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NY Court: Suing to Rescind Contract Doesn't Equal Breach


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1/30/2018
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Just a few months back, New York's Court of Appeals issued a rather important ruling in the breach of contract realm, holding that just because a plaintiff brings a lawsuit seeking to rescind a contract, that action, in and of itself, does not mean that they've signalled their intention to breach the agreement, which in legalese, is referred to alternately as "anticipatory breach of contract," or "anticipatory repudiation."

 What Happened in Princes Point LLC v. Muss Development

In Princes Point,  the plaintiff agreed to purchase a developable waterfront parcel on Staten Island from defendants, which was memorialized by a purchase agreement that was executed in 2004. The agreement provided that, as a condition precedent to closing, defendants were required to deliver certain government approvals necessary to develop the property. 

The agreement also provided that if the approvals could not be obtained by the Outside Closing Date, then either party could terminate the agreement upon 30 days' notice. In the event of such termination, plaintiff would receive a refund of its deposit and the parties would be released from the majority of their contractual obligations. 

Following Hurricane Katrina, the New York State Department of Environmental Conservation (DEC) noted certain flaws in a retaining wall along the waterfront of the property, and compelled defendants to fix those problems. Not surprisingly - defendants were unable to secure the necessary approvals by the original closing date set in the purchase agreement, which in turn, led the parties to enter into an amended agreement that increased both the purchase price and the down payment, and that both parties would share in the costs of the government-mandated repairs.

About one month before the new closing date, plaintiff sued, claiming, inter alia, that defendants should be held to the original contract because had fraudulently induced them into signing the amended contract, and therefore, plaintiffs claimed, they shouldn't be held to share in the additional repair costs or the higher purchase price for the property.

Predictably, the defendants counterclaimed, asserting that by failing to proceed to closing as required by the amended contract, plaintiffs had breached the contract, and therefore, defendants should be entitled to retain the entire downpayment (as well as the plaintiff's contributions towards the necessary repairs of the property). 

After prevailing at the trial court level (plaintiff's claims were dismissed, and defendants won on their counterclaims), the Appellate Division affirmed the trial court's judgment, holding that  "[B]ecause a rescission action unequivocally evinces the plaintiff's intent to disavow its contractual obligations, the commencement of such an action before the date of performance constitutes an anticipatory breach” (Princes Point LLC v. Muss Dev. L.L.C., 138 AD3d 112, 114 [1st Dept 2016] ). The Appellate Division further stated “that the seller was not required to show that it was ready, willing, and able to complete the sale [as a condition of receiving damages] because the buyer's anticipatory breach relieved [the seller] of further contractual obligations” (id.).

The Court of Appeals Reverses, and Clarifies What Is - and Isn't - Anticipatory Breach of Contract

Defining "Anticipatory Breach of Contract"

Before jumping into the facts of this particular case, the Court of Appeals (New York State's highest court) set forth the general rule for what constitutes an anticipatory breach of contract:

"An anticipatory breach of a contract—also known as an anticipatory repudiation—'can be either a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach or a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach' (Norcon Power Partners v. Niagara Mohawk Power Corp., 92 N.Y.2d 458, 463 [1998] [internal quotation marks omitted]; see 2B N.Y. PJI2d 4:1 at 35–36 [2017] ) ...

"For an anticipatory repudiation to be deemed to have occurred, the expression of intent not to perform by the repudiator must be “positive and unequivocal” (Tenavision, Inc. v. Neuman, 45 N.Y.2d 145, 150 [1978]; see Ga Nun v. Palmer, 202 N.Y. 483, 489 [1911] )."

In other words, anticipatory repudation will be found where the other side to the contract makes clear that it won't - or can't - fulfill its obligations under the contract while there is still time left for them to keep their end of the deal.

The Reversal

Against the foregoing factual and legal background, the Court of Appeals succinctly framed the central question to this case as follows:

"This appeal presents the question whether the mere commencement of an action seeking 'rescission and/or reformation' of a contract constitutes an anticipatory breach of such agreement."

In deciding that issue in the negative, the Court reasoned

"[I]n this context—specifically, where the amended complaint seeks, among other things, reformation of the amendments to the contract and specific performance of the original agreement—there was no “positive and unequivocal” repudiation (Tenavision, 45 N.Y.2d at 150, 408 N.Y.S.2d 36, 379 N.E.2d 1166) ... 

"At bottom ...  the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval (see Restatement [Second] of Contracts § 250, Illustration 3)." 

The Takeaway

In my view, this is an extremely sound decision; a party that is caught in a particularly tough situation (as was certainly the case for the plaintiffs here) should be permitted to seek the Court's guidance and ruling without fear that the mere act of doing so will be deemed a breach of contract with all of the terribly adverse consequences attendant to doing so.

 

 

 



Category: Breach of Contract

Jonathan Cooper
Non-Compete, Trade Secret and School Negligence Lawyer

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