The New York Court of Appeals Reminds Litigants That Words in Contracts Have Meaning

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Posted on: May 20 2024

When parties enter into a contract, each assumes that the language 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 document will be enforced according to its terms.²

When the parties have a dispute over the meaning of their contract, the court first asks if the contract contains any ambiguity.³ Since New York is a textual jurisdiction (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 outside sources.”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

Ambiguity exists if the agreement, “read as a whole, fails to disclose its purpose and the parties’ intent …, or when specific language is ‘susceptible of two reasonable interpretations.’”⁸ An agreement is unambiguous and should be enforced on its plain terms “if the language it uses has ‘a definite and precise meaning, unattended by danger of misconception …, and concerning which there is no reasonable basis for a difference of opinion.’”⁹

“Whether or not a writing is ambiguous is a question of law to be resolved by the courts.”¹⁰ “[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.”¹¹ This rule is especially applicable where the parties are commercially sophisticated and their contract contains a merger clause.¹²

Finally, since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,”¹³ 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.”¹⁴ This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.”¹⁵

In Mulacek v. ExxonMobil Corp., 2024 N.Y. Slip Op. 02724 (May 16, 2024) (here), the New York Court of Appeals addressed these fundamental principles of contract interpretation. In doing so, the Court held that the language of the agreement before it was clear and unambiguous and, as a result, barred plaintiff from bringing the action.

The plaintiffs in Mulacek were shareholders of InterOil Corporation, a Canadian oil and gas company. Defendants acquired InterOil by paying its shareholders a fee per share and agreeing to make a Contingent Resource Payment (“CRP”) based on an independent appraisal of the volume of resources in certain wells located in Papua New Guinea and calculated pursuant to a formula set forth in a CRP Agreement.

Under the CRP Agreement, InterOil’s shareholders, such as plaintiffs, became “Holders” of receipts evincing their entitlement to a CRP. The CRP Agreement defined Holders of more than 25% of the receipts as “Required Holders” and empowered a “Holder Committee” to act as the Holders’ agent in certain circumstances. The CRP Agreement, in addition to providing for a determination of the volume of resources by an independent appraiser, set forth covenants that defendants would, among other things, ensure that the volume of resources was determined consistent with the procedures set forth in a separate agreement. Section 8.05 provided that those covenants were “in favor of and for the benefit of the Holders.” At the same time, Section 8.05 provided that the Holders had “no rights” under the CRP Agreement, except as “expressly set forth” therein. The sentence that immediately followed provided that “only the Required Holders or the Holder Committee (with Required Holder approval) [would] have the right, on behalf of all Holders, by virtue of or under any provision of this Agreement, to institute any action or proceeding … with respect to this Agreement, and no individual Holder or other group of Holders [would] be entitled to exercise such rights.”

Plaintiffs commenced the action alleging that defendants breached the covenants, thereby devaluing the CRP. Defendants moved to dismiss the complaint pursuant to, inter alia, CPLR 3211 (a) (1) and (3) on the ground that, under Section 8.05, only the Required Holders—which plaintiffs were not—and the Holder Committee had standing to commence an action to enforce the covenants. Plaintiffs countered that Section 8.05 was a “no-class-action” clause that barred them only from commencing an action “on behalf of all Holders” but preserved their right to commence an action on their own behalf. Supreme Court granted the motion and dismissed the complaint, and the Appellate Division affirmed.¹⁶ The Court of Appeals affirmed.

The Court held that “[c]ontrary to plaintiffs’ contention, Section 8.05 unambiguously bar[red] them from commencing an action on their own behalf to enforce their third-party beneficiary rights under the Agreement.”¹⁷ The Court explained that “Section 8.05 negate[d] any right of the Holders except as ‘expressly set forth’ therein, and it expressly set[] forth the right of the Required Holders or the Holder Committee to commence certain types of actions or proceedings.”¹⁸ “Nothing in Section 8.05 expressly set[] forth a right of the Holders to commence an action on their own behalf or otherwise,” said the Court.¹⁹ Thus, held the Court, “[t]he Agreement … ‘explicitly negate[d]’ any right of plaintiffs to commence an action on their own behalf to enforce the covenants.”²⁰

The Court also foreclosed any reading that would inject ambiguity into the CRP Agreement. In that regard, the Court held that “[t]o the extent that any other provisions in the [CRP] Agreement could be read to imply such a right, Section 8.05’s restrictions on the right to sue prevail ‘[n]otwithstanding anything to the contrary in th[e] Agreement.’”²¹ Finally, the Court noted that “the final sentence of Section 8.05 establishe[d] that enforcement of the covenants [was] ‘[s]ubject to’ those restrictions.”²²

Takeaway

Mulacek underscores the fundamental principle of contract interpretation – i.e., contracts are to be construed pursuant to the parties’ intention. As the Court explained almost two decades ago, “[t]he best evidence of what the parties … intend is what they say in their writing.”²³ 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 Mulacek, the Court made clear that, in the context of the underlying transaction, the terms of the agreement were clear and unambiguous. In that regard, the CRP Agreement expressly provided that the right to commence litigation to enforce the covenants in the agreement rested only with the Required Holders or the Holder Committee. As the Court found, “[n]othing in Section 8.05 expressly set[] forth a right of the Holders to commence an action on their own behalf or otherwise.”²⁴

In short, Mulacek is a reminder that contracts that say what they mean, mean what they say.

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).
Ellington v. EMI Music, Inc., 24 N.Y.3d 239, 244 (2014).
Greenfield v. Philles Records, 98 N.Y.2d 562, 569 (2002); see also Quadrant Structured Prods. Co., Ltd. v. Vertin, 23 N.Y.3d 549, 559-560 (2014).
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.
216 A.D.3d 114, 117-118, 123 (1st Dept. 2023).
Slip Op. at *1.
Id.
Id.
Id. (citing Mendel v. Henry Phipps Plaza W., Inc., 6 N.Y.3d 783, 786-787 (2006)).
Id.
Id.
Slamow v. Del Col, 79 N.Y.2d 1016, 1018 (1992).
Slip Op. at *1.

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.