Duty to Read

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Duty to Read

Credit Manager Tom Wright was skeptical about Sam O'Brien, a new prospect being touted as a potential major customer by the sales rep. O'Brien Distributors, Inc., was clearly a fast growing operation and current suppliers were reporting good payment histories. But Tom worried that O'Brien might be trying to expand too fast in an already crowded market.

"I can't approve this one unless we get O'Brien's personal guarantee," Tom told the sales rep.

"I think he'll throw me out," the rep objected.

"It's a personal guarantee, or no deal," Tom replied.

The rep was back the next day with the signed credit application--which contained the personal guarantee agreement--and the order. Shipments began, and for the first few months payments were prompt. But then the payments slowed and then stopped. When the outstanding balance reached $30,000, Tom put O'Brien on hold. Two months later O'Brien Distributors had filed for bankruptcy, and Tom called to exercise the personal guarantee.

"I never made any personal guarantee," O'Brien objected.

"I've got it right here with your signature," Tom told him "It was on the credit application."

"I never read the application," O'Brien retorted. "You're trying to pull something, and you're not going to get away with it."

Is the personal guarantee Tom got valid?

Click "Next" for the answer.

Answer and Analysis

If a party who has the capacity to read and understand an agreement signs that agreement, he may not later avoid his obligations under it by complaining that he did not read or understand it. Otherwise, it is fairly obvious that no one could rely on signed agreements. The same thing applies to the acceptance of is such documents as bills of lading, passenger tickets, insurance policies, bank books, and warehouse receipts where they purport to be contracts between parties. The party accepting these documents is basically assenting to their terms.

Nevertheless, the courts over the years have carefully and systemically developed a number of exceptions to this rule. If the document is not legible or easily read, a party is not bound by the fine print. Or if it was in such small type and so long and crowded that it was physically difficult to read, the court could readily believe that there was no assent.

The courts are reluctant to enforce terms of contract where they are not sufficiently called to the attention of one party, such as printed notices on letterheads, catalogs, or tags or printed notices inside of clothing. Some courts have been reluctant to give effect to clauses that are printed on the reverse side of a document unless it is clearly and conspicuously referred to on the front side of the document.

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Purported contracts that are posted on desks, walls, or other public places may also be an exception unless the particular party to the contract actually observed the particular contractual terms or because the posting was so clearly conspicuous the party should have observed the particular contractual terms. An example is an air traveler purchasing an insurance policy from a vending machine covering only scheduled airline flights. Appearing next to the vending machine was a listing of the non-scheduled airline flights. The court held that it was a question of fact for a jury whether the passenger had been given sufficient notice of the limitation.

Another exception to the general rule of a duty to read is where a party receives a particular document that the party has no reason to believe contains any contractual terms. This would apply to the proverbial parking ticket or the ticket that is issued when a party checks his coat at the restaurant or the ticket that he receives when he delivers a package to a parcel check room. It is a fundamental rule that if a person without fault on his part assents to a document believing that it is something other what it is, the instrument would probably be considered unenforceable. The question is always when consent to the terms of the contract is present, and this determination is often decided on a case-by-case basis by the courts.

Whether the contractual provision is sufficiently called to the attention of a party to a contract probably depends upon whether a reasonable man acting in a reasonable manner and evaluating all the circumstances then and there prevailing would know that there were terms that were intended to be part of a proposed agreement between the two parties. A failure to read a particular document must be considered in view of all the circumstances with regard to the particular situation.

Fraud and mistake are another exception to the rule of duty to read. Where a particular party deliberately misrepresents what the contents of a writing or an agreement are, and the other party relies on that oral representation and then signs without having read the document, many courts will decide that the party had no right to rely on the oral representation because he was entering into a written contract and a reasonable man should know that all of the oral representations are merged into the written contract. While many courts take this position, the majority seem to feel there is a lack of mutual agreement between the parties and that the party who makes the misrepresentation is guilty of fraud and thus cannot enforce the contract.

A misrepresentation becomes more difficult where the contract specifically states that all oral representations made prior to the contract are merged into it. Even here there is a conflict among the courts, with some stating that a failure to read the integration provision in the contract which merges the oral representation into the agreement precludes that party from offering the oral representation even though it was a fraudulent one.

Perhaps the better view is that a party is bound to know the contents of the paper that he signs. Where one party persuades another to sign a contract by fraudulently representing that it contains stipulations agreed upon when in fact it does not, and where the signing party is thereby induced to omit reading the contract, it is well settled that the false representations as to the contract's contents renders it enforceable, and the party so defrauded is not precluded from contesting its validity.

Contracts of adhesion are also exceptions to the rule. An adhesion contract is one between a stronger and a weaker party in which an unconscionable bargain is entered into due to the stronger party's prodigious amount of bargaining power. In those cases, the contract is normally avoidable. An example would be the classic cases where an individual purchased an automobile and contained in the contract of purchase was an express warranty that limited damages to replacement of defective parts. In this instance the individual suffered serious personal injuries. The court stated that the lawmakers did not authorize automobile manufacturers to use its grossly disproportionate bargaining power to relieve itself from liability and to impose on the ordinary buyer, who in effect has no real freedom of choice, the grave danger of injury to himself and others that attends the sale of such a dangerous instrumentality as a defectively made automobile.

The issue of whether a consumer or a business is involved also is an important factor in these decisions. The courts tend to protect the consumer when he or she is dealing with a business. The courts tend to let the written contract stand in those situations between two businesses on the theory that the businesses are sophisticated enough to understand that they have to read the written agreement.

In this area it is difficult to set down black and white rules, because for every decision that carves out an exception, the next court will say that that exception does not apply to this set of circumstances. The facts and circumstances of every case are always different, and there are rarely cases so similar that they are almost identical. Perhaps the best advice is to read the contract so that there will not be a need to avoid the terms of the written agreement. This applies even more so to bills of lading, documents of title and warehouse receipts, because the courts apply a strict liability test to these instruments--more so than to parking tickets and coat checkroom tickets.

In the instant case, because a business is involved the better view is that the guarantee will be enforced, even though it was not executed in the presence of the credit manager. The credit manager should interview the sales rep as to the circumstances of the execution of the agreement. Carving out an exception to the rule in a business situation may be difficult--but some sales reps have no scruples.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.