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Read Before Signing

I didn’t anticipate how many friends and family members would tap me for free advice when I became a lawyer. Sometimes, my J.D. seems to hang over me like the sign at Lucy’s psychiatry booth from Peanuts. You might have had the same experience.

Remarkably, I get asked one question more frequently than any other: “Do I really need to read a contract before signing it?”

A recent per curiam opinion from the Fourth Circuit reminds us that the answer is unequivocally “yes.”

As caselaw goes, Carpet Super Mart, Inc. v. Benchmark International is unremarkable and uncontroversial. At just over three pages of text, though, it provides an easy read that will be accessible to your next neighbor or uncle who wants to argue with you about the importance of reading things before signing.

Carpet Super Mart (known as CSM) entered into a contract with Benchmark to “facilitate a sale of CSM’s assets to a third-party.” Benchmark would be paid “5% of the Transaction Value” for its work. The parties disagreed about what this meant. CSM said that this meant 5% of the transaction purchase price. Benchmark said that it meant 5% of the “total benefit received by CSM” in the transaction. CSM sued for declaratory relief concerning the contract* and section 75-1.1 violations.

Both the district court and the Fourth Circuit agreed with Benchmark. According to both courts, the contract—which even incorporated by reference some important “standard terms and conditions” (Note: That’s lawyer code for “fine print,” Uncle Walt.)—was clear and unambiguous in its support of Benchmark’s reading.

CSM’s claims did not stop with the contract, though. Its section 75-1.1 claim was based on the allegation that “in oral communications, Benchmark misled CSM into believing that Benchmark’s consideration was limited to 5% of the purchase price.” According to CSM, Benchmark fraudulently induced CSM to enter into the contract by “orally misrepresenting the terms” and failing to provide a copy of the incorporated “standard terms and conditions.”

The Fourth Circuit rejected CSM’s section 75-1.1 claim. It started with Davis v. Davis, North Carolina’s seminal case on the fate of those who sign contracts without reading them. Under Davis, such a party is bound by the contract unless the other party makes a false representation that is (1) material, (2) peculiarly within the other party’s knowledge, and (3) insusceptible of being discovered as false by the exercise of “proper vigilance.”

Because the existence of the “standard terms and conditions” was “readily apparent from the face of the agreement,” the court reasoned, those terms were not peculiarly within Benchmark’s knowledge. Further, under Bumpers v. Community Bank of Northern Virginia, CSM would need to show reasonable reliance on Benchmark’s alleged misrepresentations. As a matter of law, CSM could not make this showing when it neglected to ask for the “standard terms and conditions.”

In short, reasonableness requires reading the contract, including documents incorporated into the contract by reference.

Presumably, Carpet Super Mart did involve sophisticated parties engaged in a reasonably sophisticated commercial transaction. Obviously, the law can and does treat consumer transactions and transactions involving parties of different sophistication levels differently. Nevertheless, if you are looking for a trump card to quickly end a debate about the importance of reading contracts with your brother-in-law over a holiday dinner (hypothetically speaking, of course), Carpet Super Mart will do just the trick.

*A previous version of this post incorrectly reported that CSM sued for breach of contract.  In fact, CSM sought declaratory relief related to the contract in its complaint.  Thanks to one reader who pointed out this error.

Author: Tom Segars

January 28, 2020 Thomas H. Segars
Posted in  Other 75-1.1 Issues