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Bulletin

Volume 5 Issue 12

December 2006

Oral Evidence Admissible to Supplement Terms of Promissory Note

 

             The Court of Appeals of Utah determined that evidence of an oral agreement between a borrower and its creditor may delay payment under a promissory note.

 

             In January, 2002, Data Systems International, Inc. met with a loan broker and signed a promissory note for $269,285.07 plus interest in favor of The Cantamar, LLC, refinancing prior obligations DSI owed to Commercial Lending Group.  The loan was due May 11, 2002.  The parties discussed the fact that DSI also needed a substantial amount of additional funding and the loan broker was allegedly working on obtaining an additional $15 million for DSI.  Although they continued to make their monthly payments, when DSI did not pay the loan in full on the due date, Cantamar sued.  The trial court sided with Cantamar and determined that DSI owed Cantamar $269,285.07 in unpaid principal, plus interest, attorney’s fees and legal costs.  DSI appealed.

 

             On appeal, DSI argued that they were not obligated to pay the 2002 note due to significant deal terms which were discussed at the time the note was signed, but not included within the text of the note.  Specifically, DSI claimed that (i) when they signed the 2002 note, the broker indicated it was a consolidation of the previous Commercial notes and that therefore “DSI was not required to repay the Note unless and until [the broker] obtained a $15 million investment for DSI” as had been the agreement under the Commercial notes, (ii) the broker knew DSI had no means to repay the note unless they obtained the additional investment, which the broker promised was imminent, and (iii) DSI would not have agreed to the new note without this understanding regarding the additional investment.  Generally, when an agreement between parties is reduced to writing, evidence of oral agreements or discussions is not admissible in court to contradict the terms of the written agreement.  However, here it appeared to the Court that the complete agreement between the parties may not have been included in the contract, and the Court determined that the lower court should have considered DSI’s evidence regarding the condition precedent of the additional investment, as well as all other relevant evidence. 

 

             DSI also claimed that the broker fraudulently induced it to sign the contract by claiming that Cantamar would not enforce the due date listed in the Note.  On appeal, the Court stated that oral evidence is admissible to prove a party was induced to enter into a contract by fraud and agreed with DSI that they should have been able to introduce evidence regarding this claim by the broker. 

 

             This is an important reminder to contracting parties to include all relevant deal terms within any written agreement and to specifically exclude any prior oral or written agreements between the parties.

 

             This case is cited as The Cantamar, LLC v. Carlton J. Champagne, et al, 142 P3d 140 (August, 2006).