Parol Evidence
At Slotegraaf Niehoff, P.C., we always advise our small business owners to closely review contracts and be very careful with respect to formalities before executing in order to avoid personal liability. A recent Indiana Court of Appeals decision helps underscore why these formalities can be so important.
In Yellow Book Sales and Distribution Co., Inc. v. JB McCoy Masonry, Inc., 29A04-1504-CC-151, a case decided just this past December, the Indiana Court of Appeals examined whether the parol evidence rule applied to a dispute involving whether a business owner was individually liable for a one-sheet, fill-in-the-blanks form contract she signed with Yellow Book. Yellow Book’s form contract had a blank at the top of the page where the name of the “Customer” was to be inserted. The Contract included, in relevant part, the following language at the bottom of the page: “THIS CONSTITUTES A CONTRACT FOR ADVERTISING WITH YELLOW BOOK SALES AND DISTRIBUTION COMPANY, INC. . . . THE TERMS AND CONDITIONS SET FORTH HEREIN AND ON THE REVERSE HEREOF ARE AGREED TO BY CUSTOMER AND SIGNER.”
The signature area of the contract had three lines. The first line was labeled “Print Customer Name” and JB McCoy Masonry, Inc. was written above it. The second line was labeled “Authorized Signature Individually and for the Customer.” The signature of Robin J. Brooks, designated as Owner, was written above. The third line was designated “Signer’s SS# (required for new accounts or new signers), and above that line was the printed name “Robin Brooks” along with a number that Ms. Brooks later identified as the EIN for McCoy Masonry.
The terms of the agreement had the Customer paying $2,629 per month for 12 months. Fairly quickly after the Contract was signed, the Customer stopped making payments. Yellow Books brought sought against McCoy Masonry and Robin Brooks, individually, seeking damages in excess of $30,000. The case proceeded to a bench trial.
During the bench trial, Ms. Brooks testified over objection that she intended only to sign the contract on behalf of the Company, and pointed to her use of the word “Owner” next to her signature in support of that contention. As she attempted to further clarify her intentions, counsel for Yellow Book objected again on the grounds that the Contract was clear and unambiguous, and that the parol evidence rule prohibited the Court from considering evidence beyond the “four corners” of the contract unless there had been some evidence showing that the Contract was ambiguous on its face.
Ultimately, the trial court found that the Contract was ambiguous, that Ms. Brooks’ testimony regarding her intentions was admissible despite the parol evidence rule because of this ambiguity, and that Ms. Brooks was not individually liable for the amount owed.
Unfortunately for Ms. Brooks, the appellate court did not agree with the trial court. On appeal, the Court found that the Contract was not ambiguous and that Ms. Brooks’ testimony regarding her intentions should not have been considered. Furthermore, the Appeals Court went so far as to find that Ms. Brooks was personally liable under the Contract, pointing to the various parts of the Contract’s fine print that detailed the personal liability of the “signor.” The Appellate Court remanded the case to the trial court to determine damages.
A couple of things are evident on review of this opinion. First, the trial court was bending over backwards to find a way to invalidate the personal liability of Ms. Brooks. The trial court appeared to have disfavored the manner in which Yellow Books did business, but that disfavor should not have been sufficient to overcome the applicable legal doctrines. The appellate court was not willing to set aside the parol evidence rule just because its application led to personal liability under circumstances in which the Defendant may not have anticipated such liability.
Secondly, contracts must be read closely before they are signed! Subjective beliefs about the meaning of the contract are unlikely to be persuasive in the face of unambiguous contract language. Small business owners must pay particular attention to whether their signature appears to be on behalf of the business or on behalf of themselves as an individual. Using designators such as “as Owner of . . . ”, or “as President of . . . ”, or “as Member of . . . ” and including the proper designations of limited liability status (“Inc.” or “LLC” or “P.C.”, etc . . .) is a must, but the use of such terms may not necessarily out-weigh contract text that indicates individual liability.
Finally, this case points out the dangers of executing a form contract. When presented with a form contract, one can assume its terms are tilted significantly to the favor of the party who drafted it. A thorough review of its terms – even the fine print – is a must. Unfair provisions should be stricken before the contract is signed, and nothing should be signed until you have a clear understanding of all the contract provisions.