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CAN'T TRUST THIS: CONSEQUENCES OF BAD CONTRACTS

November 05, 2020 BY Roberto Bazzani

Contracts are a part of our daily lives. We sign financing documents to purchase cars and leases to rent apartments. We are handed thick stacks of paper to review when deciding to invest in seemingly great business opportunities. But few carefully read any of these documents, and almost no one reads the boilerplate language at the end of these documents. This is a mistake.  All too often the person sitting across from us at the “deal table” is more concerned with closing the deal or meeting a monthly sales quota, or even unloading a business that is losing money, than with telling you the whole truth about the deal. 

So, what happens when you sign a contract and then receive something materially different than what is expected, especially if you did not read your contract?  Generally, Georgia law enforces the principle of “caveat emptor” or “buyer beware.” The four corners of the contract states what each parties’ obligations are and claiming that you did not read or understand the agreement before signing it invokes no sympathy in a court of law or equity. A competent adult who has signed a contract is presumed to have read its provisions and to have understood its contents. Swyters v. Motorola Emps. Credit Union, 244 Ga. App. 356, 358 (2000). Because of this, you must carefully read a contract and understand what the transaction actually entails before placing your “John Hancock” on the paper. This is especially true if the contemplated contract contains a merger clause. 

The Merger Clause 

For example, you are looking for a place to live. You drive around town and find a home under construction that seemingly and perfectly fits all of your wants and needs, at the right price. In the sales office, the sales representative paints a glowing picture of you watching the sunset over Atlanta while sipping a glass of wine on your balcony after work, all while being treated to a lightshow from the skyscrapers in the distance. However, during the sales pitch you notice there are cranes and construction crews in the lot next door. You ask if the new construction is going to obstruct your view. Not to worry, says the representative, the building next door will never be as tall as this one. You choose to believe him, sign the paperwork, buy the property and move in. Yet, a few months later, the building next door is towering over your balcony, completely blocking that view you fell in love with.  

A hypothetical situation? Not at all. This recently happened to a group of condominium purchasers right here in Atlanta, who claimed they paid a substantial premium for the views of the city from one side of a high-rise building that were later blocked by new construction. Novare Grp., Inc. v. Sarif, 290 Ga. 186 (2011). In Novare, the buyers claimed that they had been defrauded by a salesperson who knew that the view would disappear as soon as the building next door was completed. In its defense, the seller pointed to the contract and its merger clause. 

A merger clause acts as a disclaimer of any representations that may have been made but are not written down in the actual contract. Giacomantonio v. Romagnoli, 306 Ga.App. 26 (2010). The merger clause in the Novare agreement stated, in effect, that  representations of the sales representative that were not repeated in the contract could not be relied upon by any of the buyers, and the seller relied on this clause to successfully argue that the buyers had no right to depend on anything the salesperson said while advertising the property, if that representation was not repeated inside the contract itself. In short, the holding in Novare was that the seller was only obligated to provide what was actually represented in the written contract. Since the contract said nothing about beautiful views or made any guarantees that the buyers’ building would be taller, the seller made no enforceable misrepresentations and the buyers could not recover damages, as there could be no fraud that induced the buyers to purchase those properties.  While this sounds unfair, the merger clause is not the end of the story; a party can get beyond the limits of a merger clause βΈ» sometimes and under certain circumstances. 

Remedies in Rescission 

In short, the fact that a contract contains a merger clause does not mean that there will be a bad outcome.  A buyer can get beyond the effect of the merger clause by rescinding the contract. Rescission allows a “jilted party,” under certain and limited circumstances, to cancel the contract and to put both parties to the contract back in a similar place to where they were before the contract was signed. O.C.G.A. § 13-4-60.  To do this, a party who was defrauded must seek rescission soon after he or she discovers that there has been a fraud. American Safety Indemnity Company v. Sto Corporation, 342 Ga.App. 263 (2017).  But, to rescind, you must also restore or offer to restore whatever benefit he or she received under the contract. Moreover, these requirements for rescission must be strictly followed, as the right to rescind may be waived by inaction and, once waived, cannot be revived at a later date.  And, as the buyers in the Novare case found out, seeking rescission after a party files suit is too late to cancel the contract. The offer to rescind must happen as soon as the fraud is discovered, and prior to filing suit. 

Seeking to rescind, however, is just the first step in getting out from underneath a bad agreement. A party that believes he or she was defrauded into entering into a contract must also show that they reasonably relied on the misrepresentations. To reasonably rely, a person must have taken reasonable steps to investigate (due diligence) if the representation at issue was true, in order to successfully bring forth a fraud claim. Martin v. Ctr. Pointe Investments, Inc., 310 Ga.App. 253 (2011).  

In the end, the age-old adage applies: An ounce of prevention is worth a pound of cure. How do you prevent having to resort to the cure, i.e., hiring a lawyer to sue for fraud? By consulting an attorney prior to signing the contract.  Your counsel can not only help negotiate better terms but can also help you avoid unforeseen outcomes that could land you in a court seeking relief from a judge or jury.  Either way, if or when you do find yourself in need of counsel, the Drew, Eckl and Farnham commercial transaction and litigation teams are ready to help. 

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley
(Editor-in-chief)