A Contract That Means What It Says

• Posted on: Jun 23 2021

In New York, contracts are to be construed in accordance with the parties’ intent. See, e.g., Slatt v. Slatt, 64 N.Y.2d 966 (1985). “The best evidence of what parties to a written agreement intend is what they say in their writing.” Slamow v. Del Col, 79 N.Y.2d 1016, 1018 (1992). Thus, a written agreement that is clear and unambiguous on its face must be enforced according to the plain meaning of its terms. See, e.g., W.W.W. Assoc. v Giancontieri, 77 N.Y.2d 157, 162 (1990). Extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous. Id. 

A contract is unambiguous if “on its face [it] is reasonably susceptible of only one meaning.” Greenfield v. Philles Records, 98 N.Y.2d 562, 570 (2002). Parol (or extrinsic) evidence cannot be used to create an ambiguity where the words of the parties’ agreement are otherwise clear and unambiguous. Innophos, Inc. v Rhodia, S.A., 38 A.D.3d 368, 369 (1st Dept. 2007), aff’d, 10 N.Y.3d 25 (2008).

Conversely, “[a] contract is ambiguous if the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.” New York City Off-Track Betting Corp. v. Safe Factory Outlet, Inc., 28 A.D.3d 175, 177 (1st Dept. 2006) (internal quotation marks and citation omitted). The existence of ambiguity is determined by examining the “entire contract and consider[ing] the relation of the parties and the circumstances under which it was executed,” with the wording to be considered “in the light of the obligation as a whole and the intention of the parties as manifested thereby.” Kass v. Kass, 91 N.Y.2d 554, 566 (1998), quoting Atwater & Co. v. Panama R.R. Co., 246 N.Y. 519, 524 (1927). Whether a contract is ambiguous is a question of law for the court to decide. Kass, 91 N.Y.2d at 566.

Significantly, a court may not, in the guise of interpreting a contract, add or excise terms or distort the meaning of those used to make a new contract for the parties. Teichman v. Community Hosp. of W. Suffolk, 87 N.Y.2d 514, 520 (1996); Morlee Sales Corp. v. Manufacturers Trust Co., 9 N.Y.2d 16, 19 (1961).

In transactions involving the purchase and sale of real estate, the Court of Appeals has made clear that the rule requiring a written agreement to “be enforced according to its terms” has special importance:

We have … emphasized this rule’s special import in the context of real property transactions, where commercial certainty is a paramount concern, and where … the instrument was negotiated between sophisticated, counseled business people negotiating at arm’s length. 

Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004), quoting Matter of Wallace v. 600 Partners Co., 86 N.Y.2d 543, 548 (1995).

The foregoing principles were recently considered in Villager Capital Advisors, LLC v. Union Settlement Assn., Inc., 2021 N.Y. Slip Op. 04003 (1st Dept. June 22, 2021) (here), a case involving the payment of a commission in connection with the sale of real property.

Villager Capital arose out of a brokerage agreement between plaintiff, Villager Capital Advisors, LLC, a real-estate broker, and defendant Union Settlement Association, Inc. (“Union”). Union is the sole member of two housing development fund corporations (“HDFC”), defendants East 103rd Street Housing Development Fund Corporation and East 104th Street Housing Development Fund Company. 

[Ed. Note: The Housing Development Fund Corporation is a revolving loan fund established in 1966 under Article XI of the Private Housing Finance Law and administered by the New York State Division of Housing and Community Renewal. The purpose of the HDFC program is to provide loans to nonprofit organizations to develop low-income housing projects. HDFC loans may be used for pre-development costs, site acquisition, construction/ rehabilitation financing, and other mortgageable project development costs. HDFC loans may also be used to provide short term financing repaid from equity contributed by investors in low-income housing credit projects. A brief discussion of HDFCs can be found here.] 

Union owned and operated the St. Lucy’s Apartments through the two funds. Union wanted to sell its interest in the St. Lucy’s Apartments. To do so, Union and the HDFCs entered into a brokerage agreement with plaintiff. Under the terms of the brokerage agreement, Union agreed to pay plaintiff “a Sale Commission equal to the sum of (i) 5% of the first $1,000,000 of gross sale price of the Project Interest, plus (ii) 3% of the portion of the gross sale price in excess of $1,000,000.” Plaintiff was to receive the commission “immediately upon the closing of the sale transaction.”

Following a bidding process, Union and L&M Development Partners (L&M”) signed a purchase agreement that acknowledged plaintiff as the broker that procured the deal. L&M agreed to assume Union’s debts and to pay $5,747,574 in cash for the St. Lucy’s Apartments. The assumed debt consisted of two Housing Development Corporation-financed mortgage loans, totaling approximately $3,466,000. The assumed debt plus cash payment totaled $9,214,294.

The sale was later approved by both the Attorney General and Supreme Court. (See Not-For-Profit Corporation Law (“NPCL”) §§ 510, 511.) In the petitions submitted for such approvals, the parties represented the purchase price to $9,214,294 for the St. Lucy’s Apartments—the sum of the cash purchase price and the value of the mortgages assumed by L&M. Supreme Court, New York County (Masley, J.), approved the sale by two orders dated December 22, 2017. In those orders, Justice Masley listed the purchase price as $9,214,294. 

Plaintiff submitted an invoice for its commission to Union. The commission sought was based on a purchase price of $9,214,294. The amount due, less a pre-payment of $10,000, was $286,429. Union replied that the assumed debt was not part of the consideration for plaintiff’s commission. Plaintiff responded, arguing that the gross purchase price of $9,214,294 was confirmed in Justice Masley’s orders. Union made no further mention of the commission.

L&M and Union closed the transaction on January 31, 2018, without informing plaintiff that it was taking place. A week later, on February 6, 2018, plaintiff was advised that the transaction had closed.

Plaintiff received payment from Union for $182,427.22 on February 26, 2018— $104,001.78 less than the amount in plaintiff’s commission invoice. Union included a cover letter explaining that the commission calculation was based only on the cash payment paid by L&M and did not include the value of assumed mortgages.

Plaintiff brought the action for breach of contract and quantum meruit, seeking payment of the alleged shortfall. 

Plaintiff moved for summary judgment on its breach of contract claim. Union cross moved for summary judgment, seeking to dismiss plaintiff’s claims.

Plaintiff argued that “gross sale price” unambiguously referred to the entire consideration paid for the apartments, including the value of the mortgages that L&M assumed. Plaintiff contended that a commission payment based on the entire consideration paid by the buyer is the industry standard and is thus commercially reasonable. Any interpretation of “gross sale price” that did not include the assumed debt, said plaintiff, effectively excised the word “gross” from “gross sale price.”

In response, Union contended that plaintiff’s interpretation was “unheard of in the real estate industry.” Union argued that, if L&M assumed the mortgages and there was no cash payment, plaintiff would still receive a commission—which would be an absurd result. 

The motion court concluded that neither party had demonstrated that the party’s interpretation of “gross sale price” was the only one flowing from the text of the brokerage agreement. Instead, held the motion court, “[t]he agreement is … ambiguous.”

The motion court explained that it was reasonable, as plaintiff asserted, for a broker who facilitated an agreement for a buyer to assume millions of dollars in mortgages to be paid a commission based on the value of those mortgages. This was particularly true because the text of the brokerage agreement reflected the parties’ understanding that the mortgages could be assigned to a buyer and that plaintiff’s services were being enlisted to help bring about that assignment. Thus, the motion court reasoned, it would be reasonable for the agreement to provide that plaintiff’s commission would be calculated based upon the value of the mortgage debts it helped get assigned from Union to L&M, as well as the cash payment by L&M.

On the other hand, said the motion court, Union’s interpretation—that “gross sale price” refers only to the cash payment—was also reasonable. The mortgage debts at issue were held by a third-party lender and were not Union’s to sell. Thus, if the mortgages were not Union’s to sell, explained the motion court, but merely part of the overall structure of the agreement, then the parties could not have intended the mortgages to be part of the “gross sale price.”

The motion court concluded that neither position would rule the day, holding that the term was ambiguous. 

The motion court also held that the parties’ reliance on extrinsic evidence – e.g., the two court orders and petition – underscored the ambiguity of the term in the agreement: “When parties seek to use extrinsic evidence to resolve an ambiguous term of a contract, summary judgment remains inappropriate when determining the meaning of that term would require ‘a choice among inferences to be drawn from extrinsic evidence.’” (Quoting, Amusement Bus. Underwriters v. American Intl. Grp., 66 N.Y.2d 878, 880 (1985)).

Accordingly, the motion court denied plaintiff’s motion for summary judgment on its breach of contract claim and denied defendants’ cross motion for summary judgment to the extent it sought dismissal of the claims for breach of contract and account stated (here).

On appeal, the Appellate Division, First Department unanimously modified, on the law, to grant plaintiff’s motion, and otherwise affirmed the motion court’s order.

The Court held that the term, “gross sales price” was “plain and unambiguous”; the term included the value of assumed debt, in addition to the cash payment made by the buyer in exchange for the purchase. Slip Op. at *1. “To apply a different interpretation”, reasoned the Court, “would negate the unambiguous language in the agreement.” Id. (citation omitted). Thus, concluded the Court, “Defendants [were] simply attempting to rewrite the term ‘gross sale price.’” Id.

The Court also rejected Union’s argument that the breach of contract claim should have been dismissed as against the HDFCs because they were not in privity with either party to the brokerage agreement (i.e., plaintiff and Union). The Court reasoned that the HDFCs were third-party beneficiaries of the brokerage agreement. Id. The Court explained that “[a]lthough the HDFCs did not sign the brokerage agreement, Union Settlement Association, Inc. represented in the agreement that it sought to sell all of its interest in the project, including 100% ownership of the HDFCs along with all of the interests and assets held by the HDFCs.” As such, “the HDFCs were intended third-party beneficiaries of the brokerage agreement.” Id. (citing Mendel v. Henry Phipps Plaza W., Inc., 6 N.Y.3d 783, 786 (2006)).

[Ed. Note: To assert third-party beneficiary rights under a contract, a party must establish “(1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for [their] benefit and (3) that the benefit to [them] is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate [them] if the benefit is lost.” Burns Jackson Miller Summit & Spitzer v. Lindner, 59 N.Y.2d 314, 336 (1983).

Takeaway

Village Capital underscores the fundamental principle of contract interpretation – i.e., contracts are to be construed pursuant to the parties’ intention. As the Court of Appeals explained almost two decades ago, “[t]he best evidence of what the parties … intend is what they say in their writing. Slamow, 79 N.Y.2d at 1018. When the parties’ writing is clear and unambiguous on its face – that is, the terms are reasonably susceptible to only one meaning – it should be enforced according to the plain meaning of those words. 

In Village Capital, the Court made clear that, in the context of the underlying transaction, the word “gross” included every payment of value. This meant the value of the assumed mortgages and the cash payment. To conclude otherwise would “negate” the clear and unambiguous meaning of the word “gross”.