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Authored - NJ Contract Law Update - Confusing Language Ignored Where the Overall Intent of the Guarantee Was Clear
JUNE 21, 2013 | Windels Marx - Commercial Litigation

Janak Corp. v. Shree H.H. Corp., ____ N.J.Super. ____, 2013 WL 1844540 (App.Div. May 3, 2013), involved a $1 million SBA loan for the purchase of a business, and "subordinate financing provided by [the seller/plaintiff] in the amount of $300,000." The Court engaged in contract construction regarding a Guarantee that the plaintiff had drafted. (While a guarantee is often a unilateral document in its execution, its interpretation essentially follows contract-construction principles.)

A restriction in the main SBA loan precluded plaintiff, as "stand-by Creditor" (or "secondary lender"), from taking any action to enforce its claims against Borrower on its subordinate or stand-by loan, until the primary loan was satisfied. The issue presented was whether this implicitly restricted the plaintiff from executing not against the "Borrower", but against the separate "Guarantors" for which the secondary lender had arranged. The Borrower was a party to both loans, but the Guarantors were parties only to the secondary loan.

The defendant Guarantors seemed to believe that their strongest defensive issue involved a confusing "representation" in the Guarantee. That clause indicated in part that the secondary loan did not violate any other agreement "with the exception of SBA Financing Documentation executed concurrently" (emphasis added).

Read literally, this phrase could have been an admission that the secondary loan documentation violated the SBA loan documentation--perhaps even intentionally so.

However, to so construe the Guarantee seemed illogical. Not only would that have ascribed a counterintuitive intent to the parties (although there could be a conspiratorial explanation--most unlikely; even more unlikely to be admitted in writing; and not expressly advanced by the defendants as far as one can tell--but in addition, such an interpretation contravened a proviso which seemed to be more at the heart of the Guarantee as drafted. That proviso provided clearly that the Guarantee could be pursued without first proceeding against the Borrower.

Under those circumstances, the Court felt the document was clear enough to (1) grant summary judgment, and (2) eschew discovery.

In this instance, the language cited by the defendants, standing alone--or in the eyes of another judge reading the summary judgment Rules more hypertechnically--could have been problematic. The moral of the story, therefore, is to give every document a 'second read' before it 'goes to press'--possibly a reading by someone other than the drafter--to make sure there is nothing internally inconsistent.

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Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

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