What is a Dual Contract?
In basic terms, a dual contract is an agreement that consists of two separate contracts between the same parties. Each of the contracts serves a different purpose or concern and they are executed in conjunction to over-ride any plausible arguments that may arise over time regarding ambiguities in timelines, prices, and other negotiated terms. A dual contract operates to kill any ambiguity that might otherwise exist in a single contract. Its terms dictate that if one of the contracts is breached, the other remains enforceable and does not affect the aggrieved party’s right to damages for the breach of the contract that was not breached . Dual contracts are standard in lease agreements where the term is broken into two segments: an interim lease followed by a longer-term lease. It is also common in the context of a real estate purchase and sale, wherein a Seller contracts to sell an interest in property for one price, then immediately executes a second contract for a higher price, which has the same parties as the first contract, to finalize the transaction at the price listed on the second contract. One purpose of a dual contract is to set forth acceptance of the conditional terms of the sale.
Legal Effect of Dual Contracts
Contractual disputes that ensue over the use of dual contracts, and agrreements to dual contract (i.e., seller/landlord agree to sell/lease property at one price to one buyer/tenant, and simultaneously agree to sell/lease the same property at another price to a different buyer/tenant) often go beyond breach of contract issues. In fact, such agreements might be found to violate (1) the regulatory framework of the federal Government Owned Contractor Operated (GOCO) and the federal Graty-Lott Act (10 U.S.C. §§ 7307); (2) anti-kickback statutes (10 U.S.C. §135); (3) the federal False Claims Act (FCA), 31 U.S.C. § 3729, et seq.; and (4) criminal laws, civil liability and penalties, which may include fines, imprisonment, debarment, and treble damages against both the contractor/seller/landlord and the contractor/tenant. Specific statutory provisions that address the viability of contractual dual contracts are too numerous to address in this article. They clearly make the existence of contractual dual contracts a serious issue and potential liability to landowners and contractors.
Pitfalls of Dual Contracts
While dual contracts can be used to achieve certain business objectives, they also carry significant risks. One major risk is the potential for litigation. The courts have invalidated or cancelled sales that were made pursuant to dual contracts, and ordered restitution for down payments and broker commissions. See Sinaya v. Balistreri, 230 So.2d 80 (Fla. 3d DCA 1970). In the case of Balistreri, the court held that when the developer entered into the first contract, it did so with the intent to defraud, and it was therefore illegal for the developer to sell the resold lot to a fourth party pursuant to the second contract.
Beyond court imposed liability, parties to a dual contract are also at risk of liability under the Florida Deceptive and Unfair Trade Practices Act ("FDUTPA"). Under FDUTPA, the Attorney General or a private party can sue a business in equity to abate an unfair practice. While it is uncertain how a court would apply FDUTPA to a land sale made pursuant to a dual contract, possible forms of relief could include the imposition of constructive trusts, the award of treble damages, attorneys’ fees and costs, a permanent injunction, or an order to cease doing business in Florida. Fla. Stat. § 501.207(1); Whether a court would impose too rigid of a penalty on a party selling time-share units in a manner it deems to be unfair would depend on the facts of each case, but it could potentially put the party selling time share properties at risk of losing its business in Florida entirely.
There are also dangers that arise from a third party claiming that a party who has already paid the gross sales price resulting from a dual contract is entitled to terminate and rescind the contract in order to recover a portion or all of the advance deposit. Finally, parties running afoul of the law may face criminal prosecution, including misdemeanors, felonies, or penalties for unlicensed contracting activity, which with careful planning can be avoided.
Purpose of Dual Contracts
While there are numerous reasons why parties may enter into a dual contract, there are some more common reasons that have been reported for why they are used. These include parties who entered into the contracts to: 1) hide the true price of real estate; 2) claim that the total price was in fact lower than it would otherwise be; 3) be able to then seek a higher interest mortgage using the "real" price of the property; 4) lie about the true cost of the property to gain financing, and the like.
One of the most common reasons why many contract with a builder is if the builder has a fairly narrow access to credit. Some builders must satisfy their lenders after each home or condominium is built by either selling or listing the completed home with a real estate agent to maximize their ability to sell the property. During this period , most lenders will not allow the builder to use any of the funds they receive from the builder’s sale until the builder pays off their loan. However, because lenders are often interested in lending money quickly, builders will attempt to make use of personal loans to fund their building projects. Although this may be an option, not all lenders are willing to lend money as personal loans and some require builders to pledge additional collateral as security for the loans. Builders may choose to enter into a dual contract to avoid these requirements and to gain immediate access to the funds.
Cases on Dual Contracts
Numerous case studies have been published regarding dual contracts, analyzing the various legal ramifications of their use. These case studies typically draw from real-life experiences of physicians who enter into dual contracts.
In one case, a physician signed two separate contracts with the State Department of Health, one for regular pay and another for supplemental pay. The supplemental contract only covered additional on-call shifts. Initially, the physician received full payment from the supplemental contract. However, after a change in administration, the physician received half the payment for her supplemental contract while receiving full payment for her regular contract. The physician noticed in her paycheck that she was receiving the lesser payment for her supplemental contract, but did not follow up on it until she received a paycheck for a week in which she had worked two on-call shifts. She confronted HR and began her quest to recover the 50 percent she believed she had withheld for the past two years. It became a lengthy process of documentation and phone calls as the physician attempted to justify why she believed she deserved full payment for her supplemental contract labor.
In this case, the Department of Health did indeed owe the physician additional payments for her supplemental contract. The department believed the physician’s contract was open to interpretation. The physician was confident that she was honest in her dealings in signing both contracts. The Department ultimately paid her retroactively for the previous two years’ contracted payment, even though the intention was that the two contracts only paid for regular and supplemental shifts separately.
The department’s insistence that the physician was at fault because her second contract was, in fact, a second-job contract was due to its prior lack of payment for the supplemental shifts within the two years. Even though the employer paid for the full amount of work done, the physician was required to defend why she was not double-dipping. While the physician’s records provided backups to her clerical work, the department still tried to use other terms to find additional fault upon the physician to recover more than what was owed. The physician prevailed in the end, but not without enormous effort in defending her role. This situation shows the potential for the All Pay or Before Pay clauses in dual contracts to become very risky to the job security of the physician within the contract. A misuse of such clauses can subject the physician to litigation instead of medical practice.
Preventing Dual Contracts
Accordingly, to avoid falling into the trap of dual contracts, businesses should ensure that binding contracts are entered into with all customers in situations where a price change is being offered.
If a decision is made to change the prices to be offered by a utility, the issues should be handled properly and a new contract should be entered into with the customer or the agreement between the parties should be amended to reflect the changes. Every effort should then be made to ensure that only one contract is in force at any point in time. Additionally, companies that offer promotions should have contracts outlining the specifics of the situation, the representatives providing the information and pricing should be properly trained so as to avoid confusion and misunderstandings and written material should be clear so that there is no doubt about what the price is being offered .
The issues related to dual contracting have not been widely litigated, but given the robust enforcement regime that the Federal Energy Regulatory Commission (FERC) has implemented, enforcement actions may yet surface on these issues. For example, in the Virginia Power Energy Marketing case, FERC alleged that Virginia Power Energy Marketing violated section 206 of the Federal Power Act and Federal Energy Regulatory Commission (FERC) Rule 35.2(e) by entering into "non-bona fide" financial contracts with an affiliate at prices that were more favorable to the affiliate than they would have been absent the relationships between them.