When Is A Well-Written Contract Not Enough?

Attorneys for builders, developers and real estate professionals constantly advise their clients to use carefully drafted and reviewed contract documents as the best protection against litigious consumers. It is good advice, but a recent case in the federal court for the Middle District demonstrates how even a well-written contract may not be enough to provide the protections sought, especially where fraud or misrepresentation becomes an issue.

In the case of Scott v. LTS Builders, the plaintiffs were a couple driving through the Poconos when they noticed a billboard advertising a new development. They exited the highway, toured the development, and bought a building lot on the spot. Only later did they learn that a utility easement restricted about one-third of the lot and would prevent them from orienting the house on the lot as they had originally planned. They sued the builder, the developer, the sellers' real estate agents, a title abstracting company and the sellers themselves.

The builder sought protection from the action in two clauses contained within the contract the buyers had signed. First, it argued that the case should be dismissed from federal court because it was governed by an arbitration clause in the contract. The Court rejected that argument on the basis that the other defendants were not parties to the agreement to arbitrate; therefore, requiring the plaintiffs to file a separate arbitration action would unnecessarily duplicate costs and risk inconsistent results.

In a second attempt to invoke the protections of the contract, several of the defendants attempted to rely upon the merger clauses of both the real estate contract and the construction contract to preclude evidence about prior oral representations allegedly made to the buyers that there were no easements restricting the use of the lot. The Court, pointing out that a visual inspection of the property would not have disclosed the easement, and that a title report provided to the buyers before settlement did not adequately warn them of the effects of the easement, rejected that argument because they found that the plaintiffs had adequately alleged fraudulent misrepresentations upon which they had relied in purchasing the property.

The Court rejected all attempts to rely upon the protection of the contract clauses, chiefly because it found credible accusations of fraud. So it would seem that the moral of the story for developers, builders and real estate agents is: have a well-drafted contract, but do not make any representations you are unsure of to prospective buyers. Fraud trumps all protective clauses.