Confession of Judgment – Be Careful When Giving Up Your Right to Due Process

Does your proposed or existing commercial lease or other commercial contract contain a confession of judgment clause (sometimes also known as a cognovit provision)?  If so, you should read this so that you understand your rights and the applicable law.

A confession of judgment clause permits a party to a commercial lease or other commercial contract to skip the entire litigation process and proceed directly to obtaining a judgment against the other party without any pre-judgment opportunity to be heard by the court. A confession of judgment clause can permit a judgment for possession of real property or money damages, or both. Pennsylvania is one of only a handful of states that permit enforcement of confession of judgment clauses.

As a matter of public policy, Pennsylvania strictly construes confession of judgments clauses against the party seeking to enforce it, and requires observance of specific formalities in connection therewith.  This is because such clauses confer immense power and substantially limit due process. If the required formalities are not observed, the confessed judgment should be stricken by the court upon request of the defendant. The Pennsylvania Supreme Court described this power aptly when it explained that a confession of judgment clause “is perhaps the most powerful and drastic document known to civil law” and “equivalent to a warrior of old entering a combat by discarding his shield and breaking his sword.”

Confession of judgment clauses are only permitted in connection with commercial transactions and are prohibited in residential lease and other consumer transactions.  Whether a contract is commercial or consumer in nature depends on whether it is for business purposes or whether it is for personal, family or household purposes.  A confession of judgment clause in a consumer contract is invalid and violates the Pennsylvania Unfair Trade Practices and Consumer Protection Law (violation of which permits recovery of triple damages and attorneys’ fees).

A confession of judgment clause must be signed, the signature must “bear a direct relation” to the confession of judgment clause, and the clause must be set forth conspicuously in the contract.  Thus, for instance, an unsigned addendum containing a confession of judgment clause that appears several pages after the lease’s signature page will likely be invalid.  In addition, if a tenant assigns (permissibly) a lease to a new tenant, the new tenant will not be bound by the confession of judgment clause unless the new tenant explicitly agrees to and signs a new confession of judgment provision. Moreover, where a lease or other contract is amended, the amendment must either fully restate the confession of judgment clause (which must be signed), or it must explicitly incorporate by reference the confession of judgment provision in the original contract. Generally incorporating by reference, generally restating, or generally ratifying “all provisions” of the original contract or lease in the amendment is insufficient.

Examples of confession of judgment clauses that may not be sufficiently conspicuous are those that contain small typeface and those that are buried in an extremely large contract.  Some courts have even held that confession of judgments clauses must be set forth in bold and/or capitalized lettering to be sufficiently conspicuous.

Often times, confession of judgment clauses also permit recovery of a set amount of attorneys’ fees in addition to the principal amount of the judgment and this sum is sometimes set forth as a particular amount (e.g. $10,000) or is sometimes set forth as an “attorneys’ commission” of a particular percentage of the judgment (e.g. 5% of the principal due and owing).  Courts will not second-guess such attorneys’ fee provisions.  The only exception is where the confession of judgment provision permits recovery of a “reasonable attorneys’ fee,” in which case the court is permitted to review the amount of the fee for reasonableness.

If a plaintiff files a confessed judgment, the defendant has two non-exclusive options, which must ordinarily be exercised within thirty days of the date that notice of entry of the judgment is served upon the defendant.  A petition to strike the confessed judgment is warranted where “a fatal defect or irregularity appears on the face of the record.”  When reviewing a petition to strike, the court is limited to reviewing the confession of judgment documents, and exhibits thereto, filed by the plaintiff.  A petition to open the confessed judgment is appropriate where “the petitioner acts promptly, alleges a meritorious defense, and presents sufficient evidence in support of the defense to require the submission of the issues to a jury.”  A request to strike and a request to open the judgment must both be asserted in a single petition. If a confessed judgment is stricken, the matter is concluded, although the party who filed the confessed judgment may nonetheless proceed to file a separate ordinary civil lawsuit.  If a confessed judgment is opened, the case then proceeds like any other lawsuit with one caveat—a judgment still exists of record.

Confession of judgment clauses, and the enforcement and defense thereof, are complicated.  If you are negotiating a commercial lease or other commercial contract that may contain a confession of judgment clause, if you need to file a confessed judgment, or if you have had a confessed judgment filed against you, you should contact an attorney right away to ensure that your legal rights are protected.