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Indemnification Clause in Lease/Alteration Agreements Unenforceable—No Exception for Lessor’s Negligence

The Second Department determined an indemnification clause in lease/alteration agreements was unenforceable because it was not limited to the lessee’s acts or omissions and because it did not make exceptions for the lessor’s negligence (General Obligations Law 5-321):

Broad indemnification provisions … which are not limited to the lessee’s acts or omissions, and which fail to make exceptions for the lessor’s own negligence, are unenforceable pursuant to General Obligations Law § 5-321 where [the relevant agreements] were not negotiated at arm’s length by two sophisticated business entities… . Nolasco v Soho Plaza Corp., 2015 NY Slip Op 05164, 2nd Dept 6-17-15

 

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Florida’s Law of Restrictive Covenants Re: Non-Solicitation of Customers by a Former Employee Violates New York Public Policy by Favoring Employers at the Expense of Employees

The Court of Appeals, in a full-fledged opinion by Judge Stein, determined the Florida law on restrictive covenants re: non-solicitation of customers by a former employee violated the public policy of New York State.  Therefore the choice-of-law provision in the employee agreement was unenforceable.  The Court of Appeals went on to find that, applying New York law, questions of fact precluded a determination whether the non-solicitation agreement at issue should be enforced.  With respect to the public policy violation, the court explained:

… Florida law requires a party seeking to enforce a restrictive covenant only to make a prima facie showing that the restraint is necessary to protect a legitimate business interest, at which point the burden shifts to the other party to show that the restraint is overbroad or unnecessary (see Fla Stat § 542.335 [1] [c]). If the latter showing is made, the court is required to “modify the restraint and grant only the relief reasonably necessary to protect” the employer's legitimate business interests (Fla Stat § 542.335 [1] [c]). In contrast to this focus solely on the employer's business interests, under New York's three-prong test, “[a] restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. A violation of any prong renders the covenant invalid” … . Whereas Florida shifts the burden of proof after the employer demonstrates its business interests (see Fla Stat § 542.335 [1] [c]), New York requires the employer to prove all three prongs of its test before the burden shifts … . Further, Florida law explicitly prohibits courts from considering the harm or hardship to the former employee (see Fla Stat § 542.335 [1] [g] [1]). This directly conflicts with New York's requirement that courts consider, as one of three mandatory factors, whether the restraint “impose[s] undue hardship on the employee” … .

Additionally, under Florida law, courts are required to construe restrictive covenants in favor of protecting the employer's interests, and may not use any rules of contract interpretation that would require the construction of a restrictive covenant narrowly or against the restraint or drafter (see Fla Stat § 542.335 [1] [h]). In contrast, New York law provides that “[c]ovenants not to compete should be strictly construed because of the 'powerful considerations of public policy which militate against sanctioning the loss of a [person's] livelihood'” … . Brown & Brown, Inc. v Johnson, 2015 NY Slip Op 04876, CtApp 6-11-15

 

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In an Action Stemming from the Purchase of Residential Mortgage-Backed Securities, the Breach of Defendant’s Representations and Warranties Concerning the Borrowers’ Incomes, Occupancy Status and Debt Obligations Occurred on the Date the Contract Was Executed (Starting the Six-Year Statute of Limitations at that Point)—Defendant’s Obligation to Cure or Repurchase Did Not Constitute a Second Contract—Defendant’s Refusal to Cure or Repurchase, Therefore, Did Not Start the Running of Another Six-Year Limitations Period

The Court of Appeals, in a full-fledged opinion by Judge Read, in an action involving residential mortgage-backed securities, determined that a cause of action based upon breach of representations and warranties accrued on the date the contract was executed. A few years after the parties executed a mortgage loan purchase agreement (MLPA) and a pooling a servicing agreement (PSA) borrowers began to default, resulting in hundreds of millions in losses.  Upon investigation it was determined that the underlying mortgage loans failed to comply with the defendant’s representations and warranties about the borrowers’ incomes, occupancy status and existing debts.  The Court of Appeals held that the breach of the representations and warranties occurred when the MLPA was executed on March 28, 2006.  The action was commenced on the last day of the limitations period (on March 28, 2012), but was untimely because the contractual conditions precedent to suit had not been complied with as of that date. Plaintiff argued that the defendant’s refusal to cure or repurchase after notification in January, 2012, breached a second contract and started the six-year statute running from that point. The Court of Appeals held that the defendant’s repurchase obligation was not a valid agreement “to undertake a separate obligation, the breach of which does not arise until some future date…”.  “[Defendant’s] cure or repurchase obligation could not reasonably be viewed as a distinct promise of future performance. It was dependent on, and indeed derivative of, [defendant’s] representations and warranties, which did not survive the closing and were breached, if at all, on that date…” . ACE Sec. Corp. v DB Structured Prods., Inc., 2015 NY Slip Op 04873, CtApp 6-11-15

 

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Townhouse Residents, Members of a Community Homeowners’ Association, Entered an Implied Contract to Pay a Proportionate Share of the Fees for Authorized and Necessary Services in Connection with the Maintenance of the Townhouse Facilities

The Third Department affirmed Supreme Court’s ruling that defendants (townhouse residents) had entered an implied contract to pay a proportionate share of the full cost of maintaining the facilities. The defendants had refused to pay membership fees after a dispute with other residents arose.  The Third Department, applying the “business judgment rule,” determined the fees assessed by the plaintiffs were for authorized and necessary services provided by the plaintiff:

… [T]he Court of Appeals has made clear that an implied contract for a community homeowners’ association “includes the obligation to pay a proportionate share of the full cost of maintaining . . . facilities and services, not merely the reasonable value of those actually used by any particular resident” … . We review plaintiff’s action in undertaking such expenditures under the business judgment rule, which, in the absence of “claims of fraud, self-dealing, unconscionability, or other misconduct,” is limited to an inquiry of “whether the action was authorized and whether it was taken in good faith and in furtherance of the legitimate interests of the corporation” … . Bluff Point Townhouse Owners Assn., Inc. v Kapsokefalos, 2015 NY Slip Op 04905, 3rd Dept 6-11-15

 

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Plaintiff Not Competent When Release Was Signed/Statute of Limitations Tolled by Plaintiff’s Mental Disability

The Third Department determined Supreme Court properly concluded the release signed by the plaintiff was not enforceable, because the plaintiff was not competent at the time it was signed, and the statute of limitations was tolled by plaintiff’s mental disability. Plaintiff suffered a brain injury when he was struck by a car in 1991. A few months later plaintiff signed a release provided by an insurance adjuster in return for $5000.  The case languished for years and Supreme Court denied defendant’s motion for summary judgment dismissing the case in 2014. The court explained the relevant law:

With respect to the release signed by plaintiff, “the burden of proving incompetence rests upon the party asserting incapacity to enter into an agreement [and], to prevail, plaintiff was required to establish that [his] ‘mind was so affected as to render [him] wholly and absolutely incompetent to comprehend and understand the nature of the transaction'” … . The incapacity must be shown to exist at the time the pertinent document was executed … . Regarding the statute of limitations issue, the toll for “insanity” provided by CPLR 208 is narrowly interpreted, the concept of insanity is “equated with unsoundness of mind” … and encompasses “only those individuals who are unable to protect their legal rights because of an over-all inability to function in society” … . The mental incapacity must exist at or be caused by the accident and continue during the relevant time … . Lynch v Carlozzi, 2015 NY Slip Op 04893, 3rd Dept 6-11-15

 

Question of Fact Raised Whether an Indemnification Clause on a Scaffolding Inspection Tag Created an Enforceable (Unsigned) Indemnification Contract

In a case stemming from plaintiff’s fall from an allegedly improperly installed scaffold, a question of fact had been raised whether a tag on the scaffolding, which included an indemnification clause, evidenced an enforceable indemnification agreement:

“[A] contract may be valid even if it is not signed by the party to be charged, provided its subject matter does not implicate a statute—such as the statute of frauds (General Obligations Law § 5-701)—that imposes such a requirement” … . “[A]n unsigned contract may be enforceable, provided there is objective evidence establishing that the parties intended to be bound” … . “[I]n many instances the issue of whether or when an indemnification agreement came into being in the absence of a signed document will present a question of fact to be resolved by the trier of fact” … .

Here, in support of their respective motion and cross motion, [the parties] failed to eliminate all triable issues of fact as to whether the scaffold inspection tag …, which included an indemnification clause, related to the scaffold employed by the injured plaintiff at the time of the accident and, if so, whether these parties’ words and deeds demonstrated their intent to be bound by the terms of thereof … . Murphy v Eagle Scaffolding, Inc., 2015 NY Slip Op 04823, 2nd Dept 6-10-15

 

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Management Agreement Did Not Give Rise to Tort Liability for Slip and Fall

In determining the management agreement with a hospital did not give rise to tort liability for a slip and fall on the hospital premises, the Second Department explained the relevant law:

“Generally, a contractual obligation, standing alone, will not give rise to tort liability in favor of a third party” … . However, there are three exceptions to this general rule: (1) where the contracting party, in failing to exercise reasonable care in the performance of its duties, launches a force or instrument of harm or creates or exacerbates a hazardous condition; (2) where the plaintiff detrimentally relies on the continued performance of the contracting party’s duties; and (3) where the contracting party has entirely displaced the other party’s duty to maintain the premises safely … . “As part of its prima facie showing, a contracting defendant is only required to negate the applicability of those Espinal exceptions that were expressly pleaded by the plaintiff or expressly set forth in the plaintiff’s bill of particulars” … .

Here, the plaintiffs alleged that Sodexo [the building manager] maintained and controlled the premises. Sodexo established its prima facie entitlement to judgment as a matter of law by submitting evidence establishing that the plaintiffs were not parties to the management agreement and thus, it owed the injured plaintiff no duty of care …; that the management agreement was not so comprehensive and exclusive as to displace the Hospital’s duty to maintain the premises safely …; and that it did not create the allegedly hazardous condition … . In opposition, the plaintiffs failed to raise a triable issue of fact. Sperling v Wyckoff Hgts. Hosp., 2015 NY Slip Op 04840, 2nd Dept 6-10-15

 

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Question of Fact Whether a Building Manager Owed a Duty to Plaintiff—Plaintiff, a Sidewalk Pedestrian, Was Struck by Window-Washing Equipment—The Window Washing Service Was an Independent Contractor Hired by the Building Manager—Question of Fact Raised Whether a Duty to the Plaintiff Ran from the Building Manager Because of the Inherently Dangerous Work the Independent Contractor Was Hired to Do and Because of the Nature of the Contract Between the Building Manager and the Building Owner—The Court Noted that the Property Owners Were Not Liable Because Ownership and Control of the Building on the Property Had Been Transferred (to the Building Owner)

The Second Department determined there was a question of fact whether a building manager (Milford) who hired a window washing service (Red Cap) could be liable for injury to a pedestrian (plaintiff) struck by a piece of window-washing equipment which fell. Although Red Cap was an independent contractor, plaintiff raised a question of fact about whether Milford owed a nondelegable duty to plaintiff because the work it hired Red Cap to do was inherently dangerous (in the absence of warning signs and pedestrian barriers) and whether the building management services contract between Milford and the building-owner (S & P) was sufficiently comprehensive and exclusive to create a duty running to plaintiff. The court noted that the property owners were not liable because ownership and control of the building (on the property) had been transferred (to the building-owner):

Milford established its prima facie entitlement to judgment as a matter of law by submitting proof that Red Cap was an independent contractor and, thus, it could not be held liable for Red Cap’s negligent acts …, and that, as S & P’s contractual managing agent, it owed no duty to the plaintiff … . However, in opposition, the plaintiff raised triable issues of fact as to whether Milford owed a nondelegable duty to the plaintiff because it knew or had reason to know that the work it hired Red Cap to perform was inherently dangerous to pedestrians in the absence of warning signs or barriers on the sidewalk below the window-washing apparatus …, and whether the property management services agreement with S & P was sufficiently comprehensive and exclusive so as support a duty running to the plaintiff … . Baek v Red Cap Servs., Ltd., 2015 NY Slip Op 04794, 2nd Dept 6-10-15

 

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An Unconditional Guaranty of Payment of a Another’s Obligations Is Enforceable by Summary Judgment In Lieu of a Complaint In New York, Even In the Face of an Allegation the Underlying Judgment Was the Result of Collusion and Fraud

The Court of Appeals, in a full-fledged opinion by Judge Rivera, determined an unconditional guaranty (re: payment of corporate debts) was a proper basis for summary judgment in lieu of a complaint, notwithstanding defendant’s (unsupported) allegation the underlying judgment was the result of collusion and fraud.  An unconditional guaranty is enforceable in New York, even where it is alleged the guaranty itself was the product of fraud:

Guarantees that contain language obligating the guarantor to payment without recourse to any defenses or counterclaims, i.e., guarantees that are “absolute and unconditional,” have been consistently upheld by New York courts * * *.

This Court has acknowledged the application of these absolute guarantees even to claims of fraudulent inducement in the execution of the guaranty … .* * *

Here, defendant personally guaranteed the obligations owed by Agra Canada under the Purchase Agreement, as well as obligations owed by Agra USA. Moreover, defendant specifically agreed that his “liability under this Guaranty shall be absolute and unconditional irrespective of (1) any lack of validity or enforceability of the agreement; . . . or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Seller (Agra Canada) or a guarantor.” By its plain terms, in broad, sweeping and unequivocal language, the Guaranty forecloses any challenge to the enforceability and validity of the documents which establish defendant’s liability for payments arising under the Purchase Agreement, as well as to any other possible defense to his liability for the obligations of the Agra businesses. Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v Navarro, 2015 NY Slip Op 04753, CtApp 6-9-15

 

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