Would You Buy A Used Ewe From This Man?

admin   March 12, 2010   Comments Off on Would You Buy A Used Ewe From This Man?

In the years after the Civil War, the attention of Americans shifted from matters of grand national concern to the more prosaic pursuit of personal financial advancement. With that pursuit came disputes that continue to percolate through the court system today. Take, for instance, the case of a humble Illinois shepherd, William Beltzer. In 1867, Beltzer bought a flock of sheep from a man who assured him that the ewes of the flock “were not with lamb,” and “had not been to buck.” As nature would have it, the truth soon emerged, and it was apparent that the ewes had in fact been “to buck” and were “with lamb.” Feeding and protecting a flock of pregnant ewes and newborn lambs during a winter on the Central Plains proved a financial disaster for Beltzer.

The following spring, repenting of his trusting ways, the shepherd turned to the courts to recover his financial loss. Although the legal tools employed by the court in disposing of the case had a primitive feel (there was no Uniform Commercial Code in those days), the logic of the case and the court’s central concern, the honesty of the seller, had a surprisingly modern cast. While the case was sent back to the trial court for further findings of fact, the Illinois Supreme Court ruled that the outcome depended entirely on scope of the seller’s obligation to deal truthfully with Beltzer.

While truthfulness pays in business, business is — as Vito Corleone put it — strictly business. Parties to a business deal, therefore, need to be clear about the difference between a duty of honesty and good faith on the one hand, and the freedom to engage in puffery, on the other.

Fast forward to 2002, and we find that the complexities of truth-telling continue to bear upon the administration of civil justice. A disc jockey in Davenport, Iowa — a Howard Stern wannabe — announced that his station would pay $30,000 a year for five years to anyone who would permanently tattoo his forehead with the station’s tagline, 93 Rock. David J. Winkleman and a buddy called the station to confirm that the offer was “legitimate,” and the station directed them to a tattoo parlor, where each allowed 93 Rock to be engraved on his forehead. The two entrepreneurs then presented themselves at the radio station for payment.

The station refused to pay. Winkleman sued, claiming that the station and its DJ had induced him to get a tattoo so that he would be “publicly scorned and ridiculed for his greed and lack of common good sense.” The case is now pending, and the legal issue is whether Winkleman should have understood the offer to be a joke, or whether he was entitled to believe the disc jockey and take the offer at face value.

While Winkleman’s disappointed dealings offer a comic dimension to a business transaction gone awry, they also highlight an issue pivotal to the success or failure of all commercial transactions. Specifically, can you believe what the other guy is telling you? While Beltzer’s misplaced trust and Winkleman’s gullibility might seem remote from mainstream commercial dealings, commerce has and always will thrive on a currency of honesty and fair dealing. One hundred-plus years after Beltzer’s bad winter with his pregnant ewes, courts are still called upon to referee how far the obligation of candor extends in a business setting.

In transactions involving the sale or lease of goods — equipment, supplies, widgets — the obligation of candor is substantially embodied in the Uniform Commercial Code rules on express and implied warranties. In other transactions — the sale of a business, a loan transaction — which do not primarily involve the sale of goods, the outcome of a dispute involving alleged dishonesty often turns on the presence or absence of “integration” language in the governing agreement.

An integration clause is usually found among the boilerplate provisions at the end of a contract. Typically, the integration clause recites that the written terms of the contract constitute the entire understanding of the parties, and that what is in the written contract supersedes any prior representations or promises.

Here’s how the integration clause works in a typical commercial transaction:

Charles Marten, an experienced Maryland car dealer, saw in a failing dealership an opportunity to buy into an operation cheap and turn it around by besting the skill and energy of the sellers. Marten, like Winkleman, wanted to make sure the offer was “legitimate,” so he requested financial information. The sellers presented a handwritten schedule of figures, which, they avowed, represented a true picture of the revenue and profit “trend” of the dealership.

Marten, determined not to be Winklemanned into a bad deal, insisted that the sellers present better data, such as an audited statement, or at least a professionally prepared unaudited statement. The sellers demurred, insisting that no information existed. Hungry for the deal, Marten committed a cardinal sin: He swallowed the sellers’ sales talk about “trends,” and their implausible (and, it turned out, lying) insistence that no better financial information existed. Marten’s credulity led, predictably, to a deal that went south and a lawsuit against the old owner.

Marten’s contract contained a standard integration clause, which stated that the written contract of sale “supersedes all prior … inducements or conditions, express or implied, oral or written.” The sellers argued that Marten should not have relied on their talk about trends and should not have believed their excuse for not showing better financials to Marten, since all that was superseded by the purchase agreement. The Maryland Court of Appeals disagreed with the sellers and ruled in Marten’s favor. Integration clauses are intended to protect parties acting in good faith against a misunderstanding, and they are intended to draw distinctions between enforceable promises and mere puffery. They are not intended to shield a swindler from his lies. As the court explained, a party to a contract cannot, by misrepresentation of a material fact, induce the other party to enter into the contract, and then, by insisting upon an integration clause, protect himself from a claim of misrepresentation. “The effect of misrepresentation and fraud,” the court said, “cannot be thus easily avoided.”

Integration clauses are for the lawyers to work out (though every competently drawn contract of any sophistication has one). Good lawyering, however, is merely a necessary, and not a sufficient, condition to ensuring a successful transaction. To avoid getting fleeced, stick to a due diligence checklist and follow these rules:

  • Stay away from oddball deals unless you understand that area of business cold, and understand why the oddball deal is being offered.
  • Have the contract recite what financial disclosures have been made (such as: “seller warrants that it has provided buyer with balance sheets and income statements for three years preceding the date of this contract, which financial information is accurate, complete and not intentionally misleading”).
  • Bring a hard eye to your own budgets.
  • Talk the deal through with your advisers — accountants, lawyers, co-owners and managers. If the consensus is against the deal, common good sense should tell you it’s a bad deal. **

© Maryland Gazette. Reprinted with permission.