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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: October 13, 2018

Fact Questions Regarding Whether Contract Breach Was So Material As to Justify Rescission Preclude Summary Judgment

On September 28, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in Sabby Healthcare Master Fund Ltd. v. Microbot Med. Inc2018 NY Slip Op. 32429(U), holding that fact questions regarding whether a breach of contract was so material as to justify rescission precluded summary judgment, explaining:

Rescission should be granted only when a party’s breach is material and willful, or if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. More specifically, to warrant rescission, a party must allege fraud in the inducement of the contract; failure of consideration; an ability to perform the contract after it is made; or a breach in the contract which substantially defeats the purpose thereof. Further, the equitable remedy is to be invoked only when there is lacking complete and adequate remedy at law.

Here, the record shows a material issue of fact as to whether the breach was so fundamental as to defeat the object of the SPA. Sabby submits testimony from its principals suggesting that they would not have entered the SPA, without additional lock-up restrictions on Alpha, but for the representation that Alpha was an affiliate and thus subject to certain other restrictions based on SEC rules. However, the record also contains email exchanges among Sabby principals that tend to suggest an awareness by Sabby that Alpha was not subject to any restrictions-including restrictions that an affiliate would be subject to under SEC rules. Further, while it is clear to the Court that the SPA’s Disclosure Schedule does represent that Alpha was an affiliate, it is unclear whether such a contractual representation-made in a footnote-was so central to the parties’ purpose in executing the SPA that a breach thereof warrants rescission.

Therefore, Microbot, as the moving party, has not met its burden of proving as a matter of law that the SPA’s representation of Alpha as a Micro bot affiliate was not central to Sabby’s decision to consummate the transaction. Further, Microbot has not established, and has submitted no evidence tending to show, that Sabby has an adequate remedy at law or that the parties cannot be restored to the status quo ante.

(Internal quotations and citations omitted).

Suits for breach of contract typically seek money damages. As this decision shows, there are other remedies available to a plaintiff, including rescission–that is, rescinding the contract and returning the parties to their positions before the contract was signed. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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