Earlier this year, we wrote about the First Department’s decision addressing the question, as framed by the Court of Appeals, of “whether the mere commencement of an action seeking ‘rescission and/or reformation’ of a contract constitutes an anticipatory breach of such agreement.” The First Department found that it did. The Court of Appeals recently disagreed and reversed.
The facts of this case are found in our prior post. Briefly, a buyer entered into a contract to buy two parcels of land with the closing set for after the seller obtained certain regulatory approvals, but not later than 18 months from the contract date. If the approvals could not be obtained either party could, among other things, terminate the contract. After the approvals were delayed, the seller opted to terminate the contract and return the downpayment unless the buyer agreed to modify the contract. The contract was modified to extend the deadline to close and other contract terms. The parties also agreed that the buyer would not sue the seller if the approvals could not be timely delivered. Believing that the approvals were forthcoming, the parties again extended the closing deadline. Before that newly extended closing deadline, the buyer sued the seller seeking to cancel, or rescind, the contract. The seller counterclaimed claiming that the buyer’s lawsuit, by which it announced that it would not close and sought to cancel the contract before the time to close, was itself a default entitling the seller to keep the buyer’s substantial downpayment. After the buyer’s lawsuit for rescission was dismissed, the seller pursued its counterclaim for the downpayment. The First Department deemed the buyer’s lawsuit to be a breach of the parties’ contract and allowed the seller to keep the downpayment.
The Court of Appeals zeroed in on the First Department’s core finding that “the Appellate Division affirmed . . . because a rescission action unequivocally evinces the plaintiff’s intent to disavow its contractual obligations, the commencement of such an action before the date of performance constitutes an anticipatory breach’ (Princes Point LLC v. Muss Dev. L.L.C., 138 AD3d 112, 114 [1st Dept 2016] ). The Appellate Division also concluded ‘that the seller . . . was not required to show that it was ready, willing, and able to complete the sale [as a condition of receiving damages] because the buyer’s anticipatory breach relieved [the seller] of further contractual obligations’ (id.).”
The Court of Appeals principle discussion focused on what an anticipatory breach (or anticipatory repudiation) is and how it is deemed to have occurred. The court highlighted the big picture issues underlying a repudiation, that the “expression of intent not to perform by the repudiator must be ‘positive and unequivocal’ . . . that the party harmed by the repudiation must make a choice either to pursue damages for the breach or to proceed as if the contract is valid and that ‘a wrongful repudiation of the contract by one party before the time for performance entitles the nonrepudiating party to immediately claim damages for a total breach.’” In this case, and especially given the revised closing dates, the Court of Appeals found the buyer’s claims to be no different than one seeking declaratory judgment of the parties’ rights and obligations under a contract notwithstanding that the buyer was seeking to rescind the contract. “There is no material difference between this action and a declaratory judgment action. At bottom, both actions seek a judicial determination as to the terms of a contract, and the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.” Thus, in this setting, the court found that seeking rescission of the parties’ modifications to the original contract was not a repudiation merely a request for clarification of the parties’ rights, no different than a declaratory judgment action.
The court did not address the impact of the lower court’s refusal to rescind the contract modifications and which party, if either, was now in breach of the contract. The court also did not address the issue of the buyer’s ability to show that it was ready, willing and able to close, a fairly critical issue as it provides a complete defense to a seller’s refusal to close.
One wonders if this case provides a new litigation strategy to a potentially defaulting party—to sue first, in anticipation of its upcoming breach, seeking rescission which as determined by the Court of Appeals is simply a request for declaratory relief.
These multiple issues and considerations are inherent in every complicated breach of real estate contract claim and must be considered early in a litigation so as to chart the appropriate strategy. Given this decision, a new, creative, quiver may be available in a party’s arsenal.