Breach of Contractual Representation of Future Legal Reliance

Is a Claim for the Breach of a Contractual Representation of Future Legal Reliance Actionable?


Recently in a certified question, the Minnesota Supreme Court found that under Minnesota Law a claim for the breach of a contractual representation of future legal compliance is actionable without proof of alliance. This new law came out of the recent Minnesota Supreme Court case Lyon Financial Services, Inc. d/b/a US Bank Corp Business Equipment Finance Group v. Illinois Paper and Copier Company.

The facts of this case are that Lyon Financial Services and Illinois Paper and Copier Company entered into a partnership agreement. Illinois Paper sells copy machines and other office equipment. Lyon is a financial services firm based in Minnesota and is a subsidiary of US Bank Corp that specializes in business equipment financing.

The 2008 partnership agreement between Lyon and Illinois Paper stated that Lyon would have the first right to review all of Illinois Paper’s maintenance inclusive transactions for customers who inquired about lease financing. In the partnership agreement Lyon would purchase the office equipment from Illinois Paper and then lease the office equipment back to Illinois Paper’s customers. The partnership agreement further stated that Illinois Paper represented and warranted that “all lease transactions to Lyon for review are valid and fully enforceable agreements.”

A cause of action arose when Lyon leased office equipment to Village of Bensenville, Illinois for a period of six years. Less than two years into the lease, the Village of Bensenville stopped paying Lyon and stated that under Illinois law municipal leases can last no more than five years. Lyon brought suit against Illinois Paper claiming that Illinois Paper’s warranty that all of its leases were valid and fully enforceable agreements was false.

After this case went up to the United States Court of Appeals for the Seventh Circuit, the Seventh Circuit determined that Minnesota law applied, it certified a question to the Minnesota Supreme Court. The Minnesota Supreme Court streamlined the question and reformulated it to whether a claim for the breach of a contractual representation of future legal compliance is actionable under Minnesota law without proof of reliance. The Minnesota Supreme Court answered the question in the affirmative.

In response to Lyon’s breach of contract claim, the dispute centered on whether a party is required to plead detrimental reliance under representation of future legal compliance in order to maintain any breach of contract claim. The Minnesota Supreme Court stated that Minnesota has not previously identified detrimental reliance as an element of a breach of contract claim. Instead, a breach of contract claim requires only that the promise at issue be part of the bargain. In so holding, the Minnesota Supreme Court dismissed Illinois Paper’s request to require reliance in an action based on the alleged breach of representation of future legal compliance because Minnesota has previously recognized reliance as an element of a breach of warranty claim. The court reasoned that although detrimental reliance is sometimes an element of other tort claims that does not necessarily mean that detrimental reliance will be an element of a contract claim.

Illinois Paper’s next argument was that reliance should be required because the breach of a legal representation is not actionable under any theory of contract, warranty or otherwise. The Court rejected this argument stating that Minnesota has never held that representations of future legal reliance are not actionable in contract. In supporting that finding the Court referred to a case Parkside Mobile Estates v. Lee, 270 N.W. 2d 758 (Minn. 1978). In Parkside, the seller of the mobile home warranted that the park complied with zoning, building, licensing, health, and subdivision laws including ordnances and regulations of the City. In that case, the Minnesota Supreme Court rejected the argument that the representation was not actionable because it was a representation of law. Lastly, the Minnesota Supreme Court supported its opinion by stating that public policy favors the freedom to contract and because Illinois Paper and Lyon agreed to allocate the risk of legal non-compliance to Illinois Paper it does not necessarily mean that the terms of the parties bargain should not be enforced.