Iowa lawsuit shows danger of “standard” contract terms

Why practice owners should never sign a binding document without carefully reviewing it.

By Todd A. Newman

Practice owners are routinely asked to sign commercial contracts on the spot. “This is our standard contract” or “That’s just boilerplate language” are oft-repeated lines from salespersons eager to close the deal. But so-called “standard” and “boilerplate” language can have serious consequences, as illustrated in GreatAmerica Financial Services Corporation v. Lloyd S. Meisels, P.A., a recent decision of the Iowa Court of Appeals.

Background

Lloyd S. Meisels, P.A. (“Meisels”), operated an animal hospital in Florida. The case arose from a contractual relationship and ensuing dispute that Meisels had with Dex Imaging Inc. (“Dex”), a local office equipment dealer.

The contracts

Meisels’ odyssey began when it signed a sales order with Dex for photocopiers and other office equipment.

As part of this transaction, Meisels signed a service agreement with Dex. Under the service agreement, Dex was obligated to maintain and service the equipment, and correspondingly, Meisels was obligated to promptly pay Dex’s invoices for these services.

Meisels also signed a lease agreement with Dex. This document called for Dex to lease the equipment to Meisels for 63 months, or approximately five years, and for Meisels to make monthly lease payments.

However, the lease agreement also contained provisions that would later become problematic to Meisels, namely, an assignment provision, a “hell or high water” provision and an attorney-fee provision.

The assignment provision allowed Dex to assign the lease without notice and specified that the assignee would have the same rights and benefits as Dex under the lease but not Dex’s obligations. Further, this provision stated that “the rights of the assignee will not be subject to any claim, defense, or set-off ” that Meisels may have against Dex.

The “hell or high water provision” of the lease stated: “Your [Meisels’] payment obligations are absolute and unconditional and are not subject to cancellation, reduction, or setoff for any reason whatsoever.” Such provisions are known as hell or high water clauses because they require the lessee to continue to make full lease payments come hell or high water , i.e., even if the leased equipment becomes unsuitable, defective or even destroyed.

Under the attorney fee provision of the lease, Meisels was required to pay the lessor’s attorney fees in the event of litigation, including appeals, in which the lessor prevailed.

The dangerous contractual provisions did not end there. Upon receiving substantially all of the equipment from Dex, Meisels signed a “Delivery & Acceptance Certificate.” The certificate stated that Meisels “irrevocably accepted” the leased equipment as “satisfactory for all purposes of the lease.”

The dispute

Almost immediately, Dex assigned its interest in the equipment lease to GreatAmerica Financial Services Corp. (“GreatAmerica”), an Iowa company that provides financing to businesses that wish to lease equipment for commercial use. Thus, while Dex continued to be  responsible for maintenance of the equipment under the service agreement, the lease payments were now to be made to GreatAmerica.

Initially, this arrangement went off without a hitch, and Meisels proceeded to make the first 15 monthly payments under the lease. But then technical issues with the equipment cropped up. These issues included failed printer drivers, paper jams, ink cartridge errors, font errors, system errors and poor image quality.

After Dex was unable to resolve these issues to Meisels’ satisfaction, Meisels’ frustration boiled over. Meisels sent Dex a letter demanding the return of its lease payments “owing to Dex’s continuing failure to perform.” Meisels also demanded “to be released from the balance of the equipment and service agreements.”

After receiving no response from Dex, Meisels sent a second letter, this time to both Dex and GreatAmerica. Meisels claimed that it had been “fraudulently induced into the lease and services agreement.” As such, Meisels declared that was tendering the equipment back to Dex and ceasing payments to GreatAmerica under the lease. Meisels demanded that GreatAmerica return prior lease payments of more than $34,000 and suggested that GreatAmerica look to Dex for future payments.

The lawsuit

GreatAmerica was not amused and proceeded to sue Meisels for breach of the equipment lease in the Iowa District Court. In turn, Meisels dragged Dex into the lawsuit by filing a third-party petition against it.

Things did not go well for Meisels. First, the court dismissed Meisels’s third-party claim against Dex for lack of personal jurisdiction, as Dex was a Florida company with insufficient contacts to Iowa to be sued there. Then, the court rejected Meisels’ position that the equipment lease and service contract were a “unified agreement” under which Meisels could stop lease payments to GreatAmerica if Dex failed in its service obligations.

Based on the plain language of the assignment provision, the hell or high water clause and the delivery and acceptance certificate, the court found that GreatAmerica had an unconditional right to the monthly lease payments and that Meisels had waived any rights to withhold these payments because of its dissatisfaction with the equipment or with Dex.

For these reasons, the court entered summary judgment in favor of GreatAmerica and against Meisels. For good measure, the court ordered Meisels to pay GreatAmerica’s legal fees under the lease’s attorney fee provision.

Meisels appealed the ruling to the Iowa Court of Appeals, but things only got worse. Concluding that Meisels was bound by the contract documents to make all lease payments to GreatAmerica, the appeals court affirmed the lower court’s ruling—and ordered Meisels to reimburse GreatAmerica for legal fees incurred in the appeal proceedings.

Lessons

The takeaway for practice owners is to never sign a contract without carefully reviewing and understanding its terms. Did Meisels understand that Dex could assign the right to collect Meisels’ lease payments to a third party and that Meisels would have to continue making these payments even if Dex utterly failed to keep the leased equipment in good condition?

While it is unclear whether Meisels was pressured into this transaction, the case serves to warn practice owners not to be forced into a bad deal. When you are told not to worry about questionable contract language because it is merely “standard” or “boilerplate,” this should raise a big red flag.

For example, a troublesome contract provision might require you to pay the vendor’s attorney fees in the event of any dispute, even if the vendor is wrong, or to indemnify the vendor against all claims, even those arising from the vendor’s own misconduct. Such provisions, in effect, can leave you stuck with little to no recourse if the deal goes sour.

When you come across such troublesome contract language, keep in mind that it is not in the contract by accident. To be sure, it was drafted by the vendor’s lawyers to serve the vendor’s interests—not yours. Thus, at a minimum, you should have your own lawyer review the document to identify trouble spots and to offer suggestions on how to fix them.

Often, you can cure the contractual infirmities through negotiation. But if the vendor stands pat and insists on unfair terms, your best option might be to walk away. After all, if the vendor won’t make reasonable concessions in order to secure your business, then how would you expect the vendor to handle concerns that you may have in the course of the business relationship—after you become bound to the contract’s terms?

It is particularly dangerous to enter into an agreement by initialing the screen of a salesperson’s handheld electronic device. Always insist on a hard copy of the full agreement and review it independently.

Given that courts typically will hold you to the contracts that you sign, even when you entered into a bad deal with “boilerplate” or “standard” language, it is advisable to seek the assistance of experienced counsel before signing on the dotted line.

Todd A. Newman, Esq., works closely with veterinary practices as president and owner of a Salisbury, Mass., law firm. He specializes in business, employment, labor and litigation matters. He can be reached at toddnewmanlaw.com.

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