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Posted: December 9, 2016

Covenant of Good Faith and Fair Dealing Did Not Prevent Contract Termination

On November 30, 2016, the Second Department issued a decision in ELBT Realty, LLC v. Mineola Garden City Co., Ltd., 2016 NY Slip Op. 08042, holding that the covenant of good faith and fair dealing did not prevent a party from terminating a contract, explaining:

Here, the Supreme Court properly concluded that the language of section 3.01, which provided that the purchaser could terminate the contract in “its sole discretion” and for “any reason whatsoever,” means what it says: that the purchaser had the sole discretion to terminate the contract if it found the project to be unsatisfactory for any reason whatsoever during the specified time frame. While the implied covenant of good faith and fair dealing between parties to a contract embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, here, the plain language of the contract makes clear that termination of the contract was a possibility and the parties, who were sophisticated, counseled business entities negotiating at arm’s length over a prolonged period of time, should have understood and expected that termination of the agreement could occur during that specified window of time, and that such a decision was the purchaser’s alone and did not need to be accompanied by any specific justification.

To interpret section 3.01 as the seller asks would require adding terms to the contract and thereby make a new contract for the parties under the guise of interpreting the writing, and courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include.

(Internal quotations and citations omitted).

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