VRT, INC. v. Dutton-Lainson Co.
1995 Neb. LEXIS 101, 247 Neb. 845, 530 N.W.2d 619 (1995)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A party cannot recover on a contract under the doctrine of substantial performance if that party, through its agent, made a material misrepresentation about a core element of the agreement, because such misrepresentation negates the essential element of an honest, good-faith endeavor to perform.
Facts:
- Sanitas, Inc. was formed to manufacture and market an invention for patient care equipment.
- Sanitas retained an attorney to file a patent application for the invention.
- Sanitas and Dutton-Lainson Company executed a contract for Dutton-Lainson to purchase assets related to the invention, including all current patents and patent applications.
- The contract required Dutton-Lainson to pay Sanitas a royalty of 5% on sales for a minimum of 10 years, and for a longer period if a patent was issued.
- Sanitas's attorney represented that the patent application had been filed prior to the contract's execution.
- In reliance on this representation, the parties closed the deal, and Dutton-Lainson began manufacturing and selling the equipment.
- It was later discovered that the attorney had not filed the patent application until after the contract was executed, which was too late for a patent to issue.
- Sanitas later changed its name to VRT, Inc.
Procedural Posture:
- VRT, Inc. (formerly Sanitas) filed a declaratory judgment action against Dutton-Lainson Company in the district court (trial court) to enforce the royalty provision of their contract.
- The district court found for VRT, ruling that Dutton-Lainson was obligated to pay past and future royalties.
- Dutton-Lainson, as appellant, appealed the judgment to the Nebraska Court of Appeals.
- The Nebraska Supreme Court, on its own motion, removed the case from the Court of Appeals to its own docket.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a seller substantially perform its obligations under an asset purchase agreement when its attorney falsely represents that a patent application, a central asset in the sale, has been filed, thereby making it impossible for a patent to issue?
Opinions:
Majority - Caporale, J.
No. A seller does not substantially perform its contractual obligations when its agent's material misrepresentation about a key asset prevents the seller from delivering what was promised. To bring an action on a contract, a plaintiff must establish that it substantially performed its obligations. The relationship between an attorney and client is one of agency, meaning the attorney's omissions and fraudulent acts are imputed to the client. Here, VRT's attorney falsely represented that the patent application had been filed. This misrepresentation is legally treated as VRT's own act. The filed application was the 'very essence of the transaction,' not a minor deviation. Because the misrepresentation means VRT did not make an 'honest endeavor in good faith to perform,' it failed to meet a required element of the substantial performance test and is therefore precluded from enforcing the contract against Dutton-Lainson.
Analysis:
This case solidifies the principle that the doctrine of substantial performance is not merely about the quantity or value of what was delivered, but is fundamentally rooted in good faith. By imputing an attorney's fraud to the client, the court reinforces strict agency principles within contractual disputes. The decision demonstrates that a material misrepresentation about a core component of a bargain constitutes a complete failure of performance, barring the misrepresenting party from seeking enforcement, regardless of any partial benefit the other party may have received. This holding serves as a stark warning about the consequences of misrepresentations by agents in commercial transactions.
