Failure to Read a Contract

Unexpected financial obligations can arise if contracts aren’t thoroughly understood.

Background. A church purchased property for $40,000. It made a down payment of $11,000 and then, pursuant to a promissory note, agreed to pay the balance of $29,000 at 10% interest. An amortization schedule accompanying the note showed 93 monthly payments of $311.64 each. The church made each of these payments.

After the church had made all of the payments called for in the amortization schedule, the seller discovered that the amortization schedule was wrong, and that the church still owed a balance of $19,229 under the terms of the promissory note. The church claimed that it had paid its obligation in full since it had complied fully with the amortization schedule.

The seller sued the church, and a trial court ruled that the church had to pay the balance. A state appeals court affirmed the trial court’s decision. It concluded:

[The seller] understood that he was executing a sale with vendor’s lien and received $11,000.00 as a down payment toward the $40,000.00 sale price. Further, [the seller] understood that … he was [executing] a promissory note in his favor from [the church] in the amount of $29,000.00 with ten percent (10%) interest …. [The seller] failed to discover that 93 payments at $311.64 covered only half of the principal and interest owed. However, the source of error in this matter is not [the seller’s] failure to read the entire document, for even if [he] had read every word of it, there is nothing to support that he would have caught the error in computation. Indeed, the stated price and interest rate were as was intended and the inconsistencies between those numbers and the number of payments was not noticed …. It is not likely that any person who is not a “number cruncher” would have caught this incongruity. Failure to read and failure to compute are two different things. [A party to a contract is required] to read the contract but … any ambiguity or inconsistency therein [is not] interpreted against him for failure to do so. He is treated no better than a person who read the contract; he is also treated no worse.

Relevance to church treasurers. The church was legally bound by the terms of the promissory note rather than the erroneous amortization schedule, and so it ended up having to pay an additional $19,229. While this was the amount the church agreed to pay in the promissory note that it executed, this liability was an unexpected hardship for the church because of its reliance on the erroneous amortization schedule that it had faithfully followed for nearly 8 years. The lesson of this case to church treasurers is clear—never assume amortization schedules are accurate! Whenever the church purchases land, buildings, vehicles, or any other form of property by means of a promissory note, be sure to double-check the accuracy of the payment schedule. Capdeville v. White’s Temple of Church of God in Christ, Inc., 1999 WL 1259258 (La. App. 1999).

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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