An Unsuccessful Lawsuit Seeking to Cancel a Contract Is Itself a Breach

A buyer of real property that sued the seller before the parties’ closing date seeking to cancel the contract, but without a valid reason, was deemed to have breached that contract.

The buyer entered into a contract to buy two parcels of land in Staten Island. The contract was to close 30 days 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 terminate the contract or seek to renegotiate the purchase price, without obligation to close.

Because 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, increase the price, and have the buyer reimburse the seller for certain costs incurred in doing the work that would release the regulatory approvals. 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 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, 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 ruled for the seller and allowed it to keep the downpayment. The court held that when the buyer sued to cancel the contract before the closing date it anticipatorily breached, or repudiated, the contract. Specifically, the court wrote that “‘when a party repudiates contractual duties prior to the time designated for performance and before all of the consideration has been fulfilled, the repudiation entitles the nonrepudiating party to claim damages for total breach.’” Because the buyer here never formally sought to cancel the contract, however, the question the court next addressed was whether the commencement of a lawsuit seeking to cancel the contract was an act of repudiation.

The court distinguished this lawsuit for rescission from one seeking a declaration of a party’s rights, where repudiation would not be found. Seeking to define or understand a party’s rights and obligations by way of a declaratory action does not seek to terminate any obligation. Seeking a declaratory judgment does not address a party’s conduct, it merely quantifies it. Thus, it would not be seen as an act of contract repudiation. Seeking rescission, however, is a party’s attempt to terminate a contract and its obligations and to restore the parties to their status before the contract was signed. It is the equivalent of announcing that the party would not comply with its contractual duties. Such conduct was an anticipatory breach of the contract and allowed the seller to keep the downpayment. The court went further and held that the buyer’s anticipatory breach even relieved the seller from establishing that it would have been able to secure the approvals and close by the revised deadline.

Stay tuned, however, as the seller seems to be appealing to the Court of Appeals.

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