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Posted: July 28, 2016

Court Distinguishes Clauses Relating to a Party’s Subjective or Objective Satisfaction

On June 29, 2016, Justice Bransten of the New York County Commercial Division issued a decision in International Finance Corp. v. Carrera Holdings Inc., 2016 NY Slip Op. 31341(U), discussing the rules for interpreting a clause providing for performance to a party’s satisfaction:

Where an agreement includes conditions precedent that must be met to one party’s “satisfaction,” New York courts place those clauses into two categories: (I) clauses relating to “operative fitness, utility or marketability” are examined under an objective, reasonable person standard; and (2) clauses relating to a party’s “fancy, taste, sensibility, or judgment” are examined under a subjective standard. The objective satisfaction standard requires that a party’s decision to reject the performance be reasonable. The subjective standard, by contrast, has been described as “untrammeled” and a party’s decision to reject performance thereunder is only required to be honest and in good faith. Thus, the power to withhold approval is “untrammeled” only where the object of the contract is to gratify taste, serve personal convenience, or satisfy individual preference.

Here, the Court determines that the clause at issue must be examined under an objective standard. When contract duties are contingent upon a particular condition being satisfactory’ to one party that party’s rejection of the condition is to be judged by an objective standard of reasonableness. Although IFC argues that this case warrants application of the subjective standard – effectively granting it the unilateral right to reject Carrera’s invocation of the Expropriatory Event clause – the conditions at issue here do not relate to IFC’s “fancy, taste, sensibility, or judgment.” IFC also argues that the clauses at issue here require its “individual business judgment.” Unlike the cases cited by IFC, the conditions at issue here included (i) that Carrera did not cause the Expropriatory Event, (ii) that Carrera complied with all applicable laws, and (iii) that Carrera exercised due care and took all “reasonable” measures to avoid the Expropriatory Event. Whether these conditions were met can be determined under an objective, reasonable person standard. Indeed, the inclusion of the word “reasonable” in subpart (iii) of the “satisfaction” clause further supports applying the objective standard.

(Internal quotations and citations omitted).

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