New York Business Litigation Lawyer Blog

Defendant failed to complete eight bridesmaids dresses until two hours after the ceremony was scheduled to begin, when they were delivered by the groom. As a result of this delay, plaintiff incurred a host of delays for which she incurred expenses, including a delay in the bride's appearance from the rented limousine, so as not to break the tradition of not being seen by the groom or guests before the ceremony. For these expenses, the court awarded plaintiff damages. However, for the wedding parties' inability to have pictures taken in the scenes scheduled and for the bridesmaids wearing different clothing in different pictures, no award would be made as no amount could be reasonably fixed as damages for these items. The court also rejected damages for emotional distress, finding that plaintiff "failed to meet the high threshold required in proving" this claim because defendant's failure to deliver the dresses was "not so outrageous in character and extreme in degree that it exceeds all bounds tolerated by a decent society which is of a nature calculated to cause, and does cause, serious mental distress."

After writing about the "haunted house" case recently, I came across another case that addressed the same concepts, and also in an unusual setting. The haunted house court had decided that because the buyer could not have anticipated that the house under contract was haunted, and was therefore not expected to inspect the property for ghosts, and because the sellers had knowledge of the haunting, the buyer could cancel the purchase contract.

This case, Jablonski v Rapalje, involves sellers that may have hid from a buyer the fact that the house in question was bat infested. While some of the facts should have lead the buyer to pay more attention and realize that something was amiss (discussed below), the particulars of what the buyer should have questioned and investigated divided the court. The majority decided that the sellers may have concealed the bats from the buyer, so that the buyer was allowed to cancel the sales contract.

A fair reading of these cases highlight courts trying to find a way to grant recision. To do so, the courts had to first find the sellers' concealment. This case focused on whether the sellers actively concealed the bat infestation, while the haunted house court focused on whether the buyer had an obligation to search for ghosts once the seller publicized the haunting but did not inform the buyer. Each court then turned to a detailed explanation of why the buyers were not obligated to inspect for that concealed issue, so that the contracts could be rescinded.

The outcome in this case triggered a strong dissent, addressing the alleged concealment by the seller, and whether or not the buyer should have, with reasonable effort and investigation, discovered the bat problem that the majority found to have been concealed by the seller.

Although in the minority, the dissent's objections seem to make sense. The dissent argued that the buyer knew or should have known that something was amiss yet failed to investigate. The buyer had ample opportunity to inspect, was aware that the exterior of the property was stained, that the attic smelled strongly of urine and moth balls, and saw electric extension cords (presumably for lighting) running to the attic (which may have been used to force the bats to leave temporarily). The buyer even knew of the removal of "bird feces" (later determined to have been bat guano), all of which should have been sufficient to raise suspicions and cause the buyer to investigate further. Instead, the buyer took the word of the seller that nothing was amiss and left it at that. Given these facts, held the dissent, the buyer had no claim against the seller.

Ghosts and bats aside, don't be fooled. Claims that a seller hid some defect from a prospective buyer are often rejected by the courts. The concept of "buyer beware" is alive and well in New York State. Before one buys a property of any kind, a careful physical inspection and review of title cannot be ignored. Any defect or objection will not be sustained if that defect or objection was in any way known to the public or with reasonable diligence able to have been discovered by a prospective buyer.

Because the facts often dictate the outcome, investigating who knew what and when is critical. The Firm has been involved in concealment cases in New York City and can discuss any issues relevant to your situation.

The last time we wrote on this topic, a group of plaintiffs' had their $900 million claim thrown out by a judge, essentially because the plaintiffs had stuck their head in the sand and did not investigate red flags evident in a transaction. In Pappas v. Tzolis, it was a paltry claim of just a few million that was tossed, but the underlying facts and legal principals were the same. Interestingly, it was again the selling party, the one which many believe to have less risk than the buyer, that came up holding the very short end of the stick.

The facts here are as follows: Pappas and Tzolis (and one other) formed a LLC to lease property. Tzolis personally provided the lease deposit of almost $1.2 million and was permitted to sublet the property. The parties also agreed that they had other business and could compete with the LLC or other members without notice. Trouble surfaced when Tzolis subleased the property to a company he controlled for $20,000 above the LLC's monthly payment. Unhappy with that, Pappas claimed that Tzolis prevented the LLC from leasing it directly for a higher rent, and that Tzolis was generally frustrating the lease interest of the LLC. Shortly thereafter, Tzolis bought out the other members, including Pappas. At the closing, Pappas signed a document attesting to the facts that prior to his sale of his membership interest, he had done his own due diligence using his own lawyers, and was not relying on any representation made by Tzolis or upon their relationship as co-members of the LLC. After the transaction closed, Tzolis assigned the lease interest from his entity to a third-party for $17.5 million.

Pappas sued Tzolis claiming that Tzolis had lined up this sublease before the membership interest were transferred, in violation of his fiduciary obligations to him as a member of the LLC. Had he known, argued Pappas, he would not have agreed to sell for the price that he did. The lower court threw out the case, but parts of it, including the fiduciary claim, were reinstated by the Appellate Division. The Court of Appeals, reversed the Appellate Division and threw out the case.

The court, citing to the Centro Empresarial case discussed here earlier, reiterated the rule for raising a claim of fiduciary violations in this setting. Where sophisticated parties enter into negotiations already not trusting each other or embroiled in a dispute, so that each has good reason to know that they are each acting in their own best interest, and even signing a release or waiver, they cannot come back to complain about those transactions based on the purported trust the aggrieved party had in the other.

Here, the court held that Pappas's reliance on Tzolis was unreasonable and the documents he signed controlled. His claim of fraud, that Tzolis told them he had no lessee lined up, was not only waived when Pappas signed the release and waiver, but incredible given their relationship. Pappas's remaining claims were undermined, wrote the court, because Tzolis had a right to control the leasehold and should not have been trusted by Pappas given the history and relationship among the parties.

The Silber Law Firm, LLC has successfully litigated these types of cases, and the focus on the language of the documents, in the specific context and setting in which they are executed, cannot be overstated. There are ways to minimize the risk to the parties engaged in this kind of transaction, but a hefty dose of skepticism combined with realistic due diligence is required. Sometimes the services of a forensic accountant is also something to consider, as the entity's books often tell a story that is inconsistent with what one party is being told. If you are facing a situation described in these cases, feel free to give us a call.

A few months ago, the Court of Appeals highlighted the pitfall of a not uncommon scenario, that of experienced and sophisticated business people relying on the representations of others but which are later found to be less than truthful. In Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., the court dismissed the fraud claims of former shareholders of a Latin American mobile telephone company because those shareholders ignored obvious concerns that arose in the course of the sale of their shares that should have put them on notice of potential problems. Not only were those issues not addressed, but those shareholders released the company and remaining shareholders from liability in connection with the sale. The outcome of this case underlines the fact that experienced and sophisticated parties must do their own due diligence no matter what they are told.

The facts are somewhat complicated but can be summarized as follows: Plaintiffs held a majority interest in an Ecuadorian company which sought funding from a Mexican company, Telemex Mexico, controlled by billionaire Carlos Slim. The funding was provided and a new entity was formed which was owned by the plaintiffs and Telemex. The parties agreed that in the event that there were additional transfers to different entities, plaintiffs could swap their interest from the old entity to the new entity on terms to be agreed. Following a subsequent transfer, plaintiffs tried to negotiate the terms for the transfer of their ownership interest into the new entity. Encountering resistance from Telemex, plaintiffs opted to just sell their interest outright and did not receive any interest in the new entity.

Eight years later, plaintiffs sued claiming to have been defrauded. Plaintiffs claimed that they were given incomplete and bogus information of the new entity's value. Had they known the true state of affairs, they alleged, they would have forced a transfer or sold their interests at a far higher price. Under the agreement by which plaintiffs sold their interests, they agreed to release the other shareholders and the new entity from any claims in connection with the agreement. The remaining shareholders and their entities also provided plaintiff with no warranties related to the business' state of affairs.

In dismissing plaintiffs' claims, the Court of Appeals faulted the plaintiffs for agreeing to broad release language while not pursuing the information they acknowledged not receiving. The court refused to give any credence to the plaintiff' arguments that they were mislead and could not have known the true value of what they gave up. The court determined that plaintiffs were sophisticated entities engaged in complex businesses and transactions who made conscious decisions not to investigate the information they were provided. That plaintiffs were aware that they were given incomplete information from a partner they no longer trusted further highlighted the need for plaintiffs to undertake their own due diligence, which they did not do. Only if the release was itself procured by some fraud would plaintiffs be able to proceed, and that was something that the plaintiffs could not establish.

Not long ago, we successfully represented a company in defending against the claims of a shareholder who alleged similar claims. The issues are always complex and a thorough investigation of the underlying facts and arguments must be examined prior to deciding on a litigation process.

Its hardly news that in today's market place the Internet plays a significant role in conducting business. The Internet is involved in everything from downloading purchased software to filing trademarks. Even checks are being phased out in favor of electronic transactions. Whether or not the parties realize it, prior to completing any type of online transaction, the consumer enters into an agreement with the provider. That process may be as simple as checking a box, scrolling through its terms or even just entering a password, but the purpose is the same--to enter into an agreement that controls the rights and obligations of the parties. An email exchange can also create an agreement, even without the parties intending to be bound to anything.

E-contracts were designed to make buying or subscribing to online products and services easier and quicker, without the need for the time consuming exercise of formally executing a paper contract. E-contracts were not intended to reinvent the wheel of an enforceable contract but to broaden the medium by which enforceable contracts can be prepared and executed. In a practical sense, an electronic agreement is no different than a traditional paper contract.

Just as minimum requirements are necessary for enforceable paper contracts, electronic agreements must also satisfy basic minimums.

Although using the Internet and e-contracts to purchase goods and conduct business has pitfalls, such as the possibility for abuse and the possible loss of confidentiality, when done correctly it offers many advantages. What happens when a problem arises? Are electronic agreements always enforceable? Do all e-contracts satisfy the requirements for a valid and binding relationship? Are hyperlinks embedded in an online contract binding as part of the contract? Are there any exceptions that require formal signatures? Although this is a relatively new form of contract formation, at least from an enforceability perspective, a framework to ensure the enforceability of these types of agreements has emerged, and is the focus of this article.

In the early days of e-contracts, a consumer simply had to check "I accept" on a website. Although the consumer typically knew the product purchased, usually software that was downloaded, the consumer did not always know the terms of the agreement that had been accepted. (Even today, some of the terms of e-contracts are suspect, particularly as they concern the release of personal information.) As e-contracts evolved and developed, to encourage the consumer's review of the parties' agreement, a site would force a buyer to at least go through the motion of reading the agreement, by scrolling through an agreement or allowing an agreement to be downloaded, before being allowed to confirm acceptance. Today, some agreements refer to additional terms, usually by providing a hyperlink, as incorporated in the agreement and controlling between the parties.

It took some time, but eventually e-contracts ended up in court, where the consumer sought to avoid the terms of the e-contract and the provider sought to enforce it. Interestingly, when this happened, the medium of the agreement was given little consideration by the court. The court's focus was usually on the scope of the agreement, and the information and notice provided to the consumer.

Continue reading "Electronic Contracts - The "New" Agreement?" »

In the normal course of events, two parties that enter into a contract are obligated to perform in accordance with that contract. Where a party fails to do so that party has breached the contract and will ordinarily be liable for any resulting damage to the other, non-breaching party. Although in most cases only the breaching party can be liable, there are limited scenarios where others may be liable as well. This article will discuss situations where a third- party that is not a party to the breached contract can also be liable to the non-breaching party. This third-party's liability is based on its improper interference with an existing contract, known as tortious interference with an existing contract.

Before discussing the details of this claim and liability, it is important to understand that courts will generally sanction and encourage legitimate business competition. Courts will not penalize a third-party's ordinary attempts to solicit business, even when doing so may result in the breach of a contract between two other parties. Therefore, the fact that a party to a contract breached that contract to respond to the solicitations of a third- party, does not automatically create liability for that third-party. As discussed below, the conduct of the third-party in soliciting the business often determines whether its conduct was proper.

For example, Tire Supply, Inc., has an exclusive contract to sell tires to Tire Depot, Inc., for $10 a tire. The agreement provides that Tire Supply may sell to no one other than Tire Depot and Tire Depot may purchase tires only from Tire Supply. Tire Meddler Corp., approaches Tire Supply and offers to buy all of its tires for $12 a tire, $2 more than Tire Supply receives from Tire Depot. Selling to Tire Meddler will require that Tire Supply breach and terminate its agreement with Tire Depot. Assuming that Tire Supply agrees to sell to Tire Meddler, and breaches its contract with Tire Depot, and is sued by Tire Depot for that breach, can Tire Depot sue Tire Meddler for causing Tire Supply to breach their agreement? Has Tire Meddler done anything legally wrong considering that from a strict business point of view, Tire Meddler did nothing more than offer Tire Supply a better deal?

Continue reading "Competition and Existing Contracts" »