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FOLLOW-UP – THE NEW YORK COURT OF APPEALS AFFIRMS THE APPELLATE DIVISION, SECOND DEPARTMENT’S, ENFORCEMENT OF WAIVER OF DECLARATORY RELIEF IN COMMERCIAL LEASE RESULTING IN THE DENIAL OF TENANT’S YELLOWSTONE INJUNCTION APPLICATION

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  • Posted on: May 10 2019

FOLLOW-UP – THE NEW YORK COURT OF APPEALS AFFIRMS THE APPELLATE DIVISION, SECOND DEPARTMENT’S, ENFORCEMENT OF WAIVER OF DECLARATORY RELIEF IN COMMERCIAL LEASE RESULTING IN THE DENIAL OF TENANT’S YELLOWSTONE INJUNCTION APPLICATION

Our February 9, 2018, Blog post, entitled: “APPELLATE DIVISION, SECOND DEPARTMENT, ENFORCES WAIVER OF DECLARATORY RELIEF IN COMMERCIAL LEASE RESULTING IN THE DENIAL OF TENANT’S YELLOWSTONE INJUNCTION,” addressed the decision in 159 MP Corp. v. Redbridge Bedford, LLC, in which the Appellate Division, Second Department, recognized that the “appeal [it was deciding] raises an issue of first impression in the appellate courts of New York…” to the extent that it “address[ed] the question of whether written leases negotiated at arm’s length by commercial tenants may include a waiver of the right to declarative relief that is enforceable at law or, alternatively, whether such a waiver is void and unenforceable as a matter of public policy.”  Our earlier Blog discusses the underlying facts of 159 MP and the Second Department’s basis for its holding.

On May 7, 2019, the New York Court of Appeals affirmed [HERE], over a lengthy dissent, “that, under the circumstances of this case, the waiver clause [at issue in 159 MP] is enforceable, requiring dismissal of the complaint.”  At its core, the Court of Appeals’ decision is based on the principle that a written agreement, when “clear [and] complete…, should be enforced according to its terms.”  (Quoting Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 (2004) (ellipses omitted).)  The Court of Appeals found that the lease provision at issue in 159 MP “could not be clearer.”  According to the Court, “this unambiguous waiver clause reflects the parties’ intent that plaintiffs be precluded from commencing precisely the type of suit they initiated here and, as such, this action was foreclosed by the plain language of the leases.”

The Court rejected the 159 MP plaintiff’s argument that the waiver provision at issue violated “a public policy strong enough to warrant a departure from the bedrock principle of freedom of contract.”  The Court reiterated that “[f]reedom of contract is a ‘deeply rooted’ public policy of this state (New England Mut. Life Ins. Co. v Caruso, 73 NY2d 74, 81 [1989]) and a right of constitutional dimension (U.S. Const. art. I, § 10[1]).”  Further, the Court reasoned that the “enforcement of commercial contracts according to the terms adopted by the parties [is] a pillar of the common law” because of “New York’s status as the preeminent commercial center in the United States, if not the world.” Thus, [b]y disfavoring judicial upending of the balance struck at the conclusion of the parties’ negotiations, our public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements.”

While the Court noted that unconscionable contracts and those entered unknowingly or under duress or coercion may not be enforced, the 159 MP plaintiff raised no such defenses.  Plaintiff’s sole challenge to the waiver provision in question – “that the right to bring a declaratory judgment action is so central and critical to the public policy of this state that it cannot be waived by even the most well-counseled, knowledgeable or sophisticated commercial tenant” – was found to be “unpersua[sive]” by the Court.

The Court described the interplay between the enforcement of contracts and public policy considerations as follows:

We have deemed a contractual provision to be unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public policy. But, because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after “balancing” the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger. Although we possess the power to set aside agreements on this basis, our usual and most important function is to enforce contracts rather than invalidate them “on the pretext of public policy, unless they clearly . . . contravene public right or the public welfare.

(Citations, internal quotation marks, footnotes and ellipses omitted.)

After indicating numerous instances where the Court had previously held that certain contractual provisions were void as against public policy, the Court stated that “[h]ere, the declaratory judgment waiver is clear and unambiguous, was adopted by sophisticated parties negotiating at arm’s length, and does not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract.”  Specifically, as related to the public policy considerations raised by the 159 MP plaintiff, the Court stated that:

there is simply nothing in our contemporary statutory, constitutional, or decisional law indicating that the interest in access to declaratory judgment actions or, more generally, to a full suite of litigation options without limitation, is so weighty and fundamental that it cannot be waived by sophisticated, counseled parties in a commercial lease. CPLR 3001 enables Supreme Court to grant declaratory judgments in the context of justiciable controversies but in no way indicates that sophisticated parties may not voluntarily waive the right to seek such relief. A declaratory judgment is a useful tool for providing clarity as to parties’ obligations and may, in some circumstances, enable parties to perform under a contract they might otherwise have breached. Access to declaratory relief benefits the parties as well as society in quieting disputes. However, a declaratory judgment is merely one form of relief available to litigants in enforcing a contract. In codifying the right to seek declaratory relief, the Legislature neither expressly nor impliedly made access to such a claim nonwaivable with respect to any party, much less sophisticated commercial tenants.

The Court after analyzing the history and utility of declaratory relief, found significant that the subject waiver provision did not preclude the plaintiff from access to courts because plaintiff could raise its defenses in such summary proceedings brought by the defendant landlord.

The Court also found that the declaratory judgment waiver was not rendered unenforceable because, “under the circumstances presented here, it resulted in an inability to obtain Yellowstone relief.  Because the Civil Court cannot issue injunctive relief, requests for Yellowstone injunctions must be made in supreme court.  In describing why Yellowstone relief was not available to the 157 MP plaintiff, the Court stated:

Yellowstone relief is not an end in itself but merely a means of maintaining the status quo by tolling a contractual cure period during a pending action, permitting a tenant who loses on the merits of the lease dispute to cure the defect and retain the tenancy. Here, because plaintiffs’ declaratory judgment action was barred by the lease waiver, there was no pending action in which to adjudicate the parties’ rights and to support interim relief in the form of a Yellowstone injunction. Indeed, the request was rendered academic by the dismissal of the complaint.

The Court reiterated that the inability to obtain Yellowstone relief would not leave plaintiff without remedy because it could raise such defenses as appropriate in summary proceedings.

In his lengthy dissent, Judge Wilson, among other things, expressed his view that there was a strong public policy in favor of declaratory relief and Yellowstone injunctions.  Justice Wilson feared that “[t]he majority’s decision today will result in the elimination of the “Yellowstone injunction”, and, therefore, “enable [landlords] to terminate the leases based on a tenant’s technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations.”

TAKEAWAY

The majority’s decision reinforces the primacy of freedom of contract in New York.  However, as the dissent argues, the result could be devastating to commercial tenants.  Undoubtedly, most new commercial leases will contain waivers such as those that appear in the leases that are the subject of 159 MP.  The dissent’s argument that the majority’s view will create uncertainty in contract for tenants is prescient.  It will be interesting to see how this ruling plays out.

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