TBA Law Blog

Posted by: Lynn Pointer on May 29, 2012

by Chris Caputo
Baker Donelson Bearman Caldwell & Berkowitz, PC (Memphis)

Two recent Tennessee construction cases have illustrated competing considerations of the need for formality in contractual relations and the public policy of not allowing legal formality to defeat substantive rights.  The 84 Lumber Company case demonstrates that formality in contract language will be observed and upheld by our state courts.   At the same time, the Tri Am case demonstrates the courts’ inclination to embrace the more relaxed standard concerning the enforcement of liens as promoted by the celebrated 2007 revisions to the Tennessee lien statute.
In 84 Lumber Company v. Smith, 356 SW.W.2d 380 (Tenn. 2011), the Tennessee Supreme Court strictly construed language in a personal guaranty and upheld summary judgment in favor of the party giving credit against the personal guarantor.  In that case, the Tennessee Court of Appeals had adopted the guarantor’s argument that because he had only executed the subject guaranty as “President” of the company seeking credit (as such in a representative capacity), he could not be personally liable for underlying debts incurred under the contract.  Because the language in the credit application was found by the Supreme Court to be unambiguous and (1) stated that the person signing the application agreed to serve as the guarantor of the account established for the business and (2) clearly distinguished between the person signing the guaranty and the business applying for credit, the Court held that the individual signing the contract agreed to be personally responsible for any amounts owed.   The intent reflected by the language of the credit application was strictly enforced, even where the party executing the application argued that his intent was to execute the application in a representative capacity.
In Tri Am Construction, Inc. v. J&V Development, 2011 WL 3847166 (Tenn.Ct.App.), held that a contract executed in December, 2007 (six months after the effective date of the 2007 revisions) was subject to the 2007 revisions even though visible commencement of operations of the project and the recordation of the lender’s first deed of trust occurred prior to the enactment of the revisions.  Accordingly, although there were alleged to be various technical defects in the contractor’s lien enforcement action, the Court held that T.C.A. Sec. 66-11-148 (Supp. 2010) allowing “substantial compliance” with the technical requirements of the lien statute governed and that the contractor’s failure to strictly comply with those requirements did not bar its lien claim.  In so holding, the Court of Appeals declined to follow the rules of strict compliance that had been in force prior to the 2007 revisions.


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