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Posted: November 15, 2013

Condition Precedent Strictly Interpreted

On November 1, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Kay Investments Series A, LLC v. Nordica Investments, LLC, 2013 NY Slip Op. 32834(U), reiterating the rule that when there is a doubt about the effect of contractual language, there is a presumption in New York against conditions precedent.

In Kay Investments, Justice Kornreich denied a motion for a preliminary injunction by several members of an LLC moving to, inter alia, remove the managing member for alleged breaches of fiduciary duty. Justice Kornreich held that the underlying action was barred by a settlement agreement by the same parties. The plaintiffs argued that a condition precedent for the settlement, the closing of a certain loan, had not occurred. In rejecting this argument, Justice Kornreich held:

In determining whether a particular agreement makes an event a condition courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition. This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the obligee . . . .

The express language of the Settlement Agreement does not condition its enforcement on the closing of the Madison Loan. Had the parties, who were all represented by counsel, wished to agree to such a condition precedent, they could have explicitly provided for one in the Settlement Agreement. Instead, the relevance of the Madison Loan in the Settlement Agreement is limited to the timing of the payments to the Preferred Members and the stock transfer to the Sponsor Member. The representation contained in Section IV.1 addresses the Sponsor Member’s right to access the funds, a right not challenged by the Preferred Members. The court cannot change the terms of the parties’ negotiated agreement, nor can the court give weight to the parties’ supposed contemporaneous side agreements, which are disclaimed by the integration clause.

(Internal quotations and citations omitted).

This case presents a cautionary tale for commercial litigators who draft settlement agreements. As Justice Kornreich noted, “a settlement agreement is a contract between the parties, it must be construed according to ordinary contract law.”

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