Commercial Division Blog

Posted: February 11, 2016 / Categories Commercial, Contracts, Real Property

Filing Rescission Action Before Date of Performance Constitutes Anticipatory Breach

On February 4, 2016, the First Department issued an opinion in Princes Point LLC v Muss Development L.L.C., 2016 NY Slip Op. 00783, holding that filing an action for rescission of a contract constitutes an anticipatory breach of the contract.

In Princes Point, the plaintiff, who had entered into a contract to purchase land, commenced an "an action against the seller for rescission of the contract before the closing date." As the litigation progressed, the plaintiff's claims were dismissed. The trial court then granted the defendants "partial summary judgment on their counterclaims to declare the contract terminated, to declare that plaintiff materially breached the contract, thereby entitling defendants to retain the down payment and compaction payments, and to award defendants attorneys' fees and costs." The First Department affirmed.

First, the court addressed the question of whether bringing an action for rescission constituted an anticipatory breach of the sales contract.

An anticipatory breach, or repudiation, occurs when a party to a contract unequivocally communicates to its counterpart before performance is due, by a statement or voluntary affirmative act, that it will avoid performance of its contractual duties. When a party repudiates contractual duties prior to the time designated for performance and before all of the consideration has been fulfilled, the repudiation entitles the nonrepudiating party to claim damages for total breach. Whether a party has anticipatorily breached a contract is ordinarily a question of fact reserved for a jury, but a court may decide the issue as a matter of law when the purported repudiation is embodied in an unambiguous writing.

. . .

This Court has held that an action seeking a declaratory judgment does not constitute an anticipatory breach. Several courts in other jurisdictions agree. The proposition is a rational one, because a declaratory judgment action merely seeks to define the rights and obligations of the parties. If a plaintiff succeeds in obtaining a declaratory judgment, he or she may then proceed to the performance of duties under the contract (as defined by the judgment.

An action seeking rescission of a contract is markedly different. In contrast to a declaratory judgment, a plaintiff who succeeds in obtaining rescission can no longer perform: his or her contractual duties will have evaporated. Indeed, by bringing this action for rescission, plaintiff sought to have a court declare the contract void from its inception and to put or restore the parties to status quo.

We therefore agree with the motion court that, by commencing this lawsuit before the Final Closing Date and seeking the particular relief of rescission of the Amendment and abatement of the purchase price, plaintiff unequivocally notified the Muss defendants of its intention to renounce its contractual duties. Plaintiff did not simply seek to define its rights under the parties' agreement; it sought to nullify the agreement entirely. Although plaintiff argues that it only sought rescission of the 2006 amendment and specific performance of the 2004 contract, there was one amended contract which defined the parties' rights and obligations. Plaintiff anticipatorily breached that contract by commencing this action.

(Internal quotations and citations omitted).

Next, the court addressed the question of "whether, in the context of plaintiff buyer's anticipatory breach, defendants must show that they were ready, willing, and able to close on the sale of the property - specifically, by obtaining the development approvals as a condition precedent to closing - in order to retain the down payment and compaction payments as liquidated damages." The court held that the defendants did not, explaining:

Besides giving the nonrepudiating party an immediate right to sue for damages for total breach, a repudiation discharges the nonrepudiating party's obligations to render performance in the future. Moreover, a party will be relieved or discharged from the performance of futile acts or conditions precedent upon the failure or refusal by a party to honor its obligations under their contract.

The contract required defendants to obtain the development approvals as a condition precedent to closing, but defendants were absolved of that obligation upon plaintiff's anticipatory breach. Whether defendants were in fact on track to obtain the approvals by the closing date is of no moment; the record demonstrates that they had been engaged in significant efforts to obtain the approvals until plaintiff's repudiation, and it was possible, however unlikely, that they could have obtained the approvals before the Final Outside Closing Date (which the parties had been extending on a monthly basis). They were not required to continue to pursue the approvals after plaintiff repudiated the contract by commencing the instant action seeking rescission. Once plaintiff commenced the instant action, it would have been futile and wasteful for defendants to continue to seek the approvals in preparation for a closing that plaintiff was tirelessly seeking to avoid.

We acknowledge that, although it appears that the ready, willing, and able requirement was devised exclusively to ensure that prospective purchasers of property are legally and financially able to conclude their purchases, ready, willing, and able, the concept has been expanded to apply to sellers of real property in some circumstances.

However, we have not previously considered whether a seller must make such a showing in the context of a buyer's anticipatory beach.

. . . [D]efendants in this action are not required to demonstrate their ability to close the sale, because plaintiff's anticipatory breach discharged their duty to obtain the development approvals as a condition precedent to closing. The outcome might have been different if plaintiff had defaulted on the closing date. But we are not confronted with that situation. Plaintiff commenced this action for rescission, thereby repudiating the contract of sale before the closing date occurred and discharging defendants from their obligation to fulfill conditions precedent. Therefore, defendants were entitled to retain plaintiff's down payment and compaction payments as liquidated damages.

(Internal quotations and citations omitted).