The Freedom to Contract — Affirmed and Explained

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.)

The trial court granted the landlord’s motion and tossed the case, and the Yellowstone. That court noted that no matter how “unwise” a party’s agreement may be, the parties are free to make them and to see them enforced. The fact that the tenant could not seek declaratory relief, wrote the trial court, did not prevent it from seeking other relief or raising its defenses in a summary proceeding.

The Second Department affirmed, finding that these were sophisticated parties that drafted a negotiated lease agreement, to which terms they were bound. The freedom to contract would not be abridged on these facts, especially where the tenant had other avenues for relief.  The dissent argued that preventing a party from pursuing a declaratory judgment to determine the parties’ respective rights violated public policy, rendering that provision void.  The dissent claimed that allowing declaratory judgment proceedings furthers the ability to enforce a contract—to clarify the parties’ rights and obligations. That the tenant may have had other prospects for relief, did not change this benefit.  The Second Department certified its order for appeal, to determine if it was correctly made.

After a discussion of the importance of allowing parties to contract as they pleased, within the confines of the law and without fraud or duress, the Court of Appeals affirmed.  As to the public policy argument, the Court was “unpersuaded” that the waiver of this right was “so central and critical to the public policy of this state” as to violate public policy. The Court outlined in some detail the confines of what it believed to be violative of public policy. By way of introduction, the Court wrote:

We have deemed a contractual provision to be unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public
policy. But, because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after “balancing” the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger. Although we possess the power to set aside agreements on this basis, our “usual and most important function” is to enforce contracts rather than invalidate them “on the pretext of public policy,” unless they “clearly . . . contravene public right or the public welfare.”

The fact that a contract term may be contrary to a policy reflected in the Constitution, a statute or a judicial decision does not render it unenforceable; “that a public interest is present does not erect an inviolable shield to waiver.” Indeed, we regularly uphold agreements waiving statutory or constitutional rights, indicating that we look for more than the impingement of a benefit provided by law before deeming a voluntary agreement void as against public policy (see e.g. id. [upholding waiver of Labor Law protections that serve the societal interest of preventing worker exhaustion]; Abramovich, 46 NY2d 450 [upholding waiver by tenured teacher of the protections in Education Law § 3020-a]; Antinore v State of New York, 40 NY2d 921 [1976] [upholding waiver of due process protections afforded by disciplinary hearings under Civil Service Law §§ 75 and 76]). Many rights implicate societal interests and, yet, they have been determined to be waivable.

The Court continued with examples of and considerations behind public policy exceptions, finding that the waiver here did not qualify as “the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract.”

Acknowledging the logic in allowing or even encouraging declaratory relief to clarify a party’s rights and  the enforcement of contracts, the Court wrote that while “[t]he availability of declaratory relief may indirectly encourage parties to freely contract at the outset, knowing that they can later obtain judicial clarification of their obligations at the moment a justiciable controversy arises. However, a party who has chosen freely to waive the right to seek such relief could not have relied on any such expectation; that party may compensate for the waiver by demanding greater clarity in the construction of other contract terms so that the parties’ respective rights and obligations are fully understood before they sign the agreement. Regardless, a party may agree to such a waiver during contract negotiations to obtain a valuable benefit, such as a rent concession or the inclusion of a cure period following a notice of default. Such considerations are for the parties to weigh in crafting a commercial agreement that meets their unique needs.” The Court drew an analogy from arbitration agreements, which restrict a party’s right to seek relief from a court, but which “waiver” is routinely enforced.

Finally, that the tenant here was not left without legal redress also factored into the Court’s decision. That the Yellowstone failed with the dismissal of the declaratory judgment action also did not deprive the tenant from maintaining its lease, as no eviction could be issued if the tenant’s claims were validated in a summary proceeding.  [Note–as discussed by the dissent, Yellowstone injunctions offer relief that is broader than this, something ignored by the majority.]

In sum, the Court’s holding is very clear. “The right to commence a declaratory judgment action, although a useful litigation tool, does not reflect such a fundamental public policy interest that it may not be waived by counseled, commercial entities in exchange for other benefits or concessions. Entities like those party to this appeal are well-situated to manage their affairs during negotiations, and to conclude otherwise would patronize sophisticated parties and destabilize their contractual relationships — contrary to New York’s strong public policy in favor of freedom of contract. Because the declaratory judgment waiver is enforceable, the action was properly dismissed.”

While a full discussion of the dissent’s nuanced argument is beyond the scope of this article, it is worth reading. Judge Wilson addresses public policy considerations in the context of freedom to contract and strongly supports the right to seek declaratory relief, for numerous reasons. He also believes that the majority decision kills off the Yellowstone injunction generally leaving commercial tenants vulnerable to the whims of their landlords, a conclusion that appears not unreasonable. Other commentators believe that legislation on this is the only next step.

If this issue is relevant to you, pay attention to further developments.

159 MP Corp. v. Redbridge Bedford, LLC

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