Focus on Contract Law

Sharp  Thinking

No. 92    Perspectives on Developments in the Law from The Sharp Law Firm, P.C.    June  2013

Verify Agent’s Authority When Making Contract

            By John T. Hundley, jhundley@lotsharp.com, 618-242-0246

            A party who fails to verify that a purported corporate representative has authority to make a contract on the corporation’s behalf assumes a risk that he does not under a recent decision by a panel of the Appellate Court in Chicago.

            In Cove Mgmt. v. AFLAC, Inc., 2013 IL App (1st) 120884, an independent contractor associated with AFLAC rented space in its name but later breached the lease agreement.  His agreement with AFLAC specifically provided that he was without authority to bind AFLAC to any space rental agreement.  Nonetheless, plaintiff sought to hold AFLAC accountable under the doctrine of apparent authority.

            Noting that apparent authority “is authority imposed by equity” and is “rooted in the doctrine of equitable estoppel,” the court rejected plaintiff’s plea.                                                                           

            Apparent authority “is such authority as the principal knowingly permits the agent to assume or which he holds his agent out as possessing – it is such authority as a reasonably prudent man, exercising diligence and discretion, in view of the principal’s conduct, would naturally suppose the agent to possess,” the court said.  “Apparent authority in an agent to do an act for his principal must be based on the words and acts of his principal and cannot be based on anything the agent himself has said or done.”  Because plaintiff relied exclusively on statements and representations of the agent, plaintiff’s apparent authority claim was not well taken, the court said. 

            Moreover, the court said the doctrine of apparent authority requires that the claimant have “reasonably and detrimentally relied upon the agent’s authority.”  Accordingly, it disregarded the agent’s use of AFLAC’s trademarks and other evidence that were not submitted to plaintiff before it leased the premises, because they were not relied upon in making the contract.

            The court also relied upon plaintiff’s negligence in failing to investigate the extent of the agent’s authority.  Noting that one dealing with an agent “may not . . . blindly trust the agent’s statements,” the court said plaintiff had “burden of determining for [itself], by the exercise of reasonable diligence and prudence, the existence or nonexistence of the agent’s authority to act in the premises.”

Unconscionability Defense Upheld in Mortgage Refund Case

            Illinois’ rule against enforcing unconscionable contracts is not completely lifeless, a recent decision in the Appellate Court’s First District demonstrates. 

            At issue in Crown Mortgage Co. v. Young, 2013 IL App (1st) 122363, was a contract pursuant to which “Unclaimed Funds Unit, LLC” sought to retain for itself 50% or more of surpluses that had accrued in mortgage foreclosure sales involving unrepresented homeowners who had failed to petition for the payment of those surpluses to them.  After Unclaimed scoured court records looking for such situations and located them, it contacted the former homeowners and agreed to make recovery of the surpluses while promising the former owners compensation sometimes stated to be $50 and sometimes stated to be 50% of the recovery. In the case before the court, the agreement “would have the defendant pay approximately $7,000 to Unclaimed for a service she could have obtained for free,” the court noted.                                                                                                                                                              

            Affirming the trial court’s refusal to enforce the contract, the First District noted that an unconscionability defense may raise either procedural or substantive issues or both.  “Procedural unconscionability refers to a situation where a term is so difficult to find, read, or understand that the (party) cannot fairly be said to have been aware (she) was agreeing to it, and also takes into account a lack of bargaining power,” the court said.  “Substantive unconscionability refers to those terms which are inordinately one-sided in one party’s favor.” 

            Supporting an argument for procedural unconscionability in the Crown Mortgage case were the “obvious inequality in the parties’ abilities to understand the transaction,” a “vast discrepancy in bargaining power between the defendant, a widowed woman with limited education and apparently limited means, and Unclaimed, a company with sufficient resources to send a notary to the . . . residence to obtain her signature on a contract it devised,” and the fact that she was offered no opportunity to change the contract which Unclaimed proposed.  

            However, the court said those facts “might be insufficient to invalidate” the contract if it had not been substantively unconscionable also.  Focusing on the $7,000 fee for a service that could have been accomplished for free, the court said there was a “gaping cost-price disparity in this agreement” which Unclaimed on appeal failed to address.  Citing Supreme Court precedent, it said these terms “epitomize the ‘overall imbalance in the obligations and rights imposed by (a) bargain, and significant cost-price disparity’ . . . that defines [sic] substantive unconscionability.”

Non-Reliance Clauses Prove Effective Defense to Fraud Claims

            Non-reliance clauses are proving to be effective defenses to claims of fraud in the formation of contracts.

            Such clauses are similar to but importantly distinguishable from the “merger” or “integration” clauses that long have been used in contracts.  Where the traditional clause says the parties have not agreed on any terms not stated in the document, the non-reliance clause goes further:  it says each party has not relied upon any representation, not contained in the contract, in entering into same.

            The distinction is important, because if a contract is allegedly procured by fraud, the traditional merger clause goes out the window with it.  But justifiable reliance is a requirement for a fraud claim, so an up-front statement that the party has not relied on any representations not contained in the document effectively cuts off a fraud claim that may be raised later.  See Schrager v. Bailey, 2012 IL App (1st) 111943; Greer v. Advanced Equities, Inc., 2012 IL App (1st) 112458.  Compare In re Pilgrim’s Pride Corp., 706 F.3d 636 (5th Cir. 2013).

            But don’t expect a non-reliance clause to function as a cure for poor draftsmanship.  Holding that a non-reliance clause is ineffective to bar parol evidence as to the intent or meaning of an ambiguous contract term, see In re Peregrine Fin. Group, Inc., 487 B.R. 498 (Bankr. N.D. Ill. 2013). 

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