In refusing to dismiss a complaint alleging breach of an operating agreement which gave the defendants “‘sole and absolute discretion’” to “select the company’s investments,” Judge Jennifer Schecter of New York County’s Commercial Division held that no matter the language of an agreement—which should be enforced according to its terms—“the implied covenant of good faith and fair dealing can never be waived.” Here, defendants’ conduct in diverting a company opportunity for an investment in a fund where they held an undisclosed interest gave rise to plaintiff’s fiduciary duty claim.

Shatz v. Chertok

Specifically in connection with real estate contracts, where issues come up during the due diligence period, parties often demand relief of their own imagination, which courts refuse to enforce.

In a case decided in the Commercial Division of Kings County, involving a buyer’s demand not found in the contract, the court reaffirmed the principle that relief outside the contract would not be considered and would be deemed a default. There, the seller held some 71% of the property, with the remaining interest held by the seller’s brothers. When it turned out that certain estate proceedings required to clear title would be costly, the seller notified the buyer that those proceedings exceeded what was required of him to provide clean title under the parties’ contract, but also asked that the purchase price be raised to comply with the estate proceedings. The buyer sued claiming that this notification breached the contract. Both parties moved for summary judgment.

In dismissing the buyer’s claims and his case, the court found that the buyer had two options once he learned of the costs to be incurred by the seller—either take the property as is or cancel the contract and receive the return of his downpayment. The buyer did neither. Because the buyer had no other option in connection with the seller’s notice his lawsuit was itself a breach of the contract allowing the seller to deem the buyer to be in breach, entitling him to judgment dismissing the lawsuit.

In refusing to dismiss a case where anticipatory repudiation of an employment agreement was claimed, the court held that for the purposes of a pre-answer motion to dismiss, plaintiff’s claim that he sent three emails to defendant about unpaid commissions which were ignored sufficed to properly allege that claim—“the Defendants’ failure to state its intent to perform under the Employment Agreement and Commission Agreement when such agreements required payment by a date certain is sufficient to state a cause of action for anticipatory repudiation.”

Cooperstein v. Securewatch24, LLC

Landlord sued the guarantor of a lease when the tenant failed to pay. The guarantor argued that it should not be liable for the full amount of the rent as called for in the lease because the landlord and tenant had negotiated a temporary discount without informing or consulting the guarantor. The court did not agree.

While the court agreed with the notion that an agreement cannot be modified without the consent of a surety, and that a new agreement relieves the guarantor from liability, “‘[t]he test is whether there is a new contract which will be enforced by the courts.’ However, “‘[i]ndulgence or leniency in enforcing a debt when due is not an alteration of the contract … .’” With that, the court held that “[t]he subsequent agreement between the tenant and the landlord reducing the tenant’s rent obligations did not discharge defendant’s obligations under the guaranty as it merely constituted leniency on the part of the landlord and did not create a new contract between the parties.”

SpringPRINCE, LLC v. Elie Tahari, Ltd.

The parties to a failed merger agreed to arbitrate the issue of damages resulting from the inability to complete the merger. As part of the arbitration, one of the parties made a declaration specifically disavowing any knowledge of a certain escrow payment that was to have been made as part of the efforts to complete the merger. As a result, the arbitrator concluded, relying on that declaration, that the escrow payment was never made so that the other party breached the merger agreement. Discovery in a related action, however, disclosed that the declaration was inaccurate and that its maker had lied. The court, applying the Federal Arbitration Act (the “FAA”), vacated the arbitration award.

After first explaining that it applied the FAA and not New York’s rules because the merger involved international commerce, the court went on to note the well-worn standard that its ability to review an arbitration award was extremely limited and that it would be compelled to uphold such an award even where the arbitrator provided “‘even a barely colorable justification for the outcome reached.’” Despite this high bar, the court also recognized that some conduct would support vacatur. Where fraud was the basis to vacate, the fraud must have been material and not discovered before the award was issued. There also must be a showing that there is a connection between the fraud and the award. Even something less than outright fraud, which the court called “undue means,” could support vacatur.

In this case, the declarant’s failure to disclose the truth permitted the court to vacate the award as having been procured by fraud or undue means.

Over a robust dissent, the Court of Appeals, in a long decision discussing the policy considerations in enforcing contracts as written, affirmed the Second Department’s decision, also over a passionate dissent, affirming a trial court’s decision dismissing a commercial tenant’s declaratory judgment action and with it, the tenant’s Yellowstone injunction.

“In New York, agreements negotiated at arm’s length sophisticated, counseled parties are generally enforced according to the plain language pursuant to our strong public policy favoring freedom of contract.” So begins the Court of Appeal’s decision in 159 MP Corp. v. Redbridge Bedford, LLC.  That case involved a dispute between a commercial landlord and tenant where the parties’ lease provided for the tenant’s waiver of its “right to bring a declaratory judgment action with respect to any provision” of that lease.

In response to the landlord’s demand to cure certain defaults, the tenant commenced an action seeking a declaratory judgment of its rights under the lease, and sought a Yellowstone injunction. The landlord sought dismissal of the declaratory judgment action, and the Yellowstone, based on the waiver contained in the lease. The tenant claimed that the waiver was mistakenly included for this purpose, intended only for summary proceedings. (It seems that it was not until the parties were before the Second Department that the tenant raised the argument that enforcing the lease as written should be void as against public policy.)

Typically, properly executed arbitration agreements, even as boilerplate in a form agreement, are strictly enforced. That said, there is an interesting 2017 First Department case that allows a party to avoid arbitration due to the cost of doing so.

In this case, as part of his employment, an employee agreed to arbitrate any disputes with his employer before the AAA in Florida. Doing so would require the employee to pay half of the arbitration costs, including the fees charged by the arbitrators, and administrative costs. The claims of the employee were as part of a class, where claims of late payment of wages were made, and recovery would include an award of statutory attorneys’ fees. In response to the employer’s motion to compel arbitration, the employee argued that “he had not agreed to arbitrate Labor Law claims, that any such agreement would be against public policy, and that, based on his limited financial means, as detailed in a supporting affidavit, the fee splitting and venue provisions of the agreement render arbitration financially prohibitive.”

The First Department reaffirmed New York’s strong public policy of favoring arbitrations (where agreed to) and that courts interfere as little as possible in that process and resulting award. “As a general matter, therefore, a clear and unmistakable agreement to arbitrate statutory wage claims is not unenforceable as against public policy.” That said, the court recognized the competing public policy argument that the employee could not afford to travel to Florida and participate in the AAA proceeding and that forcing him to do so would “preclude him from pursuing his claims.” The court referred the matter back to the trial court for an accounting of the employee’s income “and assets,” and the cost to participate in the arbitration. The court did not acquit the employee from the arbitration, only directed the trial court to determine if arbitrating in New York at the employer’s expense would obviate the employee’s concerns. The court also allowed the trial court to consider how the attorneys’ fees provision would impact the employee’s ability to participate in the arbitration. The court did not directly address the issue of whether the employee’s inability to pay the AAA expenses would free him from arbitration completely.

In their effort to combat a derelict and abandoned property, a group of local residents founded a community garden in 1985.  The garden covered three lots, 16, 18 and 19. Defendants (different owners throughout the relevant time periods) claimed to be the record owner of Lot 19 as it was used as part of the garden. In a long decision which we will highlight here, the First Department found that the garden’s use was open, adverse, and continuous, sufficient to withstand the dismissal of its adverse possession claim.

Starting in 1985, community residents cleared garbage, pulled weeds, and put up a fence to enclose the premises (consisting of the three lots). They planted assorted vegetation, including trees, installed playground equipment, and built a performance and exhibit stage. To improve the space, pathways and a fish pond were installed. The area was not public and was locked at night or when no community member was available to monitor its use. Over the years, many school and camp programs events were held there, and it was used generally as a community space, including for music and poetry gatherings. The members guarded the space, specifically against defendants. For example, in 1999, defendants cut the gate, entered the premises, and allegedly damaged the trees and equipment, and re-gated Lot 19 for their own use. The garden members tore down defendants’ gate, restored the garden, and reinstalled the gate so that all three lots were again combined into one parcel.

In 2013, a group with power tools and private security guards attempted to enter the garden. After a stand of, the police directed that the group be allowed into the garden. Lot 19 was then cleared and a new gate was installed segregating that Lot 19 from the others. Thereafter, New York City took steps to preserve to maintain the remaining lots as the garden.

Plaintiff and defendant entered into a contract for architectural services. Their contract had a rider that provided for additional fees and contained an arbitration provision. In response to plaintiff’s lawsuit seeking fees, defendant moved to dismiss based on the arbitration provision in the rider. Plaintiff claimed that the rider was unenforceable as the parties never signed.

The trial court disagreed. The court held that because plaintiff’s lawsuit itself relied on the rider, it could not claim that the rider, and the obligation to arbitrate, could not be enforced. The court stated that “through her pleadings plaintiff has conceded that the rider is part of the [contract] and is enforceable.” This outcome was all the more true when defendant demonstrated that the parties had relied on that rider during their relationship.

While the court did not address waiver or estoppel theories, it clearly held that by relying on the rider and incorporating it into her complaint, plaintiff could not disavow its enforceability.

Plaintiff made a claim to its insurance company for water damage and loss of business. After what appears to have been a contentious investigation, the claim was denied because the carrier alleged that plaintiff did not provide it with all of the necessary documents and information and because some of the damage was allegedly caused by a prior incident.

Plaintiff sued the carrier, and included a claim under New York’s General Business Law § 349, which prohibits deceptive business practices. This claim was based on the carrier’s bad-faith claim investigation, including its demand for irrelevant documents, and its intentional delay of issuing a denial until after the policy’s statute of limitations period had expired. Defendants moved to dismiss all of the claims.

In denying dismissal, the trial court determined that a claim under § 349 had been made, as plaintiff had sufficiently alleged that the carrier (i) engaged in a deceptive act or practice, (ii) the act or practice was consumer-oriented, and (iii) plaintiff was injured as a result in that it was now pressured to accept an unfavorable settlement due to the expiration of the contractually-shortened statute of limitations period. Finding that the shortened limitations period was universal in all similar insurance policies, the court rejected the carrier’s claim that this was not generally a consumer-oriented claim. The court also allowed the consequential damages claim of lost business to proceed to trial.

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