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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 29, 2017

Contract Claim Fails for Lack of Contractually-Required Notice and Opportunity to Cure

On March 20, 2017, Justice Kornreich issued a decision in Gottwald v. Sebert, 2017 NY Slip Op. 30521(U), denying a motion to add a breach of contract counterclaim for failure to allege compliance with contract’s notice and cure provisions, explaining:

Plaintiffs urge that Kesha cannot assert a claim for non-payment of royalties under the Prescription Agreement because she failed to give notice, which was a contractual condition precedent for a claim of breach. The court agrees. . . . The notice provision created a condition precedent to bringing a claim for breach.

The cases Kesha cited are not on point. They involved situations where complying with a condition would be futile, or the other party prevented the performance of the condition. Here, Kesha made no showing that it would have been futile to send an appropriate notice or that she was prevented from doing so. Thus, Kesha may not assert a counterclaim for breach of the Prescription Agreement.

(Internal quotations and citations omitted).

Posted: March 28, 2017

Defendant Who Was Party to Contract Liable Even Though His Employer Also Had Contract With Plaintiff

On March 20, 2017, Justice Oing of the New York County Commercial Division issued a decision in Lord Securities Corp. v. Abedine, 2017 NY Slip Op. 30522(U), holding that a defendant could be liable for a breach of a contract he had signed in his individual capacity even though his employer also was alleged to have breach its contract with the plaintiff, explaining:

Defendant claims that he was merely acting as an agent for Broad Street, and therefore plaintiff’s claim lies with Broad Street. Defendant relies on Cruz v NYNEX Info. Resources, to support this proposition. His reliance is misplaced because Cruz is factually distinguishable. There, the Appellate Division, First Department, held that an agent was not liable for a contractual breach because he was not personally liable under the contract. Here, by contrast, defendant is alleged to have breached his own contract with plaintiff, under which he could be held personally liable.

(Internal quotations and citations omitted).

Posted: March 27, 2017

Plaintiff Bound by Terms Incorporated by Reference into Purchase Order

On March 24, 2017, the Fourth Department issued a decision in Auburn Custom Millwork, Inc. v. Schmidt & Schmidt, Inc., 2017 NY Slip Op. 02180, holding that a plaintiff was bound by the terms of a general contract that were incorporated by reference into a separate purchase order, explaining:

Plaintiff nonetheless contends that the architect approval requirement of the submittal procedure contained in the specifications of the prime contract between defendant and the Town cannot be incorporated into the revised purchase order, and thus cannot be binding upon it. We reject that contention. A reference by the contracting parties to an extraneous writing for a particular purpose makes it a part of their agreement only for the purpose specified. Thus, under New York law, incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference into a subcontract, bind a subcontractor only as to prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor. Contrary to plaintiff’s contention, we conclude that the architect approval provisions of the specifications related to the scope, quality, character and manner of plaintiff’s millwork inasmuch as compliance with those provisions was the method by which the parties ensured that the quality and character of the work met the requirements of the project.

(Internal quotations and citations omitted).

Posted: March 26, 2017

Ownership Interest in LLC is Intangible Property Not Subject to Conversion

On March 23, 2017, the First Department issued a decision in Saleeby v. Remco Maintenance, LLC, 2017 NY Slip Op. 02140, affirming the dismissal of a conversion claim based on an ownership interest in an LLC because a “7.5% ‘common interest’ ownership share in a limited liability company was a type of intangible property that could not be the subject of a conversion claim.”

Posted: March 25, 2017

IM’s Did Not Create Contract Because Deal Was “Subject To” Further Documentation

On March 23, 2017, the First Department issued a decision in Luxor Capital Group, L.P. v. Seaport Group LLC, 2017 NY Slip Op. 02167, holding that an exchange of instant messages did not create a binding contract, explaining:

The instant messages exchanged between the parties reflect that the transaction at issue was “subject to language” to be agreed upon, and was contingent upon “mutually satisfactory documentation.” Further, plaintiff Luxor Capital Group, L.P.’s internal communications and actions reflect an intent not to be bound absent execution of various documents and receipt of additional information, and the record shows that Luxor never received those documents and information.

The Court of Appeals’ decision in Stonehill Capital Mgt. LLC v Bank of the W. (28 NY3d 439 [2016]) does not compel any result to the contrary. Here, in contrast to Stonehill, the documents to be executed was not between plaintiffs and defendants. Rather, in this case, the document was to be executed by plaintiffs and a third-party seller; indeed, the parties did not even discuss the document before agreeing to the trade. Moreover, unlike in Stonehill, the totality of the circumstances here does not reflect any certainty as to the existence of an enforceable agreement.

(Internal citations omitted).

Posted: March 24, 2017

Parties’ Course of Conduct Trumps No-Oral-Waiver Clause

On March 22, 2017, the Second Department issued a decision in Kamco Supply Corp. v. On the Right Track, LLC, 2017 NY Slip Op. 02025, holding that the parties’ course of conduct under an agreement can trump a no-oral-waiver clause, explaining:

In the context of relational contracts such as the subject agreements, where there are repeated occasions for performance over the course of months or years, the application of general principles of waiver and estoppel presents special difficulties, particularly when trying to gauge whether a waiver relates only to a contemporaneous or past obligation, or applies prospectively to executory obligations as well. And when no-oral-waiver clauses are thrown into the mix, the analysis becomes even more complex. . . .

Where, as here, a contract provides, among other things, for the long-term supply of goods, UCC 2-208 and 2-209 also come into play. . . .

Also relevant to this appeal is the interplay between the concept of waiver and the doctrine of election of remedies. Under the latter, when a party materially breaches a contract, the non-breaching party must choose between two options: it can elect to terminate the contract or continue it. If the non-breaching party chooses to continue to perform or accept performance, it loses its right to terminate the contract based on the prior breach.

While courts have occasionally attempted to draw a distinction between a waiver and an election of remedies, these distinctions are mostly a matter of semantic. In the ordinary case, an election of remedies is merely a species of waiver. Thus, a party that continues to perform or accept performance despite the failure of a condition precedent established for its benefit may be said—provided that such party’s intent is clearly expressed—either to have elected to affirm the contract despite the failure of the condition, or to have waived the satisfaction of the condition. Whether viewed as an election or as a waiver, the result is the same: the party is barred from terminating the contract based on the failure of the condition precedent and may be held liable if it subsequently fails to perform.

However, in the case of a waiver that is deemed broad enough to apply prospectively to an executory obligation, the effect of such a waiver would arguably be broader than that of a mere election. Whereas an election to continue the performance of a contract despite the occurrence of a material breach would bar the right to terminate the contract based on that breach. By contrast, a prospective waiver of the breached provision would, unless effectively retracted in accordance with UCC 2-209(5), serve to bar an action based on a subsequent breach of that provision.

Applying the above principles to the facts at hand, we find that the record broadly supports the view that OTRT and SEM, by electing early on to continue the agreements despite the Kamco parties’ breach of the 2005 annual minimum purchase requirement, waived their right to terminate the agreements based on that initial breach. Contrary to the Kamco parties’ contentions, however, we do not find that such conduct, without more, evinced “a clear manifestation of intent” prospectively to waive any of the 2006 monthly or annual minimum purchase requirements. The same reasoning also applies to the Kamco parties’ continued failure, in early 2006, to meet the monthly minimum purchase requirements. Such conduct can reasonably be understood as a waiver of the 2006 monthly minimum purchase requirements as and when such obligations became due, but not as a prospective waiver of executory minimum purchase requirements, including the 2006 annual minimum purchase requirement.

As time went on, however, and OTRT and SEM continued to accept, month after month, and without any formal reservation of rights or notice of default, the Kamco parties’ continued failure to meet monthly minimum purchase requirements, the situation eventually reached a tipping point where the conduct of OTRT and SEM became so inconsistent with an intent to enforce the remaining 2006 minimum purchase requirements as to leave no opportunity for a reasonable inference to the contrary.

We need not decide precisely when that tipping point happened in this case, as it is clear from the record that it occurred well before OTRT and SEM first attempted formally to enforce their rights under the agreements by asserting counterclaims and the third-party action against the Kamco parties in November or December of 2006.

As early as July of 2006, OTRT had already conceded that there was no “realistic possibility” that the Kamco parties would be able to meet their annual minimum purchase requirement for 2006, yet neither OTRT nor SEM made any effort at that time to put the Kamco parties on notice of their default. On the contrary, OTRT even agreed to allow Kamco Supply Corp. to return $47,709.92 worth of Trakloc to SEM—conduct that is so fundamentally at odds with an intent to enforce the 2006 annual minimum purchase requirement that it would be difficult to characterize it as anything other than a prospective waiver of the annual minimum purchase requirement.

Moreover, by the end of 2006, the Kamco parties’ cumulative purchases of Trakloc amounted to barely more than 2% of the total minimum purchase requirements for 2005 and 2006, leaving a monumental shortfall of 175,770,331 linear feet. At the same time, SEM had only negligible inventories of Trakloc on hand, and its capacity to produce new product was limited to approximately 12 million to 18 million linear feet per month. Thus, even assuming that the Kamco parties had been willing to comply with the 2006 annual minimum purchase requirement in November 2006, it is unreasonable to believe that OTRT and SEM had the capacity to deliver such a large amount of Trakloc in less than two months’ time.

For all of the above reasons, we find that the Supreme Court properly concluded that, by the end of 2006, the affirmative conduct of OTRT and SEM over the previous weeks and months evinced an unmistakable intent to waive the remaining 2006 minimum purchase requirements, including the 2006 annual minimum purchase requirement.

. . .

Finally, we agree with the Supreme Court that, under the facts presented, the agreements’ no-oral-waiver provision does not compel a different result. As explained above, the Kamco parties’ persistent and repeated failure to meet minimum purchase requirements, coupled with OTRT’s and SEM’s continued acceptance of such conduct without any reservation or protest until a few weeks before the expiration of the agreements (by which time it was, of course, too late to insist upon strict compliance with the terms of the agreements), equitably estops OTRT and SEM from invoking the benefit of the no-oral-waiver provision.

(Internal quotations and citations omitted).

Posted: March 23, 2017

Judiciary Law § 478 Claim Cannot Be Based on Attorney Conduct in Arbitration

On March 16, 2017, the First Department issued a decision in Doscher v. Mannatt, Phelps & Phillips, LLP, 2017 NY Slip Op. 01973, holding that a Judiciary Law Section 478 claim could not be based on attorney conduct in an arbitration, explaining:

Plaintiff also failed to state a cause of action under Judiciary Law § 478, because the statute does not apply to attorney misconduct during an arbitral proceeding. The plain text of § 478 limits the statute’s application to conduct deceiving “the court or any party”, and, because the statute has a criminal component, it must be interpreted narrowly. Moreover, courts have held that the statute does not apply to conduct outside New York’s territorial borders or to administrative proceedings, observing that its purpose is to regulate the manner in which litigation is conducted before the courts of this State.

In any event, plaintiff failed to allege the elements of a cause of action under the statute, i.e., intentional deceit and damages proximately caused by the deceit. The misconduct that plaintiff alleges is not egregious or a chronic and extreme pattern of behavior, and the allegations regarding scienter lack the requisite particularity. Moreover, plaintiff was given the opportunity to subpoena a third party for documents that he was unable to obtain from defendants, but he declined it. He cannot blame defendants for his tactical decision.

(Internal quotations and citations omitted).

Posted: March 22, 2017

Defendant Waived Forum Selection Clause By Failing Timely to Object to Forum

On March 8, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Jiangsu Jintan Liming Garments Factory v. Empire Imports Group, Inc., 2017 NY Slip Op. 30469(U), holding that a defendant had waived enforcement of a forum selection clause by failing timely to object to the plaintiff’s choice of forum, explaining:

It is well established that forum selection clauses are prima facie valid and enforceable unless shown by the resisting party to be unreasonable. However, a forum selection clause may be waived. A forum selection clause defense is a defense founded on documentary evidence.

A party waives a forum selection clause defense by failing to raise it in an answer or a pre-answer motion to dismiss.

Here, defendants, who admittedly were aware of the defense, failed to raise the forum selection clause as a defense in their answer, did not move to dismiss on that ground, and did not amend their answer as of right to assert the defense. Defendants failed to raise the forum selection clause at their preliminary conference or during nearly four months of discovery, forcing Jiangsu to incur unnecessary litigation expenses and wasting the court’s time. Nor was the defense raised in opposition to Jiangsu’s motion for summary judgment. Defendants have waived the defense.

(Internal citations omitted).

Posted: March 21, 2017

Vacatur Based on Releases Denied; Defendant Failed Timely to Raise Issue

On March 7, 2017, the First Department issued a decision in Grinshpun v. Borokhovich, 2017 NY Slip Op. 01662, affirming the denial of a motion for vacatur for failing timely to bring it, explaining:

Defendant failed to show, in support of vacatur pursuant to CPLR 5015(a)(2), that the agreements in which plaintiffs allegedly released him from liability could not have been previously discovered by the exercise of due diligence. Defendant has been in possession of the agreements since the inception of the litigation. While he claims that he was unable to access the agreements due to hurricane damage to his home office and marital difficulties, lack of access did not prevent him from alerting the court to their existence. Defendant claims that he did not know of the releases. However, he admits knowing that plaintiffs “promised to release him” and that, in consideration for one of the agreements, he was to be “left in peace.” This knowledge should have prompted further inquiry. At the very least, defendant should have brought the November 2006 release to the court’s attention when it was produced to his attorneys, one year before the instant motion was made.

(Internal citations omitted) (emphasis added).

Posted: March 20, 2017

Statute of Limitations Runs From When Contract is Signed, Not When it is Dated

On March 9, 2017, the First Department issued a decision in Natixis Real Estate Capital Trust 2007-HE2 v. Natixis Real Estate Holdings, LLC, 2017 NY Slip Op. 01796, holding that the statute of limitations on a claim for breaches of representations and warranties accrues when the contract is signed, not when it is dated, explaining:

We next examine Natixis’s argument that the entire action must be dismissed as untimely commenced. A breach of contract cause of action generally must be commenced within six years of the breach. Natixis contends that this action is time-barred because the PSA is dated “as of April 1, 2007,” but plaintiff did not sue until April 30, 2013, i.e., more than six years later. This type of argument has been rejected by this Court.

This Court has held that a claim for breach of warranty accrues at the time the contract is executed, not on its “as of” date.

Here, the PSA was executed on April 30, 2007. The Trust at issue closed on April 30, 2007. Moreover, the PSA defines “Closing Date” as April 30, 2007. Thus, April 30, 2013 (the date plaintiff commenced this action) was the last day on which plaintiff could sue, and the action is therefore timely.

Natixis sets forth no convincing reason why this Court should depart from stare decisis. On the contrary, this Court’s rationale in U.S. Bank N.A. makes perfect sense:

The claim cannot accrue earlier [than the date the contract is executed], because until there is a binding contract, there can be no claim for breach of warranty. Additionally, in the residential mortgage-backed securities . . . context, . . . the claim cannot generally accrue before the contract, because the trust that is the recipient of the representations and warranties typically does not come into existence prior to the closing of the transaction. Furthermore, the representations and warranties were made as of the closing date.”

(Internal citations omitted).