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
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 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.
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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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