Breach of Contract, The Covenant of Good Faith and Fair Dealing and Unjust Enrichment

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Posted on: Nov 13 2024

In Singh v. T-Mobile, 2024 N.Y. Slip Op. 05554 (2d Dept. Nov. 13, 2024) (here), the Appellate Division, Second Department affirmed the dismissal of an action for, among other things, breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment. As discussed below, the Court did so on the basis of familiar principles of contract and quasi-contract law.

In April 2018, plaintiff Cellray, Inc. (“Cellray”) entered into a contract with defendant iMobile PRP, LLC (“iMobile”) to sell Sprint wireless services at four different store locations, including one located in Port Jefferson Station, New York (the “management agreement”). Pursuant to an amendment to the management agreement, iMobile was permitted to terminate the management agreement upon Sprint’s merger with another entity, if directed to do so by the merged entity. In 2020, Sprint merged with defendant T-Mobile. Shortly thereafter, T-Mobile directed iMobile to terminate the management agreement with Cellray with respect to each of the four stores.

In June 2021, plaintiffs commenced the action to, inter alia, recover damages for breach of contract against iMobile and defendants Sarab Lamba and Chetan Krishna, as managing officers of iMobile. Plaintiffs alleged, among other things, that iMobile, Lamba, and Krishna breached the management agreement by failing to compensate plaintiffs upon the termination of the management agreement. Thereafter, plaintiffs amended the complaint, adding causes of action against T-Mobile and a cause of action to void the amendment to the management agreement on the ground of unconscionability.

Defendants moved to dismiss the amended complaint pursuant to CPLR 3211(a) (failure to state a claim). Plaintiffs opposed the motion and cross-moved for leave to serve a second amended complaint to specify additional damages. In an order dated May 5, 2022, the Supreme Court granted defendants’ motion and denied plaintiffs’ cross-motion. On July 13, 2022, the motion court entered an order and judgment granting defendants’ motion, denying plaintiffs’ cross-motion, and dismissing the amended complaint. Plaintiffs appealed. The Second Department affirmed.

The Court held that the motion court “properly granted that branch of the defendants’ motion … to dismiss the cause of action alleging breach of contract insofar as asserted against T-Mobile, Lamba, and Krishna,” because none of those defendants were parties to the management agreement.[1] Under New York law, “[l]iability for breach of contract does not lie absent proof of a contractual relationship or privity between the parties.”[2] Thus, “[o]ne cannot be held liable under a contract to which he or she is not a party.”[3]

Further, the Court held that the motion court “properly granted that branch of the defendants’ motion … to dismiss that cause of action insofar as asserted against iMobile.” The Court found that “defendants’ submission of the management agreement and the amendment thereto utterly refuted the plaintiffs’ allegations that iMobile was obligated to compensate the plaintiffs for termination of the management agreement upon Sprint’s merger with T-Mobile and that closure of the store in Port Jefferson Station constituted a breach of the management agreement.”[4]

In addition, the Court held that the motion court “properly granted that branch of the defendants’ motion … to dismiss the cause of action alleging breach of the implied covenant of good faith and fair dealing.”[5] “In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance.”[6] “‘Encompassed within the implied obligation of each promisor to exercise good faith are any promises which a reasonable person in the position of the promisee would be justified in understanding were included.’”[7] Thus, “the covenant is breached where one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other.”[8] “However, no obligation may be implied that would be inconsistent with other terms of the contractual relationship.”[9]

Based upon the foregoing principles, the Court held that “plaintiffs failed to sufficiently allege that the defendants’ conduct prevented the plaintiffs from performing their obligations under the management agreement or deprived them of the right to receive benefits from that agreement.”[10]

The Court also held that the motion “properly granted that branch of the defendants’ motion … to dismiss the cause of action alleging unjust enrichment.”[11] Under New York law, “[t]he existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter.”[12]

The Court found that the “unjust enrichment cause of action [arose] out of the same subject matter as the cause of action alleging breach of contract, and thus, the plaintiffs [could not] recover on an unjust enrichment theory.”[13] Moreover, said the Court, “the plaintiffs failed to sufficiently allege that the defendants were enriched or otherwise received a benefit at the plaintiffs’ expense.”[14]

Finally, the Court held that the motion court properly dismissed plaintiffs’ fraud and conspiracy to defraud claims.[15] The Court found that plaintiffs “failed to sufficiently allege that they sustained an actual pecuniary loss as a result of the alleged fraudulent conduct.”[16] Under New York law, “[d]amages for a cause of action sounding in fraud are limited to the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule.”[17]

Moreover, the Court dismissed the conspiracy to defraud claim because “conspiracy to defraud is not recognized in New York as an independent cause of action.”[18]

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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.

[1] Slip Op. at *1 (citing Arroyo v. Central Islip UFSD, 173 A.D.3d 814, 816 (2d Dept. 2019); Victory State Bank v. EMBA Hylan, LLC, 169 A.D.3d 963, 965 (2d Dept. 2019)).

[2] Hamlet at Willow Cr. Dev. Co., LLC v. Northeast Land Dev. Corp., 64 A.D.3d 85, 104 (2d Dept. 2009).

[3] Victory State Bank, 169. A.D.3d at 965.

[4] Slip Op. at *1 (citing First Korean Church of N.Y. v. 35 Ave & Parsons, LLC, 221 A.D.3d 971, 972-973 (2d Dept. 2023). Under CPLR 3211(a)(1), a party can move to dismiss a pleading on the ground that the action is barred by documentary evidence. It “may be granted only where the documentary evidence utterly refutes the plaintiff’s factual allegations, thereby conclusively establishing a defense as a matter of law.” Global World Realty, Inc. v. Zubli, 219 A.D.3d 1495, 1497 (2d Dept. 2023) (internal quotation marks omitted). This Blog examined motions to dismiss under CPLR 3211(a)(1), for example, here.

[5] Id.

[6] 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002).

[7] Singh v. City of New York, 189 A.D.3d 1697, 1700 (2d Dept. 2020) (quoting Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389 (1995)).

[8] Michaan v. Gazebo Hort., Inc., 117 A.D.3d 692, 693 (2d Dept. (2014) (internal quotation marks omitted).

[9] 1357 Tarrytown Rd. Auto, LLC v. Granite Props., LLC, 142 A.D.3d 976, 977 (2d Dept. 2016); see also 106 N. Broadway, LLC v. Lawrence, 189 A.D.3d 733, 739 (2d Dept. 2020).

[10] Slip Op at *2 (citations omitted).

[11] Id.

[12] Barker v. Time Warner Cable, Inc., 83 A.D.3d 750, 752 (2d Dept. 2011) (internal quotation marks omitted); see also Federico v. Brancato, 144 A.D.3d 965, 967 (2d Dept. 2016). This Blog examined cases involving claims of unjust enrichment, for example, here, here, and here.

[13] Slip Op. at *2 (citations omitted).

[14] Id. (citing Pierce Coach Line, Inc. v. Port Wash. Union Free Sch. Dist., 213 A.D.3d 959, 961 (2d Dept. 2023); Dee v. Rakower, 112 A.D.3d 204, 213-214 (2d Dept. 2013)).

[15] Id.

[16] Id.

[17] Kramer v. Meridian Capital Group, LLC, 201 A.D.3d 909, 911 (2d Dept. 2022) (internal quotation marks omitted).

[18] Id. (citation omitted).