Is The Commencement Of An Action, Particularly One Seeking Rescission, Itself An Anticipatory Breach? The New York Court Of Appeals Says No

• Posted on: Nov 1 2017

The Basics

A contract is an agreement between two or more parties to do something (e.g., provide goods or services) in exchange for a benefit.

When one or more parties to a contract fails to perform a term in their agreement, they are in breach of that agreement.

Most breaches fall into one of two categories: actual or anticipatory. In the former, a party to the contract fails or refuses to perform his/her obligations under the agreement or performs his/her obligations incompletely. In the latter, a party to the contract declares, before performance is required, that he/she does not intend to perform the obligations under the agreement. See 10-54 Corbin on Contracts § 54.1 (2017) (“An anticipatory breach of a contract by a promisor is a repudiation of [a] contractual duty before the time fixed in the contract for . . . performance has arrived”); 13 Williston on Contracts § 39:37 (4th ed.). A breach of contract, regardless of the form it takes, entitles the non-breaching party to bring an action for damages.

When one party unconditionally refuses to perform under the contract, regardless of when performance is supposed to take place, the refusal is called a “repudiation” of the contract.  A breach may be considered a repudiation even if it is not of an essential term or a material breach of an intermediate term. (This Blog previously wrote about the types of breaches here.)

Anticipatory Breach Examined

There are two types of anticipatory breaches: (1) express, and (2) implied. Norcon Power Partners v. Niagara Mohawk Power Corp., 92 N.Y.2d 458, 463 (1998) (noting that 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”) (internal quotation marks omitted). In an express repudiation, a party to a contract announces, before performance is required, that he/she will not perform under the agreement. The repudiation must be clear, straightforward, and directed at the other party. Tenavision, Inc. v. Neuman, 45 N.Y.2d 145, 150 (1978) (noting that the expression of intent not to perform must be “positive and unequivocal”). The declaration cannot be qualified or ambiguous. (For example, “Unless it stops raining, I will not be able to fix the roof.”) In an implied repudiation, a party takes actions that put the performance of a contract out of his/her power to perform (such as when a contractor sells the tools required to fix his customer’s roof).

If the breach can be shown to be repudiatory in nature, then the non-breaching party can terminate the contract, even though the date for performance has not yet occurred, or proceed as if the contract is valid. Strasbourger v. Leerburger, 233 NY 55, 59 (1922); see also American List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 44 (1989). Importantly, the non-repudiating party need not tender performance or prove its ability to perform the contract in the future.  American List Corp., 75 N.Y.2d at 44. Rather, the non-repudiating party is relieved of his/her obligation of future performance and can recover the present value of his/her damages from the repudiating party’s breach of the contract. Id.

The decision whether to accept that the contract has been repudiated and terminate, or wait until the date for performing the obligation passes and treat the defaulting party as being in actual breach, is not an easy one.  One commentator described the difficulty as follows:

If the promisee regards the apparent repudiation as an anticipatory repudiation, terminates his or her own performance and sues for breach, the promisee is placed in jeopardy of being found to have breached if the court determines that the apparent repudiation was not sufficiently clear and unequivocal to constitute an anticipatory repudiation justifying nonperformance. If, on the other hand, the promisee continues to perform after perceiving an apparent repudiation, and it is subsequently determined that an anticipatory repudiation took place, the promisee may be denied recovery for post-repudiation expenditures because of his or her failure to avoid those expenses as part of a reasonable effort to mitigate damages after the repudiation.

Crespi, The Adequate Assurances Doctrine after U.C.C. § 2-609: A Test of the Efficiency of the Common Law, 38 Vill. L. Rev. 179, 183 (1993), quoted in Norcon Power, 92 N.Y.2d at 463.

Whether a party has anticipatorily breached a contract is ordinarily a question of fact reserved for a jury, but a court may decide the issue as a matter of law when the purported repudiation is embodied in an unambiguous writing. Briarwood Farms, Inc. v. Toll Bros., Inc., 452 Fed. Appx. 59, 61 (2d Cir. 2011).

Can the Breaching Party Take Back the Repudiation?

A breaching party can repudiate the contract and then later retract the repudiation, as long as the non-breaching party has not made a material change in his/her position because of the repudiation. Notwithstanding, retraction cannot be done if the only contractual obligation remaining is for one party to pay money to the other. In that case, the party seeking the payment must wait until the due date for the payment has passed.

The Non-Breaching Party’s Duty to Mitigate

If one party repudiates the contract, most courts require the non-breaching party to avoid incurring unnecessary costs or expenses. This is referred to as “mitigating damages” and generally means that the non-breaching party cannot sit on his/her rights and let the situation get worse.

Princes Point LLC v. Muss Dev. L.L.C., 2017 NY Slip Op. 07298 (N.Y. Oct. 19, 2017).

Recently, the courts of New York were called upon to decide an unsettled question concerning an anticipatory breach: is the commencement of an action, particularly one seeking rescission, itself an anticipatory breach? In Princes Point, the New York Court of Appeals answered the question in the negative.

Background

In 2004, Princess Point agreed to purchase a waterfront parcel on Staten Island from the defendants Allied Princes Bay Co. and Allied Princes Bay Co. #2, LP (collectively, “APB”). In relevant part, APB agreed, as a condition precedent to closing, that it would deliver certain government approvals necessary to develop the property. The agreement prescribed a closing date of 30 days after Princes Point received notice that the approvals had been obtained, but in no event later than the “Outside Closing Date,” which was defined as 18 months after the execution and delivery of the agreement.

The agreement 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, Princes Point would receive a refund of its deposit and the parties would be released from the majority of their contractual obligations. In lieu of termination, Princes Point retained an option to waive the approvals and proceed to closing.

In 2005, following Hurricane Katrina, the New York State Department of Environmental Conservation conducted a visual inspection of a retaining wall along the waterfront of the property, found some problems, and required APB to remedy the identified defects. As a consequence, APB was unable to obtain the requisite development approvals by the closing date set forth in the purchase agreement. In light of the additional time and cost required, APB advised Princes Point that it intended to exercise the right to terminate the agreement unless Princes Point agreed to amend it.

In March 2006, the parties amended the agreement to increase the purchase price and down payment to be made with respect to the property, to require the parties to share in the costs of remediation, and to extend the “Outside Closing Date” for the sale to July 22, 2007. The Outside Closing Date later was extended to July 22, 2008, based on the ongoing nature of the remedial work required to close the sale. The amendments to the purchase agreement also contained a forbearance clause, which essentially provided that, “as a material inducement to [APB’s] agreement to the New Outside Closing Date,” Princes Point would “not commence any legal action against [APB] in the event that any of the Development Approvals had not been issued or the [remedial work] had not been completed by the New Outside Closing Date.”

Approximately one month before the final New Outside Closing Date, Princes Point commenced the action alleging, among other things, fraud in the inducement of the amendments to the contract. Princes Point also sought to eliminate the increase in purchase price and the requirement that it share in the cost of repairs to the property, as embodied in the amendments. Princes Point sought specific performance of the contract absent the amendments on the ground that the amendments were executed based on the defendants’ alleged misrepresentation of their ability to complete the remedial work necessary to close the sale.

In response, the defendants asserted various counterclaims, two of which were relevant to the appeal. In the first counterclaim, the defendants sought judgment declaring that, based on what by then was the expiration of the final New Outside Closing Date, either the contract had terminated, or Princes Point must immediately proceed to closing without any abatement in the purchase price. In the third counterclaim, the defendants alleged that, by failing to close the transaction in accordance with the contract, Princes Point defaulted on that agreement, thereby entitling APB to retain “the entire down payment,” as well as the payments Princes Point made in furtherance of its obligation to share in the cost of the remediation of the property.

Proceedings Below

The motion court dismissed all of Princes Point’s causes of action. The defendants moved for partial summary judgment on their first and third counterclaims. The defendants sought a declaration that the purchase agreement was terminated, and that Princes Point had materially breached the contract. The motion court granted the motion, adjudging that the contract had “expired by its terms” and that Princes Point had “materially breached” the agreement, entitling the defendants to, among other things, retain the down payment and the remedial payments made pursuant to the amendments to that agreement.

On appeal, the Appellate Division, First Department, affirmed the judgment insofar as appealed from and determined “that, because 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 A.D.3d 112, 114 (1st Dept. 2016). (Here.) In so holding, the court found dispositive the fact that the action before it sought rescission as opposed to a declaratory judgment:

This Court has held that an action seeking a declaratory judgment does not constitute an anticipatory breach. Several courts in other jurisdictions agree. The proposition is a rational one, because a declaratory judgment action merely seeks to define the rights and obligations of the parties. If a plaintiff succeeds in obtaining a declaratory judgment, he or she may then proceed to the performance of duties under the contract (as defined by the judgment).

An action seeking rescission of a contract is markedly different. In contrast to a declaratory judgment, a plaintiff who succeeds in obtaining rescission can no longer perform: his or her contractual duties will have evaporated. Indeed, by bringing this action for rescission, plaintiff sought to have a court “declare the contract void from its inception and to put or restore the parties to status quo.”

138 A.D.3d at 117 (citations omitted).

The First Department also concluded “that the seller [i.e., APB,] 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 First Department subsequently granted Princes Point leave to appeal to the Court of Appeals. In doing so, the First Department certified for review the question whether “the order of the Supreme Court, as affirmed by [the First Department, was] properly made?”

The Court of Appeals’ Decision

The Court reversed the First Department’s order and answered the certified question in the negative.

The Court agreed with the First Department’s observation that “the commencement of a declaratory judgment action ‘does not constitute an anticipatory breach . . . because a declaratory judgment action merely seeks to define the rights and obligations of the parties.’” Slip op. at 2 (quoting Princes Point, 138 A.D.3d at 117). But, it did not agree with the First Department’s conclusion that “‘[a]n action seeking rescission of a contract is markedly different’ from a declaratory judgment action.” Id. In this regard, the Court noted: “There is no material difference between [an] action [for rescission] and a declaratory judgment action. At bottom, both actions seek a judicial determination as to the terms of a contract, and 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.” (Citation omitted.) Consequently, the Court concluded that the filing of the action did not constitute an anticipatory breach.

In a footnote, the Court declined to reach a decision on “plaintiff’s alternative contention that, even if its commencement of this action constituted an anticipatory breach of the contract, defendants were required to show – and failed to show – that they were ready, willing, and able to perform their contractual obligations and close the subject sale at the time of the purported repudiation in order to retain the down payment and compaction payments made pursuant to the contract.” Slip op. at 3, n.4.

Takeaway 

New York follows the “traditional standard,” requiring an unequivocal statement or act to evidence an anticipatory breach. In Princes Point, the Court of Appeals makes clear that merely filing a lawsuit, while suggestive of a refusal to perform, is not the same as unequivocally repudiating one’s performance under an agreement. As the Court noted: “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.” Slip op. at 3. After all, the repudiating party could always retract the repudiation, withdraw or settle the lawsuit, or in some other way perform under the contract.

Tagged with: Breach of Contract, Business Litigation, Commercial Litigation, Contracts