It’s pretty basic that your clients should read the agreements that they sign before they sign them. Or you should at least explain to your client the key provisions in what they are going to sign, if they are not going to read it.
In McMillan v. Unique Places, LLC, 2015 NCBC 4, decided this week by the NC Business Court, the fact that the Plaintiff had not read the agreement requiring him to arbitrate his claims provided no defense against him being compelled to arbitrate.
McMillan, one of the Plaintiffs, had entered into a business arrangement with the Defendants based upon a three page "Memorandum of Understanding." The MOU contemplated the subsequent formation of an LLC called Enigma. A few weeks later one of the Defendants presented McMillan with an Operating Agreement for the LLC.
The thirty plus-page Operating Agreement contained a provision obligating the LLC members to arbitrate any disputes arising out of the agreement.
When disagreements arose among the members of Enigma about the control of the LLC, McMillan ignored the arbitration provision and filed suit in Catawba County. He then designated the case to the Business Court.
The Defendants made a Motion to compel arbitration. McMillan, seeking to escape the arbitration obligation, said that he had not read the Agreement. He said that he was fraudulently induced to sign the Agtreement and that he was unaware of the arbitration provision at the time that he signed it.
Those of you who went to law school know that this type of argument is not going to fare well. Judge Bledsoe found these contentions unpersuasive, holding:
under well-established North Carolina law, a signatory to ‘a written instrument is under a duty to read it for his own protection[; ] . . . [is] ordinarily . . . charged with knowledge of its contents[;] . . . [and] may [not] predicate an action for fraud on his ignorance of the legal effect of its terms.’
Opinion ¶15 (quoting Raper v. Oliver House, LLC, 180 N.C. App. 414, 420, 637 S.E.2d 551, 555 (2006) (quoting Biesecker v.Biesecker, 62 N.C. App. 282, 285, 302 S.E.2d 826, 828-29 (1983)).
But McMillan’s wife, another Plaintiff, was also trying to get out from under the unwanted burden of having to arbitrate her claims. She had not signed the Operating Agreement, but her arguments met with about the same success as those of her non-reading husband.
Judge Bledsoe found her to be bound by the arbitration provision, even though she hadn’t signed the Agreement containing it, because she was an intended third party beneficiary of the Operating Agreement, and some of the claims made by her in the Complaint before the Business Court were based on the Agreement.
These Plaintiffs, apparently appalled by the prospect of arbitration, have already filed a Notice of Appeal of Judge Bledsoe’s decision.
My partner Clint Morse represents one of the Defendants (Josh Hawn) in this case.