In today's Freedom Friday blog and email newsletter, I'm going to continue talking about some issues I brought up in last week's Freedom Friday blog and email newsletter. Once again, I get asked a lot of questions about contracts. Questions like whether it's enforceable, whether it would be held up in court, etc. Last week I talked about contract ambiguities, but this week I'm going to talk about whether a contract is enforceable. Is there truly a meeting of the minds, especially in “adhesion contracts,” and other contracts. So, in today's Freedom Friday blog and email newsletter, I'm answering the question, “Is my contract really enforceable?”
In general, many contracts are legally enforceable in court. However, sometimes a court might hold a contract enforceable, but rule that certain clauses in a contract are NOT enforceable (and thus the whole contract is NOT enforceable). Contracts are not always “the whole enchilada” that they claim to be.
A really good example of a clause that a court in Oklahoma might hold to be unenforceable is a breach of fiduciary duty clause in agreements that don't necessarily typically have them, such as a non-disclosure agreement. Word on the street is that there are NDAs which are circulating where the party signing the contract (receiving the confidential information) is being asked to agree to become a fiduciary of the disclosing party, and of course, the receiving party doesn't understand what they're signing. This, of course, assumes a legal duty that doesn't fit the circumstances. There are some relationships where a party is fiduciary by operation of law, such as a trustee to the beneficiary of a trust, officers and directors of a corporation to the shareholders, etc. However, can a party agree to assume a fiduciary duty if none exists in law or in the relationship, otherwise? Just because you include a fiduciary duty, does that make it so? Maybe it does, and maybe it doesn't.
Here are some reasons why maybe it doesn't. The question of whether or not a formal fiduciary duty exists is a question of law for the court. The judge has to look at the relationships between the parties as a starting place to find a fiduciary duty. There may also be questions regarding what the parties understood they agreed to when they signed the contract. Were the parties haphazardly agreeing to the terms of the contract? If so, a breach of fiduciary duty clause might not be binding. But there must be a meeting of the minds. There could also be a patent ambiguity, or a latent ambiguity in the contract regarding the breach of fiduciary duty clause, which would require outside evidence (parol evidence) to be introduced to figure out what the deal actually meant. So, those are some of the reasons why a court might rule that a formal fiduciary duty does not exist, even though its in the contract.
On the other hand, there are some considerations where the court may rule there is a fiduciary duty. A fiduciary relationship is a special trust between the fiduciary and the other party or parties in the contract. It can be created by either operation of law, or in some circumstances, an informal relationship based on a special trust between the parties. A fiduciary duty includes the duties of good faith, loyalty, candor, integrity, to refrain from self-dealing, and of fair and honest dealings. These duties are not imposed lightly. Courts always look to facts surrounding the creation of a fiduciary duty. Some fiduciary duties are created by the operation of law, e.g., corporate directors and officers, trustees, executors of an estate, etc. LLCs do not necessarily involve a fiduciary duty, but if your operating agreement includes fiduciary duties for the manager(s) of the LLC, then they can be imposed, as well. I almost never recommend my clients impose fiduciary duties in a multi-member LLC when all the members of the LLC are family members. Why would you want to impose a fiduciary duty on your family members? That's a recipe for a problem, so that's not recommended.
So, what about other types of contracts? Most contracts are arms-length transactions; you don't put a special trust in a salesman offering a good or a service. Fiduciary duties are not arms-length obligations because they impose a special trust, i.e., one party relies on and trusts the other (the fiduciary). You cannot put a fiduciary duty in a contract solely by putting that language in the contract. But there are pitfalls. Some factual determination is needed to determine if a fiduciary relationship exists. In some informal contexts, it's obvious there is a fiduciary duty, especially when you contract with someone to look after the other person's money. Also, if there are “recitals” in the contract where the parties acknowledge a fiduciary duty is created, then such a recital may prevent you from alleging there was no fiduciary relationship.
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