≡ Menu

Announcement: The Common Draft contract clauses and templates, with extensive research notes and commentary, are posted (in draft). If you’d like to be notified of significant developments in the project, please subscribe to updates at right, because I’ll be posting announcements on this blog. See also my first e‑book, Signing a Business Contract? A Quick Final Checklist for Greater Peace of Mind.

An oral understanding might not get you off the hook for a written contractual obligation

You have to wonder whether to feel sorry for the loan broker in Wheeler vs. Blumling. This broker found a business loan for a customer, and then went along with the lender's insistence that the broker himself sign a guaranty. Unfortunately, things went badly awry (including the indictment of one of the borrower's business associates for wire fraud), and the lender sued the broker and others for repayment.

(Interestingly, the loan bore interest at what the appeals court described as the "breathtaking" rate of 1,000% per annum.)

The broker tried to escape liability on his guaranty by claiming he had an oral understanding with the lender. It didn't work; the court had no trouble holding that the broker was bound by his written obligation:

... [The broker's] evidence does not support a modification of the agreement, but rather consists of assertions of prior oral negotiations that contradict the written instrument he executed. ...

[The broker] wants to contradict particular terms of a contract which has already been performed on [the lender's] side and of which [the broker] has already enjoyed the benefits (fleeting though they were). This is exactly what the parol evidence rule forecloses.

Wheeling v. Blumling, No. 07-1992, slip op. at 8-9 (1st Cir. Mar. 25, 2008).

What surprises me most about this case is that the court didn't hammer the loan broker and his lawyer for making the oral-modification argument in the first place. From the facts reported in the appeals-court opinion, it looks to me like the argument was ... thin (at best), and that there was no good reason for the broker's lawyer to have made the lender spend extra time and money enforcing his rights. Maybe there's more to it than that; I sure hope so.

Comments on this entry are closed.

On Contracts is Stephen Fry proof thanks to caching by WP Super Cache