party Half a Million Dollars

200567130-001The Texas Supreme Court just confirmed what most of us already know – that you should read your contracts before signing them. In National Property Holdings, L.P., et al. v. WestergrenWestergren sold a piece of real estate to National Property Holdings (NPH) pursuant to a written agreement. Additionally, NPH orally promised to Westergren that once it develops the property, it will pay Westergren $1,000,000.

Once NPH developed the property, Westergren demanded his $1,000,000. Instead of paying the full amount, NPH gave him $500,000 and asked him to sign a release agreement, which was titled in bold and underlined AGREEMENT AND RELEASE and stated that Westergren agreed to relinquish any and all interest in the property and all claims against NPH in exchange for the total payment of $500,000. Westergren signed it without reading.

He later sued NPH for breach of their agreement to pay him $1,000,000 and claimed that he was fraudulently induced to sign the release.  Westergren argued that at the time of the signing, NPH representatives told him that they will be making the second payment as soon as the building is built, that the release agreement was just a “receipt” and that he will be getting the other half of the $1 million as soon as their development of the land starts.  Westergren admitted that he did not read the release because he “was in a hurry” and “forgot his reading glasses ” and that he relied on the NPH’s representations about the second payment instead.

The jury found that NPH fraudulently induced Westergren to sign the release and the Court of Appeals agreed. The Texas Supreme Court, however, was less forgiving.  It found that Westergren had an ample opportunity to read the document and that had he done so, he would have discovered that the language of the agreement directly contradicted the representation made by NPH. The Court, therefore, found that NPH did not fraudulently induce Westergren to sign the release, reinforcing the old rule that “instead of excusing a party’s failure to read a contract when the party has an opportunity to do so, the law presumes that the party knows and accepts the contract terms.”  The Court even cited the 19th century U.S. Supreme Court’s opinion that best describes this point of contract law as follows:

It will not do for a man to enter into a contract, and, when called upon to respond
to its obligations, to say that he did not read it when he signed it, or did not know
what it contained. If this were permitted, contracts would not be worth the paper on
which they are written. But such is not the law. A contractor must stand by the
words of his contract; and, if he will not read what he signs, he alone is responsible
for his omission.

Thus, while a party may have a claim for fraudulent inducement where it as induced to enter into a contract by false promises, where the written agreement’s terms directly contradict the false promises, the claim for fraudulent inducement will most likely fail.

CONCLUSION: As the old saying goes, “trust, but verify.” When it comes to signing a legal agreement, do not rely on the other party’s explanation of what the agreement does or means.  Read it, and where appropriate, have an attorney review it on your behalf so that you know and understand what you are signing.  Remember, that in Texas, if somebody tells you one thing, and the written agreement actually says something else, barring a rare exception, you will be held to what the written agreement says, not the oral representations.

If you have been sued in Texas for a breach of contract or are thinking of pursing a breach of contract claim, contact Leiza Dolghih for a consultation at Leiza.Dolghih@GodwinLewis.com.

Common Defenses to a Breach of Contract Claim in Texas

Being sued for a breach of contract can be unpleasant, but it is not the end of the world. Texas recognizes dozens of statutory and common law defenses to a breach of contract claim, one or more of which may be available to a party who is being accused of breaching an agreement.

Depending on the terms of the contract and the dealings between the parties, a breach of contract claim may be straightforward or very complicated, and it may involve one or two events or multiple events spanning over a long period of time. However, regardless of how simple or complicated the case is, the defenses are the same.  Not all of them apply in each case, and their application, of course, depends on the facts of each case, but here is a quick list of the most commonly used ones:

1.  The contract was required to be in writing (State of Frauds) – Certain contracts in Texas must be in writing and signed. If they are not, they are not enforceable in court.  For example, a contract for the sale of real estate, a lease of real estate for a term longer than one year, or an agreement which is not to be performed within one year from the date of making the agreement, must be in writing and signed by the party against whom a breach of contract claim is being asserted.

2.  The contract is missing essential terms (Indefinite) – For example, if a contract is missing pricing information or the length of the term, and it is not clear what the parties intended such terms to be, such contract might not be enforceable.

3. A party entered into a contract because it relied on fraudulent information (Fraudulent Inducement) – A party who enters a contract based on misrepresentations of material facts made by the other party may be able to defends itself on the grounds of fraudulent inducement.

4. A required condition failed to happen (Condition Precedent) – If a contract specifies that a certain event must happen before the parties or a party must perform its obligations under the contract and such event has not occurred, the party accused of breaching the contract may claim failure of condition precedent.

5.  Too much time has passed since the breach (Statute of Limitations) – in Texas, a breach of contract claim must be filed within four years, unless a contractual provision lessens it to two years.

6.  The circumstances have drastically changed (Impracticability) – if, since the contract has been created, the circumstances beyond one of the party’s control have changed so drastically that it is no longer possible for it to perform its duties under the contract, the party may claim a defense of impracticability.  For example, if the house subject to a lease has burnt down, or the goods were destroyed by a force of nature, or the person that was supposed to perform has died or become incapacitated, such circumstances may give rise to a defense of impracticability.

7.  The party now suing had earlier indicated that it will not perform under the agreement (Repudiation) – if one party to a contract has repudiated the contract, the other party may be able to raise that repudiation as a defense to any claim of breach by the repudiating party.  Repudiation occurs if, without a just excuse, a party to a contract indicates by unconditional words or actions that it will not perform its contractual obligations.

8.  The party now suing has already accepted a lesser payment (Accord and Satisfaction) – where the parties now involved in the lawsuit have entered into an express or implied agreement, in which they agreed to discharge an existing obligation by means of a lesser payment tendered and accepted, the defense of accord and satisfaction may apply.

9.  Waiver – where a party to a contract has acted inconsistent with that agreement, it may have waived its right to enforce the contract.

10. Mistake (Mutual or Unilateral) – in a situation where either both parties were mistaken about the terms of the contract, or one party was mistaken and the other party knew about that mistaken belief, a party may claim that the agreement is not enforceable due to a mistake.

11. The contract in dispute has been replaced by a new one (Novation) – if the parties had entered into a new valid agreement, the old agreement between them might not be enforceable.

12.  Approval of an act or non-act by the party who is now being sued (Ratification) – if a party being sued for breach of contract can establish that its action or non-action was approved by the party who is now suing, it may establish a defense of ratification.

This above list is by no means exhaustive, and there are dozens of other defenses that a party facing a breach of contract claim may use depending on whether the contract was for provision of goods or services, whether it was in writing or established through the parties conduct, and many other circumstances that are different in each case.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.