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Thomas D. Kearns


Contract Clause Does Not Protect Seller from Inequitable Conduct

The typical clause reciting that contract won't be binding unless countersigned does not defeat claims when signed contract and deposit is held by seller for two weeks.

Sometimes lawyers do a perfectly adequate job of drafting a contract clause protecting clients from typical risks. But sometimes, the clients then act in a way that causes judges of the Appellate Division to say, in a 3 to 2 vote, that notwithstanding the clause drafted by the lawyer, the subsequent actions of the client are so inequitable that the client is refused a victory under a motion to dismiss based on the clause. In PMJ Capital Corp v. PAF Capital, LLC, that's what happened to the seller of a mortgage. The bid form for the sale required a potential buyer to acknowledge that the contract would not be binding on the seller until a counter-signed copy of the contract was given to the buyer.

That clause is customary in commercial real estate transactions. It is designed to protect the seller from a claim of an oral agreement. And it works, most of the time. It did not work in the view of the majority in PMJ because the seller kept the contract signed by the buyer and the  deposit paid by the buyer for 2 weeks while the seller apparently negotiated and signed a competing offer.

While the Court mentions an email from the seller that seems to confirm a deal, to me the crux of the decision is that the deposit was held by the seller's lawyer for 2 weeks with no word. The clause protecting the seller was deemed not sufficient in light of the inequitable conduct.

The lesson is that the best clauses in the contract world won't necessarily protect a party from its inequitable conduct. Keep in mind that the decision was an appeal from a motion to dismiss where the plaintiff is afforded a "liberal construction and . . . the benefit of every possible inference." But in real life, losing a motion to dismiss or a summary judgment motion means full discovery and a trial must follow which means significant time and expense.

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