Clients sometimes wonder why loan documents or other contracts contain certain words or phrases.
Do these “magic words” have any real impact on the rights of the parties, or are they simply legal jargon used by lawyers? The Pennsylvania Commonwealth Court’s recent decision in Wiley v. Brooks provides some answers.
Wiley involved a real estate transaction between a father (seller) and his daughter and son in law (buyers). Father transferred a residential lot to the buyers in exchange for their agreement to pay for the lot and the cost of subdividing same. Buyers failed to pay as agreed.
Several years later, the father remarried, and his wife demanded that the buyers sign a promissory note and pay the debt in monthly installments, starting in July 2008. Interestingly, the note provided that the payments were to be made to the wife, who was never an owner of the real estate and did not pay to have it subdivided. Buyers failed to make any payments under the note. More than ten years after the buyers breached the note, the wife filed suit to collect the debt. The buyers raised two arguments as to why they could not be held liable for failing to pay as agreed: 1) the lawsuit was untimely under the statute of limitations; and 2) the note was unenforceable due to lack of consideration.
The statute of limitations is the amount of time that a party has to file a lawsuit after the events giving rise to the lawsuit occurred. In Pennsylvania, there are different time periods for different types of lawsuits. For example, most personal injury claims are subject to a two-year statute of limitations, while most breach of contract claims have a four-year statute of limitations. Buyers argued that the 4-year statute of limitations applied, since wife was suing for a breach of the parties’ contract (the note).
In response, the Seller’s wife argued that the 20-year statute of limitations for “instruments under seal” applied, and that her lawsuit was therefore timely. In a bygone era, certain written agreements considered particularly important were adorned with a seal, either on wax affixed to the paper, or by creating an impression in the paper itself. These agreements were deemed “sealed instruments,” and given their special importance, were assigned a longer statute of limitations of 20 years. Today, the old practice of “sealing” the written agreement with wax or in the paper itself has faded away, and has largely been replaced with language in the agreement indicating that the agreement is intended to be made “under seal,” and in many cases, the word “Seal” appears next to the parties’ signatures. The note in the Wiley case was wax and indentation free, but it did contain the words “…this note shall take effect as a sealed instrument…” The Court held this was sufficient to qualify the note as a “sealed instrument,” such that the 20-year statute applied.
Turning to the “consideration” argument, at common law, one of the fundamental requirements to create an enforceable contract is that each side give “consideration,” meaning something of value which induces the other party to enter into the contract. The buyers argued that the wife gave no consideration for the note because the underlying debt was not owed to her, but rather, the father. The Court rejected this argument based on Pennsylvania’s Uniform Written Obligations Act. Under the Act, written agreements containing an express statement that the signer “intends to be legally bound” are enforceable, whether or not there is any consideration.
The Wiley decision underscores the significance of the language of loan documents and other contracts. The specific words contained in these agreements can heavily influence the amount of time a party has to file a lawsuit if a breach occurs, and whether the breaching party can raise “lack of consideration” as a defense, both of which can be important considerations when it becomes necessary to enforce a contract.