Category Archives for Transactions

Delegating credit matters to employees may obligate business owners

My co-blogger, Avrohom Gefen, recently won an interesting case, Felix Storch Inc. vs. Martinucci Desserts USA Inc., that was published yesterday in the New York Law Journal.  The case was decided on January 31, 2011.

The reported facts are as follows.  Plaintiff, Felix Storch, sold commercial refrigerator units to Martinucci Desserts on credit.  Martinucci went out of business without having paid for the units.  The issue at trial was whether there was a personal guarantee by Mario Sclafani, Martinucci’s owner, to pay for the units in the event that Martinucci was unable to pay.

The signed credit application contained the following phrase: “The undersigned further agrees to personally guarantee any sum or sums of money which purchaser now owes or shall owe at any time.”  However, Sclafani claimed that although he knew the units were purchased on credit, he had never seen the application and that the signature on the application was not his.

In rejecting defendant’s argument, the Court wrote:

Sclafani’s defense was that the signature was not his. He stated that he did not handle any credit matters. Instead, he referred all credit matters to “the girls in the office.” Yet, he knew he received the Plaintiff’s units on credit. Defendant cannot escape his obligations by such a self-serving scheme whereby he denies his obligations while admitting he left it to “his girls” to do what was necessary. And, in this case, there is no question his staff signed the credit application, including the guarantee, on his behalf and returned it to the Plaintiff. Business owners who relinquish such unfettered authority to manage and complete their credit applications must assume the liability for what is completed on their behalf. Plaintiff had every expectation to rely upon the application received by telefax from Defendant’s office. Although the signatures are not an exact match (the Court does not profess to be a handwriting expert), it is clear that the affixed signature so closely resembled that of the Defendant that it was, at a minimum, signed on his behalf by, according to his testimony, the “girls in the office.” Defendant’s self-serving denial was insufficient to persuade this Court otherwise. (Emphasis added.)

The full text of the decision can be read here.

Interfering with business relationships

Rabbi Max Sutton’s recent column in Community discusses the halachot of interfering with another person’s contract or business relationship.  Rabbi Sutton uses hypotheticals to highlight the following questions:

  1. May one negotiate with a licensor for exclusive rights to a license currently held by a competitor?
  2. May a salesman who leaves an employer for a competitor lure company accounts to his new employer?  If he may, may he redirect unfulfilled orders from his old employer to his new employer?
  3. May an employee quit his job and open a business in direct competition with his previous employer?

The basic rule is that one may not induce a breach of contract, but one may compete for the same contract at the end of the contract term or when the contract has been fully performed.  The full article can be read here.

Rabbi Sutton applies the above rule to employment relationships in current business settings, but does not draw a distinction in this regard between contract employees and at-will employees.  An at-will relationship, which is more common, allows either party to terminate the employment relationship for any reason without liability.  It seems to me that making an offer to a competitor’s at-will employee is not the same as inducing a breach of an agreement, since the employer specifically assumed that risk when agreeing to the at-will employment or by not offering a contract for a specific term.

Saying that the competitor is inducing a breach of the agreement would imply that an at-will employment is something other than at-will, i.e., that terminating the employment is a breach of an agreement.  However, the understanding between employer and employee is that neither party is required to continue the relationship.  I would argue that just as it is not a breach of the agreement for the employee to look for another job, it is not an inducement to breach for a competitor to make an offer to the employee.

Obligations of a guarantor in halacha

Rabbi Max Sutton, Rosh Bet Din Aram Soba in Jerusalem, published an article in the May 2010 issue of Community on the halachot of loan guarantors and sureties.  Rabbi Sutton writes:

There are two basic types of guarantee arrangements. The first is known as an ordinary guarantor (arev). An ordinary guarantor is a third party that agrees to be responsible for a debt only if the principal debtor defaults. Hence, the creditor is required to attempt to collect from the debtor, and only after he fails to pay is the guarantor held responsible. The second type of a guarantee relationship is known as a surety-ship (arev kablan). This arrangement enables the creditor to demand payment from either the debtor or the surety, whichever he chooses. The creditor need not exhaust any legal remedies against the principal debtor before holding the surety responsible for payment. Even if the debtor can make payment, the creditor has the right to collect from a surety the moment the debt is due. Once the debt is paid by either a guarantor or a surety, they may then pursue all legal remedies to collect from the debtor the money they laid out to the creditor on his behalf.

The article presents three cases which illustrate the following difficulties:

  1. Where the creditor made multiple loans, only some of which were guaranteed, how are partial payments by the debtor allocated between the loans?
  2. Where there are multiple guarantors for a single loan, how are partial payments by the debtor allocated between the remaining obligations of the guarantors?
  3. Are oral guarantees enforceable?

After discussing the issues, Rabbi Sutton concludes by summarizing the Bet Din’s ruling on each case.  The full article can be read here.

The Importance of Custom, Usage and Course of Conduct in Jewish Monetary Law

This week’s Parsha email from the Bais HaVaad Institute of Talmudic Law includes a brief discussion of the concept that Jewish Law recognizes the accepted business of the time a place and place in which a transaction occurs.

In Choshen Mishpat 201:1-2, the concept of situmta is explained. A situmta was a kind of mark placed on a barrel of wine by a customer indicating his irrevocable agreement to the purchase of the barrel. That was the prevalent custom in the wine industry back then, similar to the way saying “mazel and bracha” finalizes a sale in the New York diamond trade. While making a situmta should have no real halachic significance because it is not one of the methods of acquiring an object recognized by the Torah, in reality, it has a great deal of significance. In fact, a customer who makes a situmta actually becomes the halachic owner of the barrel!

The concept of situmta is probably the best example that can be brought to illustrate the importance that Jewish monetary law places on the prevailing understandings and customs of the marketplace. A situmta creates halachic ownership solely because that is how people think of it. The Torah understands that any marketplace transaction is fundamentally shaped by the underlying assumptions and operating principles of the people who are making the transaction. Therefore, if the custom is to consider a situmta to be legally binding, then it is as if the Torah says, ‘So be it.’

Rabbi Max Sutton on contract performance

Rabbi Max Sutton, Rosh Bet Din Aram Soba in Jerusalem, published an article, “Time is Money,” in the February 2010 issue of Community. Using cases that have come before the bet din, the article discusses the halachot of contract performance, the duty to inspect merchandise, and the timeliness of objections to incomplete performance.

Rabbi Sutton writes:

In the world of business, the element of time plays a crucial role. Generally, two parties engaged in a business deal specify the time period allowed for performance. Even when no definite time period is stipulated, an agreement can be terminated after a reasonable amount of time due to non-performance. What constitutes a reasonable amount of time depends on the circumstances and nature of the agreement. Time limitations also apply to buyers seeking to return merchandise after discovering a defect. The following cases and their verdicts display the ability of Torah Law to resolve complex time-related situations accurately and fairly.