Contract Law Archives - New York Appellate Digest

THE TIME-OF-THE-ESSENCE DATE WAS PROPERLY SET; THE BUYER WAS NOT ABLE TO CLOSE ON THAT DATE: DEFENDANTS-SELLERS ENTITLED TO KEEP THE DOWNPAYMENT (SECOND DEPT).

The Second Department determined defendants-sellers were entitled to retain the downpayment after the buyer was not ready, willing and able to close on the time-of-the-essence date:

… [T]he defendants established, prima facie, that they effectively made September 3, 2014, a time of the essence closing date, and that, although they were ready, willing, and able to close on September 3, 2014, the plaintiff was not ready, willing, and able to close on that date … . The defendants also established, prima facie, that the plaintiff was in default by demonstrating that the plaintiff did not appear at the closing and admitted that he did not have the funds to close … . In opposition, the plaintiff failed to raise a triable issue of fact. Accordingly, we agree with the Supreme Court’s determination to grant those branches of the defendants’ motion which were for summary judgment dismissing the complaint and to cancel the notice of pendency.

A buyer “who defaults on a real estate contract without lawful excuse, cannot recover the down payment,” at least where, as here, that down payment represents 10% or less of the contract price … . Ashkenazi v Miller, 2021 NY Slip Op 00140, Second Dept 1-13-21

January 13, 2021/0 Comments/by Bruce Freeman

AN ANSWER TO AN AMBIGUOUS QUESTION ON AN APPLICATION FOR INSURANCE COVERAGE IS NOT A MATERIAL MISREPRESENTATION; THEREFORE THE ANSWER DID NOT VOID THE POLICY WHICH REMAINS IN FULL FORCE AND EFFECT (FIRST DEPT).

The First Department, reversing Supreme Court, determined a question in the application for insurance coverage was ambiguous. Therefore the answer to the question was not a material misrepresentation and the policy remains in full force and effect:

A misrepresentation in an insurance application is material, voiding the policy ab initio, if, had the true facts been known, either the insurer would not have issued the policy or would have charged a higher premium … . Even an innocent misrepresentation is sufficient to void the policy … . However, “an answer to an ambiguous question on an insurance application cannot be the basis for a claim of misrepresentation” in procuring insurance … .

Here, on defendants-respondents’ insurance application submitted to plaintiff, Question 9, which asked “Any uncorrected code violations?” is ambiguous. While the plain language asks whether there are “any uncorrected fire code violations” and not uncorrected fire code notices of violation, different witnesses provided five different understandings as to what the question was asking. In any event, this Court has used the term “violation” to mean the issuance of a citation … . Indeed, the question is not even posed as a complete sentence but a sentence fragment lacking a verb, which could have clarified the question. Starr Indem. & Liab. Co. v Monte Carlo, LLC, 2021 NY Slip Op 00044, First Dept 1-5-21

January 5, 2021/0 Comments/by Bruce Freeman

Contract Law, Insurance Law

DEFENDANT INSURER DID NOT ELIMINATE ALL QUESTIONS OF FACT ABOUT WHETHER PLAINTIFFS (INSUREDS) VIOLATED THE COOPERATION CLAUSE IN THE POLICY (SECOND DEPT).

The Second Department, reversing Supreme Court, determined defendant insurer did not eliminate all questions of fact whether the plaintiffs (insureds) violated the cooperation clause in the policy:

“An unexcused and willful refusal to comply with disclosure requirements in an insurance policy is a material breach of the cooperation clause and precludes recovery on a claim. Compliance with such a clause is a condition precedent to coverage, properly addressed by the court” … . “In order to establish breach of a cooperation clause, the insurer must show that the insured engaged in an unreasonable and willful pattern of refusing to answer material and relevant questions or to supply material and relevant documents” … .

Here, the defendant failed to eliminate all triable issues of fact as to whether the plaintiffs breached the cooperation clause of the policy. Jahangir v Tri-State Consumer Ins. Co., 2020 NY Slip Op 08049, Second Dept 12-30-20

December 30, 2020/0 Comments/by Bruce Freeman

Contract Law, Family Law

CAUSE OF ACTION ALLEGING THE STIPULATION OF SETTLEMENT IN THIS DIVORCE ACTION WAS UNCONSCIONABLE SHOULD HAVE BEEN DISMISSED, CRITERIA EXPLAINED (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, determined the cause of action alleging the stipulation of settlement in this divorce action was unconscionable should have been dismissed:

… [W]e agree with the defendant that the Supreme Court should have granted that branch of her cross motion which was pursuant to CPLR 3211(a) to dismiss the second cause of action, seeking to set aside the stipulation on the ground of unconscionability. “‘An unconscionable bargain is one which no person in his or her senses and not under delusion would make on the one hand, and no honest and fair person would accept on the other, the inequality being so strong and manifest as to shock the conscience and confound the judgment of any person of common sense'” … . “An agreement, however, is not unconscionable ‘merely because, in retrospect, some of its provisions were improvident or one-sided'” … . Here, the terms of the stipulation, while perhaps improvident or one-sided in favor of the defendant, were not so unfair as to shock the conscience and confound the judgment of any person of common sense. Heinemann v Heinemann, 2020 NY Slip Op 08044, Second Dept 12-30-20

December 30, 2020/0 Comments/by Bruce Freeman

Contract Law, Insurance Law

AN INSURER WHO HAS NO DUTY TO DEFEND THE INSUREDS BECAUSE OF LATE NOTIFICATION, IN THE ABSENCE OF A PROVISION IN THE POLICY, MAY NOT RECOVER THE COSTS OF DEFENDING THE ACTION FROM THE INSUREDS AND THE SUCCESSFUL PLAINTIFF IN THE UNDERLYING ACTION (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, in a full-fledged opinion by Justice Duffy addressing a matter of first impression, determined the plaintiff insurer, which was not obligated to indemnify the insureds for a $900,000 default judgment because plaintiff insurer was not timely notified of the claim, could not recover the costs of defending the action from the insureds and the successful plaintiff in the underlying action. The policy was silent on the question. At issue was the effect of a reservation of rights in a letter to the insureds:

There is little doubt that the insurance company could have included in the policy a provision wherein it could recover its defense costs (upon a reservation of rights and a judicial determination that it is not required to indemnify) had it wanted to, but it did not do so here.

The insurance company points to its May 2017 letter wherein it reserved its rights to seek to recover the costs of defending the underlying litigation and argues that other New York courts … . * * *

Typically, a reservation of rights letter asserts defenses and exclusions that are set forth in the policy between the parties. Indeed, awarding an insurer its defense costs when the insurer issues a reservation of rights letter for the same despite the lack of any language in the policy at issue permitting the insurer to recover the costs of defending claims that are later determined not covered by the policy flies in the face of basic contract principles and allows an insurer to impose a condition on its defense that was not bargained for … . Moreover, “‘strong policy considerations militate against allowing an insurer to unilaterally declare that it can recoup the costs of defending an insured where it is later determined [that the policy at issue did not cover the asserted claims]'” as doing so would allow an insurer to define its duty to defend based upon the outcome of a declaratory judgment action and significantly curtail New York’s long held view that the duty to defend is broader than the duty to indemnify … . Thus, we hold that the insurance company may not recover its defense costs based on the May 2017 letter wherein it reserved its rights to recoup its defense costs in the underlying litigation absent an express provision to that effect in the policy. American W. Home Ins. Co. v Gjonaj Realty & Mgt. Co., 2020 NY Slip Op 08027, Second Dept 12-30-20

December 30, 2020/0 Comments/by Bruce Freeman

Arbitration, Contract Law

THE CONTRACT PROPERLY ACCORDED THE ARBITRATOR THE AUTHORITY TO DETERMINE “GATEWAY” QUESTIONS OF ARBITRABILITY; NONSIGNATORIES ARE COMPELLED TO ARBITRATE (SECOND DEPT).

The Second Department, in a full-fledged opinion by Justice Miller, over a two-justice dissent, determined: (1) the contract properly accorded the arbitrator the power to decide whether the issues raised in the complaint were arbitrable (so-called “gateway” questions); and (2) the non-signatories, here plaintiff’s LLC and defendant’s law partner and law firm, are subject to the arbitration provision in the contract. Plaintiff is a professional football player and defendant is an attorney who represented plaintiff in contract negotiation and marketing and endorsements. The opinion is detailed and comprehensive and cannot be fully summarized here:

… Revis [plaintiff athlete] entered into an agreement with Schwartz [defendant attorney] pursuant to which they agreed to arbitrate “gateway” questions of arbitrability … . …

… [N]either the Supreme Court, nor this Court, nor any court, has the authority to decide whether and to what extent these parties’ disputes are arbitrable … . Indeed, just as a court may not “rule on the potential merits of the underlying” claim that is assigned by contract to an arbitrator, “even if it appears to the court to be frivolous”… , “a court may not decide an arbitrability question that the parties have delegated to an arbitrator” … , even if the court determines that “the argument that the arbitration agreement applies to the particular dispute is ‘wholly groundless'” … . * * *

“Under the direct benefits theory of estoppel, a nonsignatory may be compelled to arbitrate where the nonsignatory ‘knowingly exploits’ the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement” … . “The benefits must be direct, and the party seeking to compel arbitration must demonstrate that the party seeking to avoid arbitration relies on the terms of the agreement containing the arbitration provision in pursuing its claim” … . Revis v Schwartz, 2020 NY Slip Op 08094, Second Dept 12-30-20

December 30, 2020/0 Comments/by Bruce Freeman

Civil Procedure, Contract Law

THERE WAS A QUESTION OF FACT WHETHER THE ONE-YEAR STATUTE OF LIMITATIONS IN THE CONTRACT WITH DEFENDANT SUBCONTRACTOR WAS REASONABLE BECAUSE THE RUNNING OF THE STATUTE COULD BE TRIGGERED BY A PARTY OVER WHICH DEFENDANT HAD NO CONTROL (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Singh, reversing Supreme Court, determined the counterclaims by defendant subcontractor, Nastasi, in this breach of a construction contract action, should not have been dismissed. The central issue was whether the one-year contractual statute of limitations was enforceable. Because the statute could be triggered by the failure of the owner to pay the plaintiff general contractor, Turner, a circumstance over which the defendant subcontractor, Nastasi, had no control, there was a question of fact whether the one-year limitations period was reasonable:

The relevant question when deciding whether a limitations period is enforceable is whether and when the damages were objectively ascertainable … . A contractual limitations period is unenforceable without a concrete determination of damages accrual … .

Here, the provisions setting a one-year limitation period for claims arising out of the contracts between Turner and Nastasi are reasonable on their face. However, the contracts also provide that payments by the owner are conditions precedent to any sums owed by Turner to Nastasi. As observed in D&S Restoration, it was neither fair nor reasonable to impose such a condition precedent, which was not within Nastasi’s control, but had the capability of nullifying its claim (D&S Restoration, 160 AD3d at 926).

… [T]he intent of the owner should not govern the interplay of the two provisions. Such a holding will unreasonably permit a party to choose to stay silent on the issue of owner payment unless it suited them, and unilaterally set the accrual date for the claim. Turner Constr. Co. v Nastasi & Assoc., Inc., 2020 NY Slip Op 08024, First Dept 12-29-20

December 29, 2020/0 Comments/by Bruce Freeman

Contract Law, Judges

THE JUDGE SHOULD NOT HAVE, SUA SPONTE, INCREASED A PENALTY TO WHICH THE PARTIES HAD AGREED IN A SO-ORDERED STIPULATION (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the judge, sua sponte, should not have increased a penalty to which the parties had stipulated:

“A so-ordered stipulation is a contract between the parties thereto and as such, is binding on them and will be construed in accordance with contract principles and the parties’ intent” … . “When an agreement between parties is clear and unambiguous on its face, it will be enforced according to its terms and without resort to extrinsic evidence” … . Accordingly, a court “should not, under the guise of contract interpretation, ‘imply a term which the parties themselves failed to insert’ or otherwise rewrite the contract” … .

Here, we disagree with the Supreme Court’s sua sponte determination to change the $1,000 per week penalty set forth in the 2013 stipulation … . Although the New York City Landmarks Preservation Law authorizes a penalty of up to $5,000 per day … , the parties expressly agreed to a different penalty in their 2013 stipulation. Thus, the court should not have “rewritten” the terms of the 2013 stipulation by changing the amount of the penalty agreed to by the parties. City of New York v Quadrozzi, 2020 NY Slip Op 07856, Second Dept 12-23-20

December 23, 2020/0 Comments/by Bruce Freeman

Contract Law, Landlord-Tenant, Real Estate

ONCE THE PLAINTIFFS-TENANTS PROPERLY SOUGHT TO EXERCISE THEIR OPTION TO PURCHASE, THE LANDLORD, WHO IMPROPERLY REFUSED TO HONOR THE OPTION, NO LONGER HAD A RIGHT TO USE AND OCCUPANCY PAYMENTS (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiffs’ cause of action for return of the rent paid to defendant after the plaintiffs exercised their option to purchase the property should have been granted. Plaintiffs were defendant landlord’s tenants. Plaintiffs sought to exercise an option to purchase the property which was in the lease. Once the plaintiffs properly exercised the option to purchase, the landlord, who refused to honor the option, could no longer seek payment for plaintiffs’ use and occupancy:

… “[I]t is well settled that the legal owner of real property is not entitled to an award for use and occupancy from a contract vendee in possession unless there also exists a landlord-tenant relationship between the parties” … . Under the merger doctrine, “execution of a contract of sale [for real property] between landlord and tenant serves to merge the landlord-tenant relationship into the vendor-vendee relationship and thus effectively terminates the former, unless the parties clearly intend the contrary result” … . “An intention to deviate from the general rule and to avoid a merger may be directly expressed in the agreement or may be inferred from a medley of factors such as the terms of the agreement, the circumstances of its making, and the subsequent behavior of the parties” … .

Here … the parties did not express an intention to deviate from the general rule or to avoid a merger upon the exercise of the purchase option. To the contrary, the terms of the rider provided, in relevant part, that “[i]n the event that Tenant decides not to exercise its option to purchase, all provisions herein remain in full force and effect and Tenant remains liable for all payments hereunder, including but not limited to rent” … . Since the plaintiffs validly exercised their option to purchase on July 21, 2015, and became a contract vendee in possession, it follows that the landlord-tenant relationship terminated on that date by application of the merger doctrine … . Blackburn Food Corp. v Ardi, Inc., 2020 NY Slip Op 07850, Second Dept 12-23-20

December 23, 2020/0 Comments/by Bruce Freeman

Contract Law, Negligence, Securities

THE SOLE REMEDY PROVISION IN THE REPRESENTATIONS AND WARRANTIES AGREEMENT IN THIS RESIDENTIAL MORTGAGE-BACKED SECURITIES CASE WAS VALID AND ENFORCEABLE; THE GROSS NEGLIGENCE PUBLIC POLICY RULE DOES NOT APPLY WHERE THE SOLE REMEDY PROVISION IMPOSES REASONABLE LIMITATIONS ON LIABILITY OR REMEDIES (CT APP).

The Court of Appeals, reversing the Appellate Division, in a full-fledged opinion by Judge Fahey, over a partial dissent, held that the sole remedy provision in the Representations and Warranties Agreement (RWA) in this residential mortgage-backed securities (RBMS) case was valid and enforceable. Plaintiff unsuccessfully tried to avoid the sole remedy provision by arguing the defendants breached the contract with gross negligence:

… [W]e … conclude that the parties’ contract, as written, means what it says. In this RMBS put-back action, plaintiff seeks to avoid a provision in the contract … that sets out a sole remedy for a breach by alleging that defendants breached the contract with gross negligence. This sole remedy provision purports to limit, but not eliminate, the remedies available to the plaintiff in the event of a breach. We conclude that, in a breach of contract action, the public policy rule prohibiting parties from insulating themselves from damages caused by grossly negligent conduct applies only to exculpatory clauses or provisions that limit liability to a nominal sum. The rule does not apply to contractual limitations on remedies that do not immunize the breaching party from liability for its conduct. The sole remedy provision is not an exculpatory or nominal damages clause. Plaintiff cannot render it unenforceable through allegations of gross negligence. * * *

We have previously considered the application of the gross negligence public policy rule only in cases where the contract provision at issue was an exculpatory clause, purporting to wholly immunize a party from liability, or a nominal damages clause limiting damages to, at most, $250 … . We have not yet determined whether grossly negligent conduct may render unenforceable contractual provisions that do not wholly insulate a party from liability for its breach, but instead impose reasonable limitations on either liability or the remedies available to the non-breaching party. We conclude that, in a breach of contract case, grossly negligent conduct will render unenforceable only exculpatory or nominal damages clauses, and the public policy rule does not extend to limitations on the remedies available to the non-breaching party. Matter of Part 60 Put-Back Litig., 2020 NY Slip Op 07687, CtApp 12-22-20

December 22, 2020/by Bruce Freeman

THE TIME-OF-THE-ESSENCE DATE WAS PROPERLY SET; THE BUYER WAS NOT ABLE TO CLOSE ON THAT DATE: DEFENDANTS-SELLERS ENTITLED TO KEEP THE DOWNPAYMENT (SECOND DEPT).

AN ANSWER TO AN AMBIGUOUS QUESTION ON AN APPLICATION FOR INSURANCE COVERAGE IS NOT A MATERIAL MISREPRESENTATION; THEREFORE THE ANSWER DID NOT VOID THE POLICY WHICH REMAINS IN FULL FORCE AND EFFECT (FIRST DEPT).

DEFENDANT INSURER DID NOT ELIMINATE ALL QUESTIONS OF FACT ABOUT WHETHER PLAINTIFFS (INSUREDS) VIOLATED THE COOPERATION CLAUSE IN THE POLICY (SECOND DEPT).

CAUSE OF ACTION ALLEGING THE STIPULATION OF SETTLEMENT IN THIS DIVORCE ACTION WAS UNCONSCIONABLE SHOULD HAVE BEEN DISMISSED, CRITERIA EXPLAINED (SECOND DEPT).

AN INSURER WHO HAS NO DUTY TO DEFEND THE INSUREDS BECAUSE OF LATE NOTIFICATION, IN THE ABSENCE OF A PROVISION IN THE POLICY, MAY NOT RECOVER THE COSTS OF DEFENDING THE ACTION FROM THE INSUREDS AND THE SUCCESSFUL PLAINTIFF IN THE UNDERLYING ACTION (SECOND DEPT).

THE CONTRACT PROPERLY ACCORDED THE ARBITRATOR THE AUTHORITY TO DETERMINE “GATEWAY” QUESTIONS OF ARBITRABILITY; NONSIGNATORIES ARE COMPELLED TO ARBITRATE (SECOND DEPT).

THERE WAS A QUESTION OF FACT WHETHER THE ONE-YEAR STATUTE OF LIMITATIONS IN THE CONTRACT WITH DEFENDANT SUBCONTRACTOR WAS REASONABLE BECAUSE THE RUNNING OF THE STATUTE COULD BE TRIGGERED BY A PARTY OVER WHICH DEFENDANT HAD NO CONTROL (FIRST DEPT).

THE JUDGE SHOULD NOT HAVE, SUA SPONTE, INCREASED A PENALTY TO WHICH THE PARTIES HAD AGREED IN A SO-ORDERED STIPULATION (SECOND DEPT).

ONCE THE PLAINTIFFS-TENANTS PROPERLY SOUGHT TO EXERCISE THEIR OPTION TO PURCHASE, THE LANDLORD, WHO IMPROPERLY REFUSED TO HONOR THE OPTION, NO LONGER HAD A RIGHT TO USE AND OCCUPANCY PAYMENTS (SECOND DEPT).

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