To limit warranties or disclaim liability for products sold in online commerce or advertised online, most businesses create a Terms and Conditions or a Rules of Use page on their business website.  A significant uptick in cases filed in New Jersey, however, cite these common broad warranty limitations and disclaimers posted on a business’ website as violations of the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA). 

The TCCWNA gives standing to consumers who have suffered no financial loss or injury against sellers who, with no intent to mislead, have provided a consumer with, or even shown, a warranty, contract, sign or notice of any sort relating to personal, family or household merchandise that includes text that violates New Jersey (or federal) law. Using software to find Terms and Conditions or Rules of Use and other web-based advertising and social media campaigns that include the offensive text, the organized plaintiffs’ bar has increasingly relied on TCCWNA to bring class actions to generate huge fees for the attorneys and $100 to each consumer in the class under the statute’s automatic damages provision.

What is the TCCWNA ?

The TCCWNA can be found in N.J.S.A. 56:12-14, et seq. The law, which became effective over 30 years ago, is a broad consumer protection law that requires that a plaintiff/consumer only show:
1.  the consumer or potential consumer was given or shown a warranty, notice, contract, or sign by the seller;
2. the product offered was consumer related – used primarily for  personal, family, or households purposes; and
3. the document or notice included some language that breaches New Jersey or Federal law in some manner.
According to the TCCWNA, N.J.S.A. 56:12-15:

No seller, lessor, creditor, lender  or bailee shall in the course of his business offer to any consumer or prospective consumer….or give or display any written consumer warranty, notice or sign…which includes any provision that violates any clearly established legal right of a consumer or responsibility of a seller, lessor ,creditor, lender or bailee as established by State or Federal law at the time the offer is made or the consumer contract is signed or the warranty, notice or sign is given or displayed.

Why are the TCCWNA lawsuits being brought?

TCCWNA lawsuits are being brought for a variety of reasons. The core reasons are:

• Most business websites include warranty waivers or indemnity provisions that try to limit a consumer’s legal right.
• The consumer does not have to show any specific injury or any loss.
• Good faith of the business is not a defense. The plaintiff does not need to prove an unconscionable act.
• There is no privity requirement; i.e., the plaintiff does not have to prove that he/she actually bought our used the product.
• Damages include attorney’s fees and court costs.
• There is an automatic $100 damages per plaintiff provision within TCCWNA so actual damages need not be proven. Just a thousand member class means $100,000 in damages.

How does TCCWNA affect a business website?

Business webpages are “notices” under the TCCWNA even if they are not intended by the business to mislead a consumer about the applicable law or to form a contract. This includes the Terms and Conditions, Menus, Disclaimers, and almost any page of the website. Any type of advertisement or print material may be considered a “notice” to consumers and the great variety of state laws and complexity of the Federal Magnuson-Moss Warranty Act make it easy to inadvertently include an impermissible warranty or disclaimer provision. Examples of text that can trigger problems include:

• disclaiming implied warranties (of merchantability or fitness for a particular purpose) on any consumer product if you offer a written warranty for that product or sell a service contract on it. 
• requiring a purchaser of a warranted product to buy an item or service from a particular company to use with the warranted product in order to be eligible to receive a remedy under the warranty.
• requiring customers to return a registration card when stating that the business is providing a “full” warranty.
• offering a warranty that appears to provide coverage but in fact provides none (like a warranty covering only moving parts on an electronic product that has no moving parts).
• excluding or imposing limitations on incidental or consequential damages or on how long an implied warranty last in some states.
• including a provision that requires customers to try to resolve warranty disputes by means of an informal dispute resolution mechanism before going to court that does not meet the requirements stated in the FTC’s Rule on Informal Dispute Settlement Procedures.

Caveat

You should always have a lawyer review the Terms and Conditions and Rules of Use pages (and perhaps all the pages) of your website before you publish to see what clauses or statements may be in violation of New Jersey or Federal law. Prohibited limitations on the legal rights of a consumer under implied or express warranties should be edited or deleted.  No business that is acting in good faith should face huge litigation costs and a stiff statutory penalty in a class action lawsuit brought by plaintiffs who suffer no actual harm. 

Scammers targeting Pennsylvania businesses have been hard at work this summer. The Pennsylvania Department of State reports that three separate direct mail campaigns have sought to get unsuspecting Pennsylvania  business owners to pay unnecessary fees:

• A mailing from a company calling itself “Division of Corporate Services – Compliance Division” urges companies to complete a form with officer and director information and return the form with a $150 payment.

• A postcard from a company calling itself “Business Compliance Division” urges owners to call a toll-free number “to avoid potential fees and penalties.” When that number is called, the owner is instructed to pay $100 by credit card to obtain a “certificate of existence” in order to comply with state regulations. The address for this company is the same as the address for the “Division of Corporate Services – Compliance Division” above. According to the Pennsylvania Department of State, this is the address of a UPS store in Harrisburg.

• A letter from a company calling itself “Pennsylvania Council for Corporations” instructs business owners to complete a form with names of shareholders, directors and officers and return it with a $125 fee.

These solicitations include citations to Pennsylvania statutes and look official, but they are not: they were neither prepared nor authorized by the Commonwealth. Essentially, these notices represent a business-generating effort from the sender to prepare generic annual minutes for unwitting companies.

The Department of State cautions that any official notices sent to businesses by the Pennsylvania Department of State or the Secretary of the Commonwealth’s office will contain letterhead and/or contact information for the Bureau of Corporations and Charitable Organizations. If you receive one of these notices or a similar solicitation, contact the Bureau at 717-787-1057, or feel free to call Sue Maslow, Joanne Murray or Michael Mills at 215-230-7500.

On July 1, 2015, the Pennsylvania Association Transactions Act (also known as the Entity Transactions Act) (the “Act”) went into effect. The primary purpose of the Act is to simplify the architecture of Title 15 of the Pennsylvania Consolidated Statutes by moving the provisions applicable to names, fundamental transactions and registration of foreign entities into a new Chapter 3. Presently, those provisions are spread out in numerous subsections applicable to each entity type (e.g., corporations, limited liability companies, etc.). The thinking was that since identical or nearly identical provisions already applied to most or all entity types, they should be moved to a new chapter to streamline the statute and hopefully simplify the process for undertaking fundamental changes. The Act adopts new terms to refer to various entity concepts, so practitioners will have to learn a new vocabulary. For example:

•  Association: a corporation for profit or corporation not-for-profit, partnership, limited liability company, statutory or business trust, or an entity or two or more persons associated in a common enterprise.
• Governor: a person by or under whose authority the powers of an association are exercised and under whose direction the activities and affairs of the association are managed (e.g., a corporate director, the general partner of a limited partnership, a partner of a general partnership, a manager of a manager-managed LLC, etc.).
• Interest holder: a direct or record holder of an interest (e.g., a shareholder, member, general or limited partner).
  
  While much of the Act is simply a reorganization of the statute, some changes are substantive. For example, the Act expands the use of conversions. In a conversion transaction, one Pennsylvania entity type converts to another Pennsylvania entity type. Until now, this result could be accomplished by using a 2-step process: forming a new entity of the desired type and merging the old entity into it. Alternatively, a business seeking to change its form would have to wind down its business and dissolve, then start again by forming a new entity type. Both approaches were cumbersome and can involve significant transaction fees and delays so the new one-step process is welcomed. But even the simplified conversions can have tax consequences, so a tax advisor should be consulted.
  
  At the opposite end of the transaction spectrum is the division transaction. Prior to the Act, an entity could only divide into like entity types. The Act permits an entity to divide into different entity types (e.g., a corporation can now divide into a corporation and a limited liability company). Once again, care should be taken to avoid unintended tax consequences.
  
  Another significant change is a new provision that allows for contractual dissenters rights where such rights would not otherwise be available under the statute. Additionally, the existing concept of share exchanges is expanded to include other association types and bundled into a new subchapter called “Interest Exchanges.”
  
  All of the transactions included in new Chapter 3 require a plan approved by the interest holders of the constituent associations, although the approval process and plan contents vary depending on the type of association. Many of these transactions have tax consequences for the entity and/or the interest holders, so the advice of tax counsel is critical.
  
  The Act is based on the Model Entity Transactions Act (known as META). The Pennsylvania Bar Association’s Section on Business Law, which drafted the Act, continues its work to modernize the remainder of Pennsylvania’s association statutes to make them consistent with the uniform laws passed in other states.

No one (not even us legal corporate types) would ever suggest that bylaws are interesting. But recent Third Circuit and Delaware Court of Chancery decisions have highlighted the complexity of issues regarding a company’s fee advancement bylaws and policies. Some corporate indemnification provisions are mandated and other provisions are simply permitted under Delaware state law. In practice, adopted corporate bylaws refer to the right (or absence of a right) of officers and directors of a company to be reimbursed by the company for losses, including legal fees, incurred in legal proceedings that name individual officers or directors if those proceedings relate to their employment or activities on behalf of that company.   Mandated indemnification obligations under Delaware statutory requirements attach only to an “officer or director” but many companies nevertheless have bylaws and policies that permit indemnification to “any person” (including officers, directors, employees and agents) who act in good faith and in a manner they reasonably believed to not be opposed to the best interests of the entity. The Third Circuit, however, recently held that the definition of “officer” was ambiguous; an executive title like “Vice President” alone does not automatically prove eligibility for indemnification. And the Court of Chancery held that officers and directors need not prove that they will be indemnified to obtain fee advancement where bylaws tie fee advancement to indemnification. In other words, entitlement to advancement of fees under corporate bylaws is to be considered independently of indemnification entitlement. Examining the requirement that the conduct in question of any person seeking indemnification must be “by reason of the fact” of his or her officer/employment status, the same court determined that bylaws may not exclude entire categories of alleged wrongdoing for the purpose of fee advancement denial. If the alleged wrongdoing relates to an officer’s duties owed to the company (such as breaches of fiduciary duty), fee advancement may be required (even where the same bylaws require a clawback if the officer is ultimately found to have engaged in such wrongdoing).

Commercial lenders in Pennsylvania await action by the legislature to fix what appears to be an unintended byproduct of recent amendments to the Pennsylvania Probate, Estate and Fiduciaries (PEF) Code that went into effect earlier this year. You may be wondering what a statute that generally applies to trust and estate matters has to do with commercial lending transactions. The answer is that the recent changes applicable to powers of attorney generally could be interpreted to apply to powers of attorney granted in commercial loan documents, leases and other contracts (such as those granted in connection with confession of judgment clauses and certain other remedies). Historically, these statutory provisions did not apply to commercial agreements. It appears that the legislature was focusing on trust and estate documents when enacting this legislation and didn’t understand the impact of these amendments on commercial transactions.

These amendments are troubling from a lender’s perspective because they require that an agent must “act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest.” In a commercial loan transaction, the agent is the lender and the principal is the borrower, so the tension is obvious: a lender that is foreclosing on property, confessing judgment, collecting rents, or exercising Article 9 remedies  is not likely to be acting in the best interest of the borrower.

Pennsylvania House Bill #665 would amend the PEF Code to clarify that the power of attorney requirements do not apply to commercial transactions. This bill is presently in the Senate Judiciary Committee. Until this bill becomes law, lenders should consider making the following adjustments to commercial loan documents containing powers of attorney (typically these include documents with confessions of judgment, security agreements, assignments of rent, and mortgages):

• Include an acknowledgement by the borrower that its reasonable expectations include confession of judgment, foreclosure and other actions typically taken by a lender under the power of attorney;

• Include a waiver of the duties imposed by the PEF Code; and

• Add a notary page.

By Thomas P. Donnelly, Esquire, Reprinted with permission from the November 24, 2014 issue of The Legal Intelligencer. (c) 2014 ALM Media Properties. Further duplication without permission is prohibited.

I do not generally characterize myself as a fan of arbitration.  While proponents argue arbitration is a superior form of dispute resolution and more efficient than litigation, my personal experience in the representation of privately held businesses and individuals is otherwise.  In many situations, the sheer cost to initiate an arbitration proceeding may be prohibitive.  For a claimant, even if that initial cost is not an effective deterrent, the budget of ongoing hourly fees required of a qualified arbitrator in addition to the parties’ own anticipated legal fees, can quickly impair the potential recovery. For a Respondent, many times the cost of proceeding was not considered at the time of execution of an agreement which compels arbitration; thus the obligation to make payment for a service technically rendered by the courts without cost comes as a surprise. In either case, the parties must realize that at arbitration each is compensating not only its own lawyer, but, at least partially, another lawyer and a private dispute resolution industry as well. While arguably profitable for the legal profession, the realities of proceeding can result in difficult client discussions.

The above being said, there are situations where arbitration clauses can be of substantive, procedural and, consequently, financial benefit.  In such cases, even a skeptic of arbitration must recognize the benefits of the bargained for exchange which is an arbitration agreement.  Under the current state of the law, and given the trends in the enforcement of the right to contract, a carefully considered and artfully drafted arbitration agreement can be an essential aspect to certain business relationships and an important term of negotiation.

Employers should almost always include the broadest possible arbitration clause in any employment agreement and, generally, as a term of employment.  In most cases, an action arising in an employment situation concerns a claim raised by an employee, or worse, a class of employees against the employer.  The employer is generally a defendant.  In such cases, arbitration clauses can serve several functions.  First, an employee initiating the action must satisfy the initial fee if mandated by the prevailing agreement. As such fees are often determined by the amount at issue, the larger the claim, the higher the fee, and the greater deterrent toward commencement of the action.  As of November 1, 2014, the filing fee for the commencement of an American Arbitration Association claim involving more than one million but less than ten million dollars was $7,000.00.  Note there is no refund of the filing fee should the matter resolve.  Certainly, the requisite fee is a deterrent to the filing of a border line claim, but could also be a deterrent to a claimant’s joinder of additional even less viable claims which include different damage components.  Under any circumstances, the employee faces an early branch to the decision tree.

The flexibility of arbitration clauses within employment agreements may prove even more critical.  With careful drafting, an employer can effectively insulate itself from certain employment related class actions.   In Quillion v. Tenet HealthSystem Philadelphia, Inc. the United States Court of Appeals for the Third Circuit compelled arbitration of a Fair Labor Standards Act claim and, more importantly, declined to strike down a provision of an employment agreement requiring such claims be brought on an individual basis precluding proceedings as a class.  The Quillion Court indicated that such a class action waiver was consistent with the Federal Arbitration Act and suggested in the strongest of terms that Pennsylvania’s preclusion of class action waiver in the employment context was preempted by Federal Law.  Certainly, the equities of any such situation, including preservation of remedies and additional recovery of fees and costs are important to the court’s inquiry, but the current trend is to support the rights of the parties to contract, even to their own peril.

The flexibility of the arbitration agreement also allows for exclusions from the scope and reservation of certain matters for litigation.  Matters of equity such as enforcement of restrictions against competition or solicitation can be reserved for the courts, thereby preserving immediate access to judicial process for enforcement of employer remedies.  Interestingly, the reverse may not necessarily be true.  The Montgomery County Court of Common Pleas recently dismissed a complaint for declaratory judgment seeking a judicial determination voiding certain restrictions against competition determining that such equity claim was within the scope of the arbitration agreement and, therefore, for the arbitrator to decide.                 

Arbitration also plays a vital role in the ever broadening world economy.  In 2014, international business is the norm rather than the exception.  The courts of the United States and the signatories to the New York Convention on Arbitration have routinely enforced arbitration clauses establishing the parameters of dispute resolution as consistent with the parties’ right to contract.  Critically, the arbitration clause can protect a company operating in this country from the many pitfalls, incremental expenses and inconsistencies of litigating in a foreign country or even against a sovereign nation in its own judicial system by selecting a choice of law and a situs of the arbitration proceeding.  Such forum selection also provides a certain substantive component not only as to applicable law, but also in the qualification of fact finders as the roles of qualified arbitrators available for commercial disputes continue to grow.   Finally, arbitration may be preferable to litigation in the United States District Courts as the parties may be granted greater flexibility and input to the development of the schedule of proceedings rather than subject to the rule of the federal judge, who may or may not be familiar with often complex substantive issues.           Finally, arbitration may also be preferable in any relationship where confidentiality is key.  In some cases, the simple fact of a public filing is of concern.  In many others, the factual allegations of a complaint, even if eventually proven unfounded, can be damaging.  While an arbitration clause cannot prevent a claimant from filing an initial public complaint in court, an enforceable arbitration clause can bring an abrupt end to the public aspect of the dispute.

The courts remain the preferred forum for dispute resolution in many circumstances.  However, with the growing trend of contract enforcement to the terms of arbitration agreements even a skeptic must admit that the inclusion of an arbitration clause in certain circumstances can provide a substantive advantage and dramatically impact the landscape of dispute resolution to your client’s benefit.

Commercial lenders were left shuddering in the wake of a September 6, 2013 Pennsylvania Superior Court decision that affirmed a $3.6 million Bucks County jury verdict in favor of a local developer against an area bank. In County Line/New Britain Realty, LP v. Harleysville National Bank and Trust Company, the developer successfully argued that the term sheet provided to it by Harleysville was in fact a binding contract notwithstanding evidence of the parties’ intent to execute subsequent, more detailed agreements. The court also upheld the lower court ruling that Harleysville’s decision not to fund the loan described in the term sheet constituted a breach of contract. The court dismissed Harleysville’s claim that the term sheet did not contain the essential terms of a loan agreement (such as the closing date, how interest would be calculated, a repayment schedule, representations and warranties, and defaults and remedies) and therefore was not enforceable. The court held that the term sheet contained sufficient terms to create a binding contract, such as the identities of the borrower and lender, the principal amount of the loan, interest rates, the term, the manner of repayment, the names of the guarantors, and an identification of the collateral. The court acknowledged that the evidence showed that the parties intended to execute subsequent agreements but nevertheless held the term sheet to be binding.

Harleysville also argued that the developer did not meet all the loan conditions specified in the term sheet, so Harleysville was not required to fund the loan. Specifically, Harleysville asserted that two conditions were not met: (i) a satisfactory review by the lender of an “environmental assessment” of the parcels, and (ii) a satisfactory review by the lender of all specifications, engineer reports and government approvals. It argued that the trial court impermissibly allowed the jury to consider evidence regarding industry custom and practice, the course of dealing between the parties, and evidence of Harleysville’s motives in evaluating whether these loan conditions had been met. The Superior Court found that the term sheet did not articulate these conditions in sufficient detail and that it was appropriate for the jury to consider additional evidence in order to interpret the parties’ intent. This extrinsic evidence was particularly damning to Harleysville because it showed that Harleysville lost interest in making the loan shortly after the term sheet was issued, due in part to its desire to reduce the amount of commercial real estate loans in its portfolio and its precarious position as a result of the recent bankruptcy filing of its largest customer.

By Thomas P. Donnelly, Esquire, Reprinted with permission from the March 27, 2014 issue of The Legal Intelligencer. (c)
2014 ALM Media Properties. Further duplication without permission is prohibited.

It happens all the time.  A potential or existing client calls and advises they have been stiffed by a customer on a commercial contract.  Often times, your client has provided goods or services to a client business only to be advised their client, the other named party to agreements in place, has ceased business operations.  [As filing under Chapter 7 of the Bankruptcy Code does not result in a discharge of corporate obligations, a bankruptcy filing is generally not forthcoming.]  There is no event which gives the client finality as to their loss.  The client is left with only their suspicions that operations have commenced under a new corporate umbrella and whatever assets remained have simply been transferred out of the client’s reach.   

While certainly not in an advantageous position, your client’s claims may not be dead.  Under the right factual circumstance, recovery may still be had.  Claims against successors, affiliated business entities, and corporate principals are fact specific and often necessitate pre complaint development through available public information or, potentially, through the issuance of a writ of summons.  If sufficient information can be mined, causes of action for violation of the Uniform Fraudulent Transfers Act, successor liability under the de facto merger doctrine, unjust enrichment, and claims for piercing the corporate veil may have merit and be successfully pursued.

Those of us routinely asked to draft or review letters of intent (LOI), memorandum of understanding (MOU) and initial term sheets have a new challenge.  The use of conventional text clearly stating “this is non-binding” to be sure a preliminary document memorializing negotiations does not give rise to the risk of unintended enforcement apparently is no longer sufficient.  As a result of the Delaware Supreme Court’s decision in SIGA Technologies v. PharmAthene, Inc., No 314, 2012 2013 Del. LEXIS 265, 1-2 (Del. May 24, 2013), it is now suggested that counsel negotiating LOIs, MOUs and even term sheets designated as final include a specific negation of good faith.  Text specifically stating the parties agree that neither party shall have a duty to negotiate in good faith is now considered appropriate.  Getting both sides to agree to include such a forbidding sentence, however, is a significant challenge.

In SIGA Technologies, the court held that expectation or “benefit of the bargain” damages (and not just out of pocket, reliance damages) were appropriate where (1) the parties had a term sheet; (2) the parties expressly agreed to negotiate in good faith in a final transaction in accordance with those terms; and (3) but for the breaching party’s bad faith in trying to improve the terms, the parties would have consummated a definitive agreement with the terms set forth in the term sheet.

The SIGA Technologies decision might have been appropriate in light of the specific facts before the court but it leaves transactional lawyers at a loss.  Business lawyers have been advising clients since the beginning of time that there is, and should be, a great difference between incomplete and preliminary letters, drafts and other communications clearly understood as non-binding (with the exception of specifically identified provisions, such as those relating to confidentiality and exclusivity) and  final, mutually executed contracts with an integration clause.  The former should have no legal effect other than as a basis to start the hard drafting process for definitive agreements. LOIs, MOUs and term sheets referring to the parties’ intent to finalize binding documents later are to be used as support for financing efforts and strategic planning and not evidence of a final oral or implied agreement between the parties.  Exceptions to this rule were, until recently, very narrowly applied and usually only if the parties made an effort to carve out the intended exceptions with clear language (non-disclosure, exclusivity or no-shop provisions).  Efforts by counsel for either party to impose a written duty of good faith and fair dealing on the other party are normally met with resistance with the better practice perceived to be silence on this point and text that allows either party to halt negotiations at any time for any reason as long as there is no breach of the binding confidentiality and/or exclusivity provisions.  Termination fees are sometimes added to encourage good faith negotiations and cover out of pocket costs incurred as a cost of freedom to abandon those negotiations.

To avoid imposition of a SIGA Technologies penalty, many corporate advisors are now insisting the only safe course is to explicitly refute the presence of good faith.  And yet, most clients do not want to suggest that they would ever negotiate in bad faith. Worse, most clients do not want to agree to allow the other party to the proposed transaction to abandon all pretenses of good faith and fair dealing.  Who wants to go to the dance with a partner who asks for permission to humiliate you while there and tells you of his or her plan to possibly leave you without a ride home?

Bad faith in the midst of negotiations has historically been perceived as bad form but not an exception to the “non-binding” rule and certainly not the basis for expectation (lost profits) damages. To make this area even more challenging, a judicial determination of one company’s bad faith (e.g., trying to improve terms if the circumstances have become more favorable for the company) can easily be deemed by the shareholders/members of the same company to be the exercise of management’s fiduciary duty to maximize equity holders’ return.  Failure to push for the best possible terms in the face of a non-binding term sheet could be found by another court to be a breach of that duty.

Whether bad faith should support an exception to the “non-binding” rule as a matter of law is an interesting question but the philosophy of law is rarely a topic businessmen and women wish to explore.  Any number of things can make a deal that seemed attractive at a given point unacceptable some time later.  Negotiations with respect to terms not included in the preliminary documents can be filled with real dispute; due diligence may reveal greater risks than anticipated; the industry-wide market may shift; or business may suddenly improve supporting more favorable terms for one party and less favorable terms for the other.  Where the risk of the business enterprise does not begin to shift until after the execution of a definitive document, why should either party get the benefit of a preliminary bargain when the facts and circumstances supporting the transaction have changed? 

While no one should be conducting negotiations in bad faith, the imposition of an implied duty of good faith and fair dealing in preliminary “non-binding” documents unless the parties specifically negate that obligation seems problematic.  In contrast, once agreements are fully negotiated and signed, the covenant to act in good faith and engage in fair dealings is appropriate between business partners of all kinds. As found in other Delaware decisions, even where the contracting parties appear to have agreed to limit the scope of their common law and statutory fiduciary duties in a final document, good faith and fair dealing have an important role that should be implied and enforced by the courts.  But, only after a final document is signed and sealed, however, should we be insisting a party trying to maximize their position “Did a bad, bad thing.”

From time to time, a client asks about when and why a corporate seal is necessary. Even some attorneys (particularly from out of state) question during contract negotiations whether the phrase “executed under seal” should be removed from a contract as an archaic concept. Historically, seals were affixed to a document as a formality to attest to the parties’ intention to be legally bound by the promises contained in the document. In several states, however, the execution of an agreement under seal continues to have specific legal significance that is not always understood or intended by the parties.

As a general rule, the Pennsylvania Judicial Code provides that the statute of limitations for actions based on a contract is four years. For instruments that are executed under seal, however, the statute of limitations is twenty years. The guarantor of a commercial loan recently learned the hard way that his guaranty was subject to the extended statute of limitations. In Osprey Portfolio, LLC v. Izett, the lender confessed judgment under Mr. Izett’s guaranty nearly five years after the loan went into default. Mr. Izett argued that the action was precluded because it was filed after the four-year limitation period. While acknowledging that the document was executed “under seal”, Mr. Izett maintained that the twenty-year limitation period did not apply because the guaranty agreement was not an “instrument”, which he defined as instruments under Article 3 of the Uniform Commercial Code. Article 3 defines “instrument” as a “negotiable instrument”, namely “an unconditional promise to pay a fixed amount of money.” Because his guaranty related to a line of credit (not a loan for a fixed sum) and was conditional upon the default of the borrower under the note, he reasoned that it did not meet this definition of “instrument.” The Pennsylvania Supreme Court disagreed and affirmed the lower courts’ rulings. It held that the term “instrument”, as used in the Judicial Code,  should be interpreted using its ordinary meaning: a written document that defines the rights and obligations of the parties, such as a contract, will, promissory note, etc. Using this broader definition, the guaranty in question clearly qualifies as an instrument. Since the instrument was executed under seal, the twenty-year statute of limitations applied and the action was allowed to go forward.

It should be noted that the Judicial Code section providing for the twenty-year statute of limitations is due to expire on June 27, 2018. Of course, the sunset date for this provision has been extended in the past, so only time will tell whether the execution of contracts and other writings “under seal” will continue to have special legal significance in Pennsylvania.