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Law Firm Can't Back Out After Receiving Benefit of Partnership Contract

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As noted in "The Only Way You Can Rescind a Contract in New York," there are two criteria that must be met before a court may rescind a contract:

  1. Money damages cannot make you whole; and,
  2. The parties to the underlying agreement aren't so far down a path that undoing the agreement would be inherently unfeasbile.

In its January 22, 2014 decision in Lawrence v. Kennedy, however, New York's Appellate Division, Second Department took the opportunity to remind us of a corollary to those rules, the failure to abide by which can mean that you waive the right to seek rescission of the contract:

You can't decide to repudiate an agreement if you become aware of the fraud or misconduct leading up to the agreement, and then decide to sit on your hands and do nothing about it until much later on, well after you've received the benefits of your end of the agreement.

The appellate court summarized its reasoning as follows:

"[T]he firm waived its right to repudiate the Employment Agreement on the grounds of fraudulent inducement and breach of contract, due to the firm's acceptance of the benefits under the Employment Agreement and its failure to act promptly upon learning of the decedent's alleged misconduct (see Sitar v Sitar, 61 AD3d 739, 742; Barrier Sys. v A.F.C. Enters., 264 AD2d 432, 433; Capstone Enterprs. of Port Chester v County of Westchester, 262 AD2d 343, 344)."

The takeaway from this case is clear: if, after entering into an agreement you learn about fraud or misconduct that would otherwise entitle you to rescind the agreement, you must decide - quickly - if that's the road you want to take.

If you snooze, you lose.

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