• Indiana Court Allows Reformation of Development Contract Where Party Covertly Changed Provision in Later Draft of Proposed Contract
  • May 28, 2009
  • Law Firm: Frost Brown Todd LLC - Office
  • An Indiana court recently found that a contract related to the construction of a sanitary sewer system was subject to reformation where the drafter of a revised version of the agreement inserted a material revision to the draft agreement without notifying the other party of the change. In Carr Development Group, LLC v. Town of N. Webster, 899 N.E.2d 12 (Ind. Ct. App. 2008), a developer had approached the Town of North Webster to discuss construction of a sanitary sewer system to serve the developer's own real estate. Carr Development wanted to connect the sewer system into the North Webster sewer system. North Webster indicated it would only consider the request if any agreement did not require North Webster to contribute any funds to the construction of the sewer system and did not require North Webster to waive any fees which it would be entitled to receive from the sewer system. In March 2004, Carr Development presented an agreement to North Webster that was never executed.

    Over a year later, Carr Development delivered a second draft of the proposed agreement to North Webster. The North Webster Town Council did not carefully review this second agreement, believing that the material terms of the agreement were identical to those which were set forth in the earlier proposed agreement, which had been sent to North Webster in 2004. North Webster approved and executed the later agreement. Sometime thereafter, North Webster realized that Carr Development had quietly slipped a provision into the later agreement that waived any sewer tap or connection fees. Carr Development refused to delete the fee waiver provision. Litigation ensued.

    The Carr Development court recognized that:

    reformation is an extreme remedy that is appropriate only in the following limited circumstances: 1) where there was a mutual mistake such that the written instrument does not reflect what the parties truly intended; or 2) where there has been a mistake on the part of one party accompanied by fraud or inequitable conduct by the other party.

    Id.

    Under Indiana law, "where one party to a contract undertakes to draw up the contract in accordance with a previous understanding, but drafts the contract contrary to that understanding, and permits the other party to sign the same without informing him that the contract is not in conformity with the previous understanding, such conduct on the part of the party preparing the contract is fraudulent." Id.

    The Carr Development court found that "[t]o the extent that Carr's silence as to the change in the 2005 agreement presented for signature is not a true misrepresentation so as to constitute actual fraud, we note that both parties acknowledge that 'inequitable conduct' under certain circumstances will justify reformation." Id. at 14. The Carr Development court found that reformation was appropriate, eliminating the sewer fee waiver provision. The Carr Development court reasoned that the parties to the agreement had a prior understanding that North Webster would not waive any fees concerning the Carr Development project. Carr Developments' conduct in proceeding to draft and submit without comment a proposed agreement contrary to this understanding, and permitting North Webster to sign the contract without informing North Webster of the modification, constitutes inequitable conduct that supported reformation of the parties' agreement to exclude the fee waiver provision.