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Articles Posted in Contract Disputes

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DSCF0815-300x225How do you know exactly what is included in your contract, and what is not? If your company enters into a contract to supply services, for example, the contract will include a provision for when and how you will be paid. What happens, though, if that provision, as it often does, includes a long list of terms, some very specific, some more general, and some catch-all?  How do you determine, pursuant to New York law, what will have to happen for you, or your business, to be paid?

As we recently discussed, it is important to know how to determine what your contract means, either before you sign it, so you can credibly try to avoid potential liability once the contract comes into existence; or, after the parties are bound and a dispute arises, so you can resolve it or perhaps limit your liability for it. One way to do that is to apply the rules of contract interpretation to the particular language of your contract.  In this article, we will examine how one such principle, ejusdem generis, is used to help determine exactly what a contract term means, or, even more likely, how a court will enforce it.

Ejusdem generis is a legal principle, which was defined, among other places, in 242-44 E. 77th St., LLC v. Greater New York Mut. Ins. Co., 31 A.D.3d 100, 103–04, 815 N.Y.S.2d 507, 510 (1st Dept. 2006):

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IMG_0912-225x300The rules of contract interpretation are best learned from seeing how they are applied.  To use them, successfully, is to know them.  In our last article, we discussed some of the basic rules.  We will now see how one of them, giving the words of the contract their plain and ordinary meaning, is applied by courts to common situations faced by New York businesses.

In Lake Const. & Dev. Corp. v. City of New York, 211 A.D.2d 514, 621 N.Y.S.2d 337 (1st Dept. 1995), a contractor sued the City of New York to be compensated for the additional work it said it performed to complete the brickwork on a public works construction project.  In preparing its winning bid, it had relied on the City Engineer’s cost estimate, which it said showed one brick wall of 972 square feet, rather than the two free-standing walls the contractor claimed were necessary to complete the job.  It obviously cost more to finish the job than the contractor estimated, so it tried to recoup at least some of its losses from the City.  Though that might seem like a reasonable approach for a business to take, it did not work.

The mere fact that the contractor claimed the contract was ambiguous did not make it so.  In upholding the lower court’s grant of summary judgement to the City dismissing the complaint, the First Department held that the relevant contract was clear and unambiguous that the contractor’s compensation was not based on the number of walls that needed to be constructed.  As the court noted, at Lake Const. & Dev. Corp. v. City of New York, supra, 211 A.D.2d 514, 515, 621 N.Y.S.2d 337, 338 (1st Dept. 1995), “the parties’ contract unambiguously provided that the quantity of brickwork to be paid for under the contract ‘shall be based on the number of square feet of free-standing brickwall installed in accordance with the plans and specifications and directions of the Engineer’.”

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DSCF0806-300x225What does your contract actually mean? You know what it says.  You know what you meant when you signed the contract and committed your business to it.  You thought it was clear and unambiguous.  What do you do when the other party claims you breached the contract and wants damages?  You know you fulfilled all your promises, duties, and obligations under the contract, and that the only way you breached it was if you promised something more, or different, than you thought you did.  So how, exactly, do you read a contract to determine what it means?

The rules of contract interpretation for contracts governed by New York law are fairly straight forward, even if the contract language they are used to decipher can appear to be opaque or misleading   For example, if the obligations of your New York business rested on the meaning of the phrase “face amount” as used in a commercial contract, with potential liability for hundreds of thousands of dollars of damages at stake, where would you start?

An interesting, if fairly old, case from the Appellate Division, First Department addressed that issue.  In Am. Exp. Bank Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 277, 562 N.Y.S.2d 613, 614–15 (1st Dept. 1990), the court set out the relevant rules for contract interpretation:

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garbage can dark - Copy.jpgA contract for the sale of goods: one business, or merchant, buys a part from another. They agree on quantity, price, and delivery. The Seller sends the Buyer a purchase order and delivers the goods, and the Buyer pays. It all sounds easy, but as we previously said, a lot can go wrong in a seemingly simple transaction.

What happens if the Buyer asks the Seller to recommend a part but it doesn’t work because it’s not the right one? What if the Buyer says he needs a part that meets certain specs, the Seller delivers what the Buyer asks for, but the Buyer asks for the wrong thing? What if the Seller says the part meets the specs but it doesn’t? Does the Buyer always have to pay for the part or can he return it, and does the Seller always have to take it back?

Some cases illustrate the complexities involved in a contract for the sale of goods better than others. Many times, you can find the most detailed application of the rules in a lower court opinion. One such case is Kabbalah Jeans, Inc. v. CN USA Int’l Corp., 26 Misc. 3d 1241(A), 907 N.Y.S.2d 438 (Sup. Ct. Kings County 2010). It’s instructive because it shows how rules designed to make things simple can sometimes make things difficult.

In a sale of goods dispute between merchants, the two most important, and meaningful, titles, are Buyer and Seller.
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pile-of-books-2-1272855-m.jpgWhat does a trial attorney do and what does it mean to be a trial attorney? These two seemingly simple questions, with their seemingly simple answers, actually go a long way towards uncovering some of the most common misperceptions about one of the most passionate, and arduous, fields in law. To put it simply, a trial attorney persuades and learns, or learns and persuades; however you put it, he never stops doing either.

Business owners, homeowners, friends and acquaintances have asked those questions many times; often with a knowing smile, an implied understanding that a trial lawyer really is a jack of all trades and master of none. It takes skill to conduct a trial, to be sure, the reasoning goes, but it’s not as if a trial lawyer has to know any one particular area of substantive law, or any one particular industry or type of dispute, well, in order to conduct a trial. If you ask anyone that has tried cases, you will find out how far off base that really is. To know how to be a good trial attorney you have to know not only the “how” but also the “what;” in fact, the “what” is so intertwined with the “how” that they really are one and the same thing.

When you try a case the procedure is important. It’s a battle and you have to know the rules of engagement so you can use them honestly and fairly to your client’s advantage. Every trial lawyer knows that what you don’t know can and will hurt you, but realizes that knowing more than your opponent helps tip the scales in your favor. Of course you need to know the mechanics; how to pick a jury, conduct a direct and cross-examination, give an opening statement and closing argument are all important. The better the trial lawyer the better each is executed.

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13073_fire_island_beach.jpg A contract does not always have to be in writing to be enforceable in New York. Most people, including business owners, might think it has to be in writing, but it does not. It must be an agreement, between at least two parties, where each has committed to give up something in order to get something back, and everyone has agreed on the important terms. Those terms, and that agreement, however, do not have to be set down on paper, where each side has signed on the proverbial dotted line. It might be nice to have such a signed document, which is known as an express contract; it might make it easier to prove that there is a contract and what its terms are; but you can still have a valid, enforceable contract without it, if that is what the parties want. In other words, in order to enforce a contract, what you need is a contract, not a writing which shows there is a contract.

In New York, a contract is binding if there is an offer, acceptance, consideration, mutual assent, an intent to be bound, and both sides agree on all of the essential terms. See Kowalchuk v. Stroup, 61 A.D.3d 118, 121 (First Dept. 2009). Parties can enter into a binding contract even without committing their agreement to a fully executed written document. See Bear Stearns Inv. Products, Inc. v. Hitachi Auto. Products (USA), Inc., 401 B.R. 598, 617 (S.D.N.Y. 2009). A contract may be implied in fact from the facts and circumstances surrounding the dispute and the intention of the parties as indicated by their conduct. See Yankee Lake Pres. Ass’n, Inc. v. Stein, 68 A.D.3d 1603, 1604-05 (3rd Dept. 2009); and Matter of Boice, 226 A.D.2d 908, 909 (3rd Dept. 1996). In other words, the parties can be shown to have entered into a binding contract because they acted like they entered into a binding contract.
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1065701_castle_-_hdr.jpg Every New York business deals with contracts: sales contracts; purchase agreements; leases, for equipment or for real property such as a store, warehouse, or office; even insurance policies which protect the business, its employees, and its property from loss and damage. Contracts are the means by which a business conducts business. When people, including business owners, think of a contract, they commonly picture a written document, which specifies all of the terms and conditions of the agreement between the parties. A contract, in order to be valid, does not necessarily need to have all of its terms reduced to writing. When there is a written contract, however, it is important that a business owner take the time to read and understand it because, chances are, the business will be bound by the contract in its entirety.

Most businesses believe that they know the terms of a contract before they enter into it, but they often concentrate on what they think are the most important provisions, without being concerned about the rest. Before the typical business enters into a contract, it will know how much money it will spend or how much money it will earn. It will be certain of exactly what it has agreed to sell, to buy, or to lease, and of how long it has to pay or to be paid. Many times, however, a business does not understand, and has not even read, the fine print. That, unfortunately, is a mistake.

In New York, a party that signs or accepts a written contract is conclusively presumed to know its contents and to assent to them, unless the other contracting party is guilty of fraud or some other wrongful act. See Metzger v. Aetna Ins. Co., 227 N.Y. 411, 416 (1920); Superior Officers Council Health & Welfare Fund v. Empire HealthChoice Ass., Inc., 85 A.D.3d 680, 682 (1st Dept. 2011); and Imero Fiorentino Associates, Inc. v. Green, 85 A.D.2d 419, 420 (1st Dept. 1982). This rule often can have unintended, and harsh, consequences for the unwary.

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1026301_olive_branch.jpgMany businesses share a common problem in negotiating and drafting contracts. Rather than resolving all key issues before they enter into a contract, rather than making clear what each party to the contract is obliged to do, and what each is entitled to receive, they allow serious ambiguities to remain in the terms of their agreement. Often the businesses want to gloss over their differences in order to close the deal. The problem with that approach is that ambiguities involving important issues, if not resolved beforehand, often lead to more serious disputes, including litigation, once the parties execute the contract. A recent case decided in New York by the Appellate Division, First Department, illustrates the problems engendered by this approach.

Parcside Equity, LLC v. Freedman, 2012 NY Slip Op 05106, Appellate Division First Department, June 26, 2012, involved a Defendant who entered into a contract in which he made an irrevocable offer to sell his life insurance policies to the Plaintiff. The terms and timing of the contract are the key to understanding the dispute. To begin with, there was no straightforward agreement to sell/buy the policies. Instead, the Defendant/Seller offered, in writing, to sell his policies to the Plaintiff/Buyer at a specific price. The Plaintiff/Buyer, however, could purchase the policies, but was not required to do so.

The central issue in the dispute was simple: The Defendant/Seller wanted to sell one of his policies for a higher price than he originally agreed to, and tried to renegotiate the terms of the offered sale, while the Plaintiff/Buyer evidently wanted to pay the lower, original price offered in the contract. This was expressed in two questions, which essentially mean the same thing. The first was how long the Plaintiff/Buyer could take to accept or reject the offer; i.e., to decide whether to purchase the policies. The second was when, if ever, the Defendant/Seller could withdraw his offer, or, in effect, materially change the terms of the proposed sale.

The written contract provided, in relevant part:

“Performance. This Agreement has been executed first by the Seller as an offer to sell the Policy hereunder, which offer shall be open for acceptance by the Purchaser until 5:00 p.m. on October 17, 2008, at which time the offer shall be deemed to be withdrawn if this contract has not been returned to the Purchaser and in the Purchaser’s sole discretion accepted by the Purchaser by that date or any other date selected by the Purchaser.”

That contract language was at the center of the dispute. The Defendant/Seller argued it meant that his offer to sell his life insurance policies to Plaintiff/Buyer could be withdrawn after October 17, 2008. If the court agreed, the Defendant/Seller would be allowed to sell the policies for a higher price than he originally agreed to, either by renegotiating with the Plaintiff/Buyer or by finding another purchaser. The Plaintiff/Buyer argued that the same contract language meant the Defendant/Seller’s offer to sell was irrevocable; i.e., it could not be withdrawn.

The appellate court interpreted the contract language in favor of the Plaintiff/Buyer. It held that the contract language clearly gave the Plaintiff/Buyer the right to purchase the life insurance policies at the offered terms at any time the Plaintiff/Buyer chose; i.e., once the Defendant/Seller made the offer, it could not withdraw the offer; it was irrevocable. That, however, was not the end of the dispute. In New York, a written offer to enter into a contract that states it is irrevocable, has a time limit even if it does not state one: It is irrevocable only for a reasonable period of time. The court applied this rule, which is embodied by General Obligations Law Section 5-1109, to the facts and found that the Plaintiff/Buyer’s acceptance, on December 4, 2008, was within a reasonable time as a matter of law.
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1184807_not_much_money.jpgWe’ve previously discussed the problem of partial payments being disguised as payments in full, and how this can prevent a New York Business from collecting the full amount a customer owes it. Depositing a check, marked payment in full, normally creates an Accord and Satisfaction, which discharges the remainder of the claim, unless the depositor endorses the check by clearly indicating that he reserves his rights or deposits the check under protest. See UCC 1-207. A check marked “Payment in Full,” however, can be defeated; even if deposited without the restrictive endorsement noted above, there still must be a genuine Accord and Satisfaction in order to discharge the remainder of the debt.

It’s important that every New York Business understand what an Accord and Satisfaction is: A subsequent contract that both parties enter into in order to satisfy, in whole or in part, their obligations under a prior contract. It can be established only by showing that both parties were fully aware of, and freely entered into, the new contract. See Merrill Lynch Realty/Carll Burr, Inc. v. Skinner, 63 N.Y.2d 590 (NY 1984); Narendra v. Thieriot, 41 A.D.3d 442 (2nd Dept. 2007); Church Mut. Ins. Co. v. Kleingardner, 2 Misc. 3d 676 (Sup. Ct. Oswego County, 2003).

It is also important to know that depositing, without a restrictive endorsement, a check marked “Payment in Full,” does not automatically establish an Accord & Satisfaction: The business that accepts, and deposits, a check marked “Payment in Full,” has to know that, if it accepts that check (i.e. it accepts the lower proffered payment) it will settle or discharge a legitimately disputed claim. See Merrill Lynch Realty/Carll Burr, Inc. v. Skinner, 63 N.Y.2d 590 (NY 1984). This is especially important where there is more than one outstanding, or possible outstanding, claim between the parties.

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754431_in_business.jpgIn our last entry, we spoke about a fairly common problem most New York Businesses have encountered: Where a customer/client makes a partial payment but tries to pass it off as payment in full for the money it owes. We also presented a way a business can protect itself: By placing a restrictive endorsement on the check, a business should be able to collect the partial payment and live to fight to recover the remainder of the debt another day.

The problem, in New York, is based on a legal concept known as “Accord and Satisfaction,” which sounds more complex than it actually is. To establish an Accord and Satisfaction, there must be a genuine dispute regarding an unliquidated claim. That could mean that the two parties to a sales contract have a dispute over how much the Buyer owes the Seller for the goods it purchased. For example, the Buyer claims it owes the Seller $700.00, but the Seller insists the Buyer owes it $1,000.00, because that is what they originally agreed to. Next, the parties must mutually resolve that dispute by entering into a new contract which discharges all or part of their obligations under the original contract. This could be an agreement by which the Seller agrees to accept the $700.00 for the goods the Buyer purchased, even though the original contract was for $1,000.00. If the Buyer pays the $700.00, and the Seller accepts the $700.00 without objection, then there is an Accord and Satisfaction, and, as a result, the Seller cannot recover the remaining $300.00 due it under the original sales agreement.

In New York, when one party accepts a check in full satisfaction of a disputed unliquidated claim, the claim is discharged, as an accord and satisfaction. (See, Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 66 N.Y.2d 321; Merrill Lynch Realty/Carll Burr v. Skinner, 63 N.Y.2d 590). As a result, if there is a dispute about the money a New York Business is owed, and it receives a check marked “payment in full”, it should make sure that it does not simply sign and deposit the check. Depositing a “Full Payment Check,” that way, is evidence that the business agrees to accept the lesser amount as payment in full. Instead, the business should clearly indicate that it does not accept the check as payment in full. One way to do this is to sign the check with the restrictive endorsement mentioned earlier.