Contract Law: Duty to Reveal Changes
The duty to reveal changes, as determined by the Wisconsin Court of
Appeals in Hennig v. Ahearn, chips away at the bedrock
principle of contract law -- the duty to read. Now, in Wisconsin,
contracting parties' course of conduct gives rise to a duty to point out
last-minute revisions to written agreements.
by James B. Egle & Jennifer E.
Annen
The duty to read is a bedrock principle of contract law.
Generally, a party to a written agreement who fails to read the
agreement cannot later seek to set aside the agreement simply because it
contains terms that the parties never discussed. Indeed, in one recent
Wisconsin Court of Appeals case, the court held: "There is no
requirement that parties discuss a contract's every term in order to be
bound by it - indeed, such a rule would reward parties for their failure
to read what they sign, hardly an incentive that contract law would seek
to create."1
Practicing lawyers, however, often find that the negotiation of a
contractual agreement involves a moving target. Careful counsel read
every word of the initial draft. The parties discuss the initial draft,
negotiate terms, and prepare revised drafts. When reviewing subsequent
drafts, however, counsel may focus their attention on changes discussed
by the parties during the course of negotiations. In such cases, an
opportunity exists for an unscrupulous party preparing the final draft
to revise, add, or delete sections without informing the other party.
Where the agreement is long and the revision is subtle, it might get
past the unsuspecting opposing counsel. Should the duty to read apply
under such circumstances?
Perhaps the first appellate court in the country to address the
conflict between the duty to read and the need to discourage sharp
negotiating practices was the Wisconsin Court of Appeals in Hennig
v. Ahearn.2 In Hennig, the
Wisconsin Court of Appeals held that a party to a contract may assume a
duty to "point out" changes in an agreement by its course of conduct
during negotiations.3 This duty, which goes
beyond simply providing a copy of the agreement to the other party for
its examination, appears to be unique to Wisconsin.4
Hennig's lesson for Wisconsin practitioners is this: Any
lengthy negotiation might trigger the duty to "point out" significant
changes. While the Hennig decision might deter unscrupulous
negotiating practices such as those alleged in Hennig, it also
might give litigators another tool to challenge the validity of
agreements.
Facts of Hennig
Hennig, the president of Heartland Retirement Services (HRS), and
Ahearn, the president of HRS's parent corporation, Heartland Development
Corp. (HDC), began serious negotiations on Hennig's employment agreement
in November 1995. Hennig and HDC each retained counsel. Between Nov. 16,
1995, and Nov. 30, 1995, the parties exchanged five drafts. In each
draft, differences between the previous draft and the revised draft were
highlighted. Ahearn and his attorney presented a draft to Hennig's
attorney on Nov. 30 and indicated it was their final offer.5 Hennig did not accept the offer.
On Dec. 5, 1995, Ahearn delivered another version of the agreement to
Hennig. The draft contained two changes that Hennig had requested, and
one change that he had not - a revision to the formula for calculating
an incentive bonus. The revisions Hennig requested were made by HDC's
counsel and provided to Ahearn. Ahearn himself allegedly revised the
formula for calculating the bonus payment after discussing the contract
with HDC's chief financial officer. The revised language consisted of
nine words inserted in the middle of a paragraph-long, multi-part
definition.6 None of the changes in the new
version of the agreement, which was five pages long, were highlighted.7
At this point, the parties' stories diverge. Hennig claimed that he
and Ahearn discussed the Nov. 30 draft on either Nov. 30 or Dec. 1.
Hennig said he asked for two changes. According to Hennig, Ahearn agreed
to those changes. On the morning of Dec. 5, the final agreement was left
on Hennig's desk. Hennig said he did not talk to Ahearn about the
document and assumed that it contained the terms of their oral
agreement.8
Ahearn denied discussing the Nov. 30 agreement with Hennig. Ahearn
said he considered Hennig to have rejected all prior proposals. Over the
weekend of Dec. 2-3, Ahearn said, he revised the contract to make one
last "take-it-or-leave-it" offer. According to Ahearn, he personally
delivered the document to Hennig on the morning of Dec. 5, told Hennig
to "read it," said that it was HDC's last offer, and added that if
Hennig didn't sign by 5 p.m., the deal was off.9
Hennig faxed the agreement to his attorney, who reviewed the
document. Neither Hennig nor his attorney reviewed the section that
contained the modification to the bonus payment. Hennig's counsel
requested that a change be made to another paragraph and inserted some
additional language. Ahearn agreed to those revisions and the agreement
was signed the following day.10
A year later, Hennig learned of Ahearn's modification when he
received his bonus; the change allegedly reduced his incentive payment
from $303,979 to $86,880. Hennig sued Ahearn and HDC, alleging
intentional, negligent, and strict responsibility misrepresentation and
seeking reformation of the contract.11
After Hennig presented his case at trial, the court dismissed the
misrepresentation and reformation claims for insufficient evidence.
The Court's Decision
James B. Egle, U.W. 1992 cum laude, is a
partner with the Madison law firm of Stafford Rosenbaum LLP, and is
leader of the firm's business law practice team.
Jennifer E. Annen, U.W. 1999 cum laude, is
an associate with the firm, practicing in business law, estate planning,
and probate.
In order to prevail on any of his misrepresentation claims, Hennig
had to establish that Ahearn made a representation of fact that was
untrue and that Hennig justifiably relied upon the
misrepresentation.12
Hennig alleged no affirmative misrepresentations. The revised
language was disclosed on the face of the final agreement. Hennig and
his counsel had at least 24 hours to read the document. Hennig did not
allege that Ahearn had told him that the only changes made to the final
agreement were those requested by Hennig. Generally, silence is not
construed as a representation.
The Wisconsin Supreme Court, however, has held that a failure to
disclose is tantamount to a representation of the nonexistence of a
fact, if there is a duty to disclose.13 The
Hennig court noted that in Ollerman v. Rourke,14 the supreme court relied particularly on
Restatement (Second) of Torts section 551(2)(e) (1977), which provides
that a party to a business transaction has a duty to disclose "facts
basic to the transaction, if he knows that the other is about to enter
into it under a mistake as to them, and that the other, because of the
relationship between them, the customs of the trade or other objective
circumstances, would reasonably expect a disclosure of those
facts."15 The crucial element, held the
Hennig court, was whether the mistaken party would reasonably
expect disclosure.
The court concluded that it was possible for a jury to conclude that
Ahearn had a duty to "point out his last-minute change" to the document,
and that Ahearn breached that duty. The court held:
"Through the presentation of the November 30 draft, all changes
proposed by either party were highlighted in successive drafts, and the
evolving terms of the agreement were expressly discussed among the
parties and their attorneys. The definition of 'net equity realized' had
remained essentially unchanged throughout these drafts. A jury could
find that Hennig reasonably expected Ahearn to disclose a significant,
last-minute revision to the definition."16
The recipient of a misrepresentation is justified in relying upon it,
unless the falsity is actually known or obvious to ordinary observation.
Of course, Ahearn's revision was provided to Hennig and counsel, and
they could have discovered the change by rereading the contract. In
Ritchie v. Clappier,17 the court
of appeals held that "[g]enerally, a person is negligent if he or she
signs a contract without ascertaining its contents and is not prevented
from doing so, even if induced to sign by fraudulent
misrepresentations."18
The Hennig court found that the Wisconsin Supreme Court has
limited Ritchie to its facts, and thus Ritchie was not
a bar to Hennig's claims.19 The court was
unwilling to adopt Ahearn's argument that Hennig was guilty of negligent
reliance because he failed to reread the entire contract.20 The Hennig court then held that whether
Ahearn's last-minute change was obvious was a matter for the jury to
determine.21 Thus, because it was possible
for Hennig to demonstrate that the last-minute change was not obvious,
Hennig also could prove justifiable reliance. The court also ruled that
Hennig could proceed with his reformation claim by presenting evidence
of his unilateral mistake and Ahearn's possibly fraudulent or
inequitable conduct.22 With the orders for
dismissal reversed, the case was remanded to the trial court.23
Analysis of the Hennig Decision
The duty to read has never been an absolute bar to contract
challenges based upon misrepresentation claims. The Wisconsin Supreme
Court has held that a party may bring a claim for fraudulent inducement
to enter a guaranty, when the guarantor claimed she did not read the
agreement after being told by a loan officer that the guaranty would
cover only one loan, when in fact the guarantee was a continuing
guaranty unlimited in amount.24 In such
cases, the statements constituting fraudulent inducement dissuade one
party from reading the agreement. It would be poor policy to allow a
party making misstatements to benefit from its misdeeds.
Outside of cases involving unconscionability, courts generally
relieve a party of its duty to read only when fraud has occurred.25 Hennig, however, did not allege that Ahearn made
any affirmative misrepresentation. The Hennig court had to find
a duty to disclose on Ahearn's part in order to allow Hennig's claim of
misrepresentation to proceed. Whether one has a duty to disclose a fact
in a particular set of circumstances is essentially a policy decision
properly decided as a matter of law.26
In finding that Hennig's allegations supported a claim for
misrepresentation, the Hennig court cited the use of
highlighted changes in earlier drafts, and also noted that "the evolving
terms of the agreement were expressly discussed among the parties and
the attorneys." The latter course of conduct occurs in almost every
contract negotiation. Arguably, even if the parties have not highlighted
revisions to previous drafts, such discussions might trigger a
reasonable expectation of disclosure, and correspondingly, a duty to
disclose.
The Hennig court could have found that Hennig or his counsel
had the opportunity to ask Ahearn or HDC's counsel whether the only
changes to the agreement were those requested by Ahearn, and that this
opportunity foreclosed any reasonable expectation of disclosure. Instead
of placing a burden of inquiry on Hennig, the court elected to put the
burden of disclosure on the party making the last-minute revision. The
Hennig court also was sensitive to the transactional costs
involved with imposing a duty to read every single word of every single
draft.27
Arguably, a key element to establishing a reasonable expectation of
disclosure is whether the parties previously had discussed the clause in
question. For example, had Ahearn revised a section of the agreement
that had been negotiated during the final round of talks between the
parties, and Hennig had failed to read the revised section, the case for
imposing a duty to point out changes would be weak. In that situation,
it would be reasonably foreseeable that Ahearn would make such
revisions. Hennig and counsel could not claim to be unfairly surprised
under those circumstances.
The Hennig decision does not address whether the duty
applies if a party expressly disclaims it. Assume Ahearn not only had
told Hennig to "read it," but had added that many changes had been made
to the agreement, including some revisions that the parties had never
discussed. Again, it would seem Hennig would have had no reasonable
expectation of disclosure under such circumstances.
Because a party, and not counsel, made the last-minute revisions, the
Wisconsin Rules of Ethics are not directly applicable to the court's
inquiry in Hennig. It should be noted, however, that SCR 20:4.1
states that an attorney may not make a material misstatement of fact to
other counsel or third parties. If counsel fails to disclose a
last-minute revision, he or she probably has violated this rule.28 Hennig has the additional benefit of
placing the force of the law of misrepresentation behind the duty to
disclose last-minute revisions.
One problem remains, however, with Hennig's reasonable
expectation of disclosure test - contract litigation. Assume two parties
exchanged several drafts of an agreement (with revisions highlighted)
and discussed all changes during the early period of negotiations. As
the deadline for entering a deal neared, however, the parties only
discussed the proposed changes and did not provide each other with
highlighted drafts. One party wanted to revise a definition that
previously had not been the topic of discussions. The parties haggled
over the proposal and eventually reached an oral agreement on a revised
definition. The party that sought the change then revised the agreement.
Both parties signed the agreement. Later, a disagreement arises
involving the definition revised late in negotiations.
If a duty to point out a revision exists, and the party challenging
the written definition alleges that the revision to the definition was
not pointed out, the party that initially proposed the revision may have
to prove that it verbally pointed out the change.29 Proving oral disclosure may be difficult.
Although counsel can guard against such claims by providing a "compare"
version of the document, showing revisions, deletions, and additions in
underlined and strikethrough font to opposing counsel, circumstances
often make the exchange of these documents impractical. At the very
least, if a duty to disclose exists, the party claiming that proper
disclosure has not been made should have the burden of proving such
nondisclosure in a misrepresentation claim.30
Finally, to avoid future surprises, counsel reviewing contracts
certainly should reread key clauses of the final agreement. For lengthy
documents, compare the pagination of the last working draft with the
pagination of the final agreement. Counsel also can ask for affirmative
representations that the only changes made to an agreement between
drafts are those that the parties had negotiated.
Conclusion
The Hennig decision is likely to be cited by counsel facing
similar contract issues in Wisconsin and elsewhere. The court's holding
may have a positive impact in discouraging sharp negotiating practices,
but other courts reviewing similar claims should place the burden of
proving nondisclosure of a last-minute revision on the party claiming
nondisclosure. To avoid claims that last-minute revisions have not been
disclosed, the best practice is to provide the other party with a copy
showing revisions in underlined and strikethrough fonts. Finally, at a
minimum, reread the key terms and conditions of any final agreement.
Endnotes
1 Nauga Inc. v. Westel
Milwaukee Co. Inc., 216 Wis. 2d 306, 318, 576 N.W.2d 573, 578 (Ct.
App. 1998).
2 Hennig v. Ahearn,
230 Wis. 2d 149, 601 N.W.2d 14 (Ct. App. 1999). On remand, the case was
set to go to trial in Dane County Circuit Court in October 2000, before
the parties reached an out-of-court settlement.
3 Id. at 156, 601
N.W.2d at 18.
4 Neither of the parties in
Hennig cited any cases directly on point in their briefs to the
court of appeals. The authors were unable to locate any decisions in
other jurisdictions that addressed the issue before the Hennig
court.
5 Hennig at 158, 601
N.W.2d at 19.
6 Id. at 171, 601
N.W.2d at 25.
7 Id. at 171-72, 601
N.W.2d at 25.
8 Id. at 160-61, 601
N.W.2d at 20.
9 Id.
10 Id. at 161-62,
601 N.W.2d at 20.
11 Id. at 162, 601
N.W.2d at 20.
12 Id. at 164, 601
N.W.2d at 21.
13 Ollerman v. O'Rourke
Co. Inc., 94 Wis. 2d 17, 94 Wis. 2d 17, 288 N.W.2d 95 (1980).
14 Id.
15 Hennig at 166,
601 N.W.2d at 22.
16 Id. at 168, 601
N.W.2d at 23. Also, citing from comment l to section 551 of the
Restatement (Second) of Torts, the court stated that if the jury
believed Hennig's version of the facts, it could conclude that Ahearn
had engaged in "a form of swindling, in which [Hennig was] led by
appearances into a bargain that was a trap." That is, a jury could find
that Ahearn made the last-minute change in the compensation arrangement
hoping that Hennig would not notice it, and that Hennig thereby would
sign an agreement that Hennig would not have knowingly accepted.
17 Ritchie v.
Clappier, 109 Wis. 2d 399, 326 N.W.2d 131 (Ct. App. 1982).
18 Id. at 404-05,
326 N.W.2d at 134 (citing Bostwick v. Mutual Life Ins. Co., 116
Wis. 392, 403, 89 N.W. 538, 541 (1902)).
19 Hennig at
170-71, 601 N.W.2d at 24.
20 Id. at 172, 601
N.W.2d at 25. Wrote the court: "[T]he inflexible rule Ahearn urges us to
apply to the present facts would greatly add to the time and expense of
consummating commercial transactions. We are thus unwilling to hold, as
a matter of law, that notwithstanding a pattern or practice of the
parties or their counsel of highlighting and discussing all
modifications in previous drafts, a party must read each and every word
of successive drafts of a complex commercial document in order to ensure
that another party has not surreptitiously inserted a significant
last-minute change."
21 Id. at 173, 601
N.W.2d at 25.
22 Id. at 174, 601
N.W.2d at 26. Thus, both of Hennig's claims were dependent upon his
ability to establish that Ahearn had acted fraudulently or
inequitably.
23 Id. at 184, 601
N.W.2d at 30.
24 Bank of Sun Prairie
v. Esser, 155 Wis. 2d 724, 456 N.W.2d 585 (1990).
25 Establishing a
misrepresentation is a prerequisite to a misrepresentation case. If
there is a duty to read the contract, and a party fails to do so,
justifiable reliance on the misrepresentation will be lacking and will
defeat the claim. Wisconsin reformation cases have generally held that
only mutual mistake or fraud will excuse a party from the terms of an
executed, unambiguous written agreement. See Carney-Rutter Agency v.
Central Office Bldgs., 263 Wis. 244, 252-53, 57 N.W.2d 348, 352
(1953). Absent mutual mistake (which is not present in
Hennig), one generally must prove fraud to obtain reformation
of an unambiguous written agreement. Ordinarily, mutual mistake would
not be present in duty-to-read cases.
26 Hennig at 167,
601 N.W.2d at 23.
27 Supra note
20.
28 ABA Informal Ethics
Opinion 86-1518 held that where two parties had negotiated over several
contentious issues, had reached an agreement in principle, but the
drafting lawyer omitted a clause that he had sought for the benefit of
his client, the other attorney and his client had an obligation not to
take advantage of the mistake and sign the agreement without the omitted
clause. This opinion, however, expressly reserves judgment on the issue
of what an attorney's ethical obligations would be if his client learned
of the mistake and wanted to take advantage of it. At the same time, it
states that if either the attorney or client took advantage of this
mistake, they may be committing fraud. It is difficult to see how
ethical constraints would prohibit an attorney from taking advantage of
a failure of opposing counsel to insert a last-minute revision, yet
would not prevent the attorney from affirmatively making last-minute
revisions himself or herself with impunity.
29 The Hennig
decision does not specify how a change is to be pointed out, but
presumably, verbal notification is sufficient.
30 This issue did not arise
in Hennig, because the parties agreed that neither Hennig nor
his counsel was informed of the change to the bonus payment clause.
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