Breach of Contract Claim Sustained Where Plaintiff Offered a Facially Reasonable Reading of The Contract

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Posted on: Apr 15 2024

The foundation of virtually every business and commercial transaction is a contract. It is difficult to imagine a transaction for the purchase or sale of goods, the merger or acquisition of a business, or the provision of services that is not based upon a contract.

There is almost nothing more costly to businesses and their owners than a dispute regarding the meaning of a contract. Such disputes often arise over the performance or non-performance of a term in the contract.

Disputes over the meaning of a contract or a term therein can take many forms. For instance, the language used in the contract may be ambiguous or reasonably clear but susceptible to different meanings. Sometimes, the language in a contract is clear but, when taken literally, it does not reflect the parties’ intent. Additionally, an event may have occurred that was not contemplated by the parties at the time of drafting, so the contract does not specifically provide for that occurrence.

When parties enter a contract, they naturally assume that the language used in their agreement accurately memorializes their understandings and intentions. For this reason, when a dispute arises, the courts in New York look to the intent of the parties as expressed by the language they chose to put into their writing.¹ A clear, complete agreement will be enforced according to its terms.²

When a dispute over the meaning of a contract arises, the court first asks if the contract contains any ambiguity.³ Since New York is a textual jurisdiction (i.e., where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document,” not to extrinsic and parol evidence.⁴ Thus, courts will examine the parties’ intentions as set forth in the agreement and seek to afford the language an interpretation that is sensible, practical, fair, and reasonable.⁵

A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning.⁶ The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.”⁷

“Whether or not a writing is ambiguous is a question of law to be resolved by the courts.”⁸ “[E]xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.”⁹ This rule is especially applicable where the parties are commercially sophisticated and their contract contains a merger clause.¹⁰

Since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,”¹¹ courts may not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.”¹² This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.”¹³

In addition, it is important to remember that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”¹⁴ “This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”¹⁵ “While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included.”¹⁶

To state a cognizable claim, “[a] plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract.”¹⁷ Conduct that frustrates the purpose of a contract is often described as bad faith, and is identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a power to specify terms,” “interference with or failure to cooperate in the other party’s performance,” and willful rendering of imperfect performance.¹⁸ General allegations of bad faith are insufficient.¹⁹

Mayville Engineering Company, Inc. v. Peloton Interactive, Inc.

These principles were at play recently in Mayville Engineering Company, Inc. v. Peloton Interactive, Inc., 2024 N.Y. Slip Op. 01990 (1st Dept. Apr. 11, 2024) (here).

Mayville Engineering involved a supply agreement between the parties pursuant to which plaintiff was to manufacture custom parts for defendant’s home exercise bikes. The agreement contained a “volume-based pricing agreement,” which incorporated a “volume-based pricing model” for various component parts that plaintiff was to manufacture.

The pricing model was set forth in Exhibit A to the agreement; that exhibit, in turn, comprised 12 pricing charts, 11 of which corresponded to each part to be manufactured by plaintiff. The first column of each of those 11 charts showed the number of parts to be ordered by defendant, with the first row showing zero parts ordered, and the remaining columns set out, among other data, columns for revenue. All columns, including the zero-parts row, showed some revenue.

Plaintiff argued that the volume-based pricing model, as illustrated by the charts, guaranteed that defendant was obliged to make fixed payments to plaintiff even when no orders for those parts were actually placed. Defendant, on the other hand, argued that the supply agreement did not require it to make any payments to plaintiff where it did not actually order any parts from plaintiff, and that the only reasonable interpretation of the agreement, including the pricing model, is that defendant was entitled to place no orders and make no payments.

Defendant moved to dismiss the cause of action for breach of the implied covenant of good faith and fair dealing (second cause of action) and the cause of action for breach of contract (the first cause of action). The motion court granted the motion as to the second cause of action, with prejudice, and denied the motion as to the first cause of action.

The First Department affirmed the rulings with regard to the two causes of action.

The Court held that “Plaintiff sufficiently stated a claim for breach of contract, as it ha[d] offered a facially reasonable reading of the relevant contract provisions.”²⁰ The Court found that the defendant failed to “make a definitive showing that plaintiff’s reading of the agreement [was] unreasonable as a matter of law, or that it [was] foreclosed by the contractual language or any other evidence in the record.”²¹ “On the contrary,” explained the Court, “plaintiff provide[d] a plausible explanation for the inclusion of revenue in the zero-unit column — namely, that the guaranteed payment obligation served to mitigate plaintiff’s required upfront investment costs.”²² “Therefore,” concluded the Court, the motion court “correctly found that a contractual ambiguity exist[ed], requiring the denial of the motion to dismiss.”²³

The Court also held that “plaintiff failed to state a claim for breach of the implied duty of good faith and fair dealing.”²⁴ The Court explained that the claim was based upon an allocation of risks and, therefore, was not an implied duty inherent in the agreement:

The claim is based on plaintiff’s allegations that under the parties’ agreement, defendant had an implied obligation to reimburse plaintiff for its reasonable and actual fixed costs, and that plaintiff entered the agreement in reliance on defendant’s promises to do so. These allegations, however, do not support the cause of action. A favorable allocation of risks to one party is not an implied duty inherent in an agreement, nor would it be reasonable for a promisee to believe that allocating risks in its favor is an inherent obligation of a promisor … Rather, any claim concerning the allocation of the risk of plaintiff’s up-front investment costs could arise only from a negotiated contractual term or some other legal basis for undertaking the obligation.²⁵

Accordingly, the Court held that “the dismissal with prejudice was appropriate, as the record offers no evidence to suggest that allowing plaintiff to replead would cure the deficiency in the cause of action.”²⁶

Footnotes

Ashwood Capital, Inc. v. OTG Mgt., Inc., 99 A.D.3d 1 (1st Dept. 2012).
Id. at 7.
Id.
Kass v. Kass, 91 N.Y.2d 554, 566 (1998).
Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 404 (2009); Abiele Contr. v. New York City School Constr. Auth., 91 N.Y.2d 1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp., 41 N.Y.2d 397, 400 (1977).
White v. Continental Cas. Co., 9 N.Y.3d 264, 267 (2007).
Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 25 N.Y.3d 675, 680 (2015) (citation and internal quotation marks omitted).
WWW Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990).
Id. at 163.
Schron v. Troutman Sanders LLP, 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted).
Bank of N.Y. Mellon v. WMC Mortg., LLC, 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted).
Id. (citations omitted).
Id.
Restatement (Second) of Contracts § 205 (1981). See also 511 W 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002) (“In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance”).
511 W 232nd Owners, 98 N.Y.2d at 153 (citations and internal quotation marks omitted).
Id. (citations and internal quotation marks omitted).
Kagan v. HMC-New York, Inc., 94 A.D.3d 67, 77 (1st Dept. 2012) (citation omitted).
E.g., Restatement (Second) of Contracts § 205 cmt. d.
Kagan, 94 A.D.2d at 77.
Slip Op. at *1.
Id.
Id.
Id. (citing Telerep, LLC v. U.S. Intl. Media, LLC, 74 A.D.3d 401, 402 (1st Dept. 2010)).
Id.
Id. at *1-*2 (citing Jaffe v. Paramount Communications, 222 A.D.2d 17, 22-23 (1st Dept. 1996); Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389-390 (1995)).
Id. at *2 (citing Izhaky v, Izhaky, 215 A.D.3d 588, 589 (1st Dept. 2023); Carde v. Rodriguez, 189 A.D.3d 498, 498 (1st Dept. 2020)).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.