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Affirmative Defense of Arbitration Waived by Participation in Judicial Process

The Third Department determined that defendant waived a contractual provision requiring arbitration by participating in the judicial process:

…[W]hile defendant asserted the contractual arbitration provision as an affirmative defense in its answer, it did not move to stay the action and compel arbitration (see CPLR 7503 [a]).  Instead, it aggressively participated in the discovery process and received the benefit of extensive discovery from plaintiff, which would not otherwise have been available in arbitration … . In doing so, defendant’s acceptance of the judicial forum “manifested a preference ‘clearly inconsistent with . . . [a] claim that the parties were obligated to settle their differences by arbitration'” … .  Thus, we agree with Supreme Court’s determination that defendant’s actions resulted in a waiver of its right to compel arbitration … . Masson v Wiggins & Masson LLP…, 515340, 515427, 3rd Dept 10-31-13

 

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No Ambiguity in Contract; No Resort to Extrinsic Evidence

In affirming the grant of defendant’s motion for summary judgment in a contract action, the Second Department explained the analytical criteria concerning whether extrinsic evidence should be considered:

“[W]hen parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing” … . Thus, “before looking to evidence of what was in the parties’ minds, a court must give due weight to what was in their contract” … . “A contract should be read as a whole to ensure that undue emphasis is not placed upon particular words and phrases” … . “Whether a contract is ambiguous is a question of law and extrinsic evidence may not be considered unless the document itself is ambiguous” … . “Moreover, courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing” … .

Here, the plaintiff failed to show any ambiguity in the subject contract that would permit consideration of the proffered extrinsic evidence of an alleged oral agreement to clarify the meaning of [a] term … .  Outstanding Transp Inc v Interagency Council of Mental Retardation & Dev Disabilities, Inc, 2013 NY Slip Op 07020, 2nd Dept 10-30-13

 

 

Letters Between Attorney and City Re: Fees Did Not Create Unilateral Contract

The Third Department affirmed the dismissal of a complaint seeking attorneys fees from the City for the defense of a police officer who allegedly pointed a loaded weapon at a coworker.  At one point the City and the defense attorney exchanged letters concerning the lawyer’s fees and the City offered to pay the defense attorney $150.00 an hour.  The breach of contract cause of action was based on those letters.  In addition to determining there was no contract, the Third Department explained the flaws in the promissory estoppel, unjust enrichment, quantum meruit and fraud causes of action. In finding that the letters did not constitute a contract, the Third Department wrote:

“For a contract to be created, regardless of whether it is bilateral or unilateral, ‘there must be a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms'” … . Price is a material term of a contract … ..

The complaint here alleges that [the City’s] letters constituted a unilateral contract whereby [the City] agreed to pay [defense counsel] at the rate of $150 per hour, and that the contract became binding when [defense counsel] performed under the contract by representing [the officer].  Plaintiffs cannot prevail because their allegations are flatly contradicted by documentary evidence.  [Defense counsel’s] invoice billed defendant at the rate of $350 per hour for his time and at other rates – all higher than listed in his ….estimate – for his staff.  This invoice contradicts plaintiffs’ assertion that the parties had agreed on all material terms of a contract, namely a price of $150 per hour … .   As documentary evidence refutes the allegations and establishes that no valid contract had been formed, Supreme Court properly dismissed the cause of action for breach of contract… . DerOhannesian v City of Albany, 515875, 3rd Dept 10-24-13

 

Effect of “Notwithstanding” Clause; Criteria for Reformation of Contract

In a full-fledged opinion by Justice Acosta, the First Department affirmed Supreme Court’s denial of defendant’s motion to dismiss a breach of contract complaint.  Plaintiffs contended the floor share price in the “notwithstanding” clause of the contract was an error, and submitted a supporting email referring to a different price in opposition to the motion to dismiss. The court agreed that the email was sufficient to overcome the dismissal motion and explained the powerful legal effect of a “notwithstanding” clause and the criteria for reformation of a contract:

It is well settled that trumping language such as a “notwithstanding” provision “controls over any contrary language” in a contract … . This Court has likewise noted that “inconsistency provisions” — i.e. those that dictate which of two contract provisions should prevail in the event of an inconsistency — “are frequently enforced by courts” … .

In construing statutes and contracts, the U.S. Supreme Court has remarked that “the use of . . . a notwithstanding’ clause clearly signals the drafter’s intention that the provisions of the notwithstanding’ section override conflicting provisions of any other section” … . Thus, the effect of a “notwithstanding” clause will prevail “even if other provisions of the contract[] might seem to require . . . a [conflicting] result” … . * * *

Before a court will grant reformation of a contract, the party demanding this equitable remedy ” must establish his right to such relief by clear, positive and convincing evidence'” … . The purpose of reformation is not to “alleviat[e] a hard or oppressive bargain, but rather to restate the intended terms of an agreement when the writing that memorializes that agreement is at variance with the intent of both parties” … . In order to “overcome the heavy presumption” that the contract embodies the parties’ true intent, the party seeking reformation must “show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties” … . Warberg Opportunistic Trading Fund LP v GeoResources, Inc, 2013 NY Slip Op 06826, 1st Dept 10-22-13

 

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Issues to Be Determined in Inquest After Default in Contract Action Explained; Viability of Fraud Cause of Action in Action Based on Contract Explained

In a contract action, the Third Department noted that: (1) a limitation of liability clause in a contract can be raised by the defaulting party after a default in the inquest on damages; (2) the court can determine whether the defaulting party stated valid causes of action; and (3) allegations of deceptive practices aimed at the general public state a cause of action under General Business Law 349.  In explaining why the fraud cause of action was valid in this contract-based case, the Third Department wrote:

In order to recover on the third cause of action for fraud, the defrauded party must allege a misrepresentation or omission of a material fact known to be false and made with the intent to deceive, as well as justifiable reliance and damages … .  While it is the general rule that “[a] separate cause of action seeking damages for fraud cannot stand when the only fraud alleged relates to a breach of contract” …, defendants’ allegations of fraud do not concern any express terms of the contract or third-party defendants’ failure to perform those term ….  Rather, defendants allege that third-party defendants fraudulently induced them into entering the contract by falsely representing that they were skilled, competent and experienced in providing construction management services.  Those allegations are not redundant of the breach of contract cause of action, which claims that third-party defendants failed to perform the terms of the contract … .  Defendants also alleged that they relied on the representations …, and the allegations permit us to infer that the reliance was justified.  Nor is there anything in the complaint or contract that would suggest that their reliance was unjustified … .  84 Lumber Co LP v Barringer…, 516235, 3rd Dept 10-17-13

 

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Criteria for Unconstitutional Impairment of Contract Rights Explained in Context of Requirement that Health Insurers Reimburse Customers Pursuant to Public Health Law Section 4308

Supreme Court granted summary judgment to plaintiff health insurer on the ground that certain portions of Insurance Law section 4308 constituted an unconstitutional impairment of contract rights.  The Third Department determined summary judgment should not have been granted (on grounds unrelated to a determination of constitutionality).  In the course of the decision, the court explained the constitutional analytical criteria:

Plaintiff is a not-for-profit health insurer that offers various types of health insurance to its subscribers, including – insofar as is relevant here – community-rated, large-group insurance and health maintenance organization policies. Historically, insurers such as plaintiff were required to obtain prior approval from the Superintendent of Insurance1 before increasing or decreasing premium rates (see Insurance Law former § 4308 [c] [1]…).  In 1995, however, the Legislature replaced this system with a “file and use” methodology, whereby insurers could increase or decrease premiums at their discretion, so long as the “anticipated incurred loss ratio” for the affected insurance pool fell within statutory minimum and maximum percentages… .  If the actual loss ratio fell below the statutory minimum, the insurer was required to “issue a refund to its subscribers or credit a dividend against future premiums”; if the actual loss ratio exceeded the statutory maximum, the insurer “increase[d] its premium rates accordingly”… .

In response to growing concerns that steady increases in premium rates were making health insurance less affordable, the Legislature amended Insurance Law § 4308 again in 2010 (see L 2010, ch 107, § 2) – reinstating the prior approval requirement and setting the minimum loss ratio for all coverage pools at 82% loss ratio for its large-group coverage pools fell below the 82% requirement.  As a result, defendant Superintendent of Financial Services directed that plaintiff issue refunds or credits totaling $3,349,976 to policyholders enrolled in community-rated large-group contracts. * * *

US Constitution, article I, § 10 provides that “[n]o [s]tate shall . . . pass any . . . [l]aw impairing the [o]bligation of [c]ontracts.”  The prohibition contained in the Contract Clause, however, is not absolute, as states “retain the power to safeguard the vital interests of [their] people” … .  “Thus, the [s]tate may impair [private] contracts by subsequent legislation or regulation so long as it is reasonably necessary to further an important public purpose and the measures taken that impair the contract are reasonable and appropriate to effectuate that purpose” … .  Analysis of a claimed Contract Clause violation “require[s] consideration of three factors: (1) whether the contractual impairment is in fact substantial; if so, (2) whether the law serves a significant public purpose, such as remedying a general social or economic problem; and, if such a public purpose is demonstrated, (3) whether the means chosen to accomplish this purpose are reasonable and appropriate”… . Healthnow New York Inc … v NYS Insurance Dept, 516179, 3rd Dept 10-17-13

 

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Nonsignatory Could Not Be Compelled to Arbitrate Under Direct Benefit Estoppel Doctrine

The Court of Appeals, in a full-fledged opinion by Judge Rivera, reversed the appellate division and determined a party who was not a signatory to an agreement which included an arbitration clause could not be compelled to arbitrate under the direct benefit estoppel doctrine.  In explaining the doctrine, the court wrote:

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 … .

Where the benefits are merely “indirect,” a nonsignatory cannot be compelled to arbitrate a claim.  A benefit is indirect where the nonsignatory exploits the contractual relation of the parties, but not the agreement itself … .  Matter of Belzberg v Verus Investments Holdings Inc, 149, CtApp 10-17-13

 

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Damage to Building Caused By Excavation Next Door Constituted “Vandalism”

In a full-fledged opinion by Judge Smith, over a partial dissent, the Court of Appeals answered two certified questions from the Second Circuit.  The case involved damage to a building caused by the excavation of a parking garage next door. The question was whether the damage could fall within the meaning of “vandalism” in the building owner’s insurance policy, even though the alleged acts were not directed at the damaged building.  The Court of Appeals answered in the affirmative:

It is true that, in some cases of alleged vandalism not directed at particular property, the term does not intuitively seem to fit.  … The word vandalism, which derives from the sack of Rome by the original Vandals in 455 AD (see IV, Gibbon, The History of the Decline and Fall of the Roman Empire at 246-248 [Folio Society 1986]), more readily brings to mind people who smash and loot than business owners who seek their own profit in disregard of the injury they do to the property of others.  We conclude, however, that there is no principled distinction between the two.  An excavator who is paid to dig a hole, and does so in conscious disregard of likely damage to the building next door, is, for these purposes, not essentially different from an irresponsible youth who might dig a hole on the same property, with the same effect, whether in search of buried treasure or just for fun. …

In common speech, and by the express terms of the policy in suit, vandalism is “malicious” damage to property.  The Second Circuit’s second question asks, in essence, what state of mind amounts to “malice” for these purposes.  We answer by adopting, insofar as it relates to property damage, the formulation we have used in reviewing awards of punitive damages. Conduct is “malicious” for these purposes when it reflects “such a conscious and deliberate disregard of the interests of others that [it] may be called willful or wanton”… .  Georgitsi Realty LLC v Penn-Starr Insurance Co, 156, CtApp 10-17-13

 

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Existence of Elevator Maintenance Contract Did Not Rule Out Duty of Care to Elevator User

The Second Department determined plaintiff had stated a cause of action in negligence against a company with a contract to maintain an elevator.  The elevator escape door and debris fell on plaintiff.  The court explained that the existence of a contract did not rule out that the company owed a duty of care to the plaintiff:

” Because a finding of negligence must be based on the breach of a duty, a threshold question in tort cases is whether the alleged tortfeasor owed a duty of care to the injured party'” … . “[A] contractual obligation, standing alone, will generally not give rise to tort liability in favor of a third party” … Exceptions to this general rule exist “(1) where the contracting party, in failing to exercise reasonable care in the performance of [its] duties, launch[e]s a force or instrument of harm; (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” … .

Here, [defendant] failed to meet its prima facie burden of demonstrating that no questions of fact existed as whether it failed to exercise reasonable care while repairing the subject elevator and whether it thereby launched a force or instrument of harm that caused the accident… . Dautaj v Alliance El Co, 2013 NY Slip Op 06657, 2nd Dept 10-16-13

 

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Stay of Arbitration Properly Denied, Collective Bargaining Agreement Allowed Issue to Be Determined in Arbitration

In affirming Supreme Court’s dismissal of an Article 75 petition seeking a permanent stay of arbitration (with respect to a collective bargaining agreement [CBA]), the Fourth Department explained the operative analysis:

In determining whether an issue is subject to arbitration under a collective bargaining agreement (CBA), a court must apply the two-step analysis set forth in Matter of Acting Supt. of Schs. of Liverpool Cent. Sch. Dist. (United Liverpool Faculty Assn.) (42 NY2d 509, 513).  “First, a court must determine whether there is any statutory, constitutional or public policy prohibition against arbitration of the grievance” … .  If the court determines that there is no such prohibition and thus that the parties have the authority to arbitrate the grievance, it proceeds to the second step, in which it must determine whether that authority was in fact exercised, i.e., whether the CBA demonstrates that the parties agreed to refer this type of dispute to arbitration … .  With respect to the second step, where there is a broad arbitration clause such as the one in the CBA at issue, “[a] determination of arbitrability is limited to ‘whether there is a reasonable relationship between the subject matter of the dispute and the general subject matter of the CBA’ ” … .  “Succinctly, the test centers on two distinct inquiries as to the public parties’ purported entry into the arbitral forum:  may they do so and, if yes, did they do so” … .  Here, with respect to the issue whether petitioner properly followed the procedures mandated by the CBA in terminating the employee in question, we conclude that the court properly determined that the parties had the authority to agree to arbitrate this grievance, and that they in fact agreed to do so.  Matter of Arbitration…, 1019, 4th Dept 10-4-13

 

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