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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