New York Law Review

Tag: contract termination

  • Matter of Heery International, Inc. (Mekong Development Corp.), 61 N.Y.2d 447 (1984): Architect’s Role in Dispute Resolution After Contract Termination

    Matter of Heery International, Inc. (Mekong Development Corp.), 61 N.Y.2d 447 (1984)

    When a construction contract incorporates the General Conditions of the Contract for Construction of the American Institute of Architects, the requirement to submit claims to the architect as a condition precedent to arbitration terminates when the architect is no longer responsible for supervising the contractor’s performance, regardless of whether the termination is due to substantial completion or the contractor’s substantial breach.

    Summary

    Heery International, the contractor, sought arbitration for “change order adjustments” after Mekong Development Corp. terminated their contract for substantial breach. Mekong argued that Heery had to first submit its claim to the architect, per the contract’s General Conditions, before arbitration. The Court of Appeals held that because the architect’s supervisory role ended with the termination of the contract, the submission requirement was no longer in effect. The Court reasoned that the architect’s role as mediator is tied to their ongoing supervisory responsibility, which ceases upon contract termination regardless of the reason for termination. Therefore, Heery did not need to submit its claim to the architect before proceeding to arbitration.

    Facts

    The contract between Heery International (contractor) and Mekong Development Corp. (owner) incorporated the “General Conditions of the Contract for Construction” of the American Institute of Architects.
    Mekong terminated Heery’s services for allegedly breaching the contract.
    Heery then sought arbitration for “change order adjustments”.
    Mekong argued that Heery was required to submit these claims to the architect as a condition precedent to arbitration, according to the General Conditions.

    Procedural History

    The Supreme Court denied Mekong’s application to stay arbitration, holding that submission to the architect was not required.
    The Appellate Division affirmed the Supreme Court’s decision, with two justices dissenting.
    Mekong appealed to the Court of Appeals based on the dissent in the Appellate Division.

    Issue(s)

    Whether a contractor, whose services have been terminated by the property owner for substantial breach of the contract, must submit their claim for “change order adjustments” to the architect as a condition precedent to arbitration under the “General Conditions of the Contract for Construction” of the American Institute of Architects incorporated in the construction contract.

    Holding

    No, because the architect’s role as mediator is tied to their general responsibility to supervise the contract, which ends when the contractor’s services are terminated, regardless of whether the termination is due to substantial completion or substantial breach.

    Court’s Reasoning

    The Court of Appeals relied on its previous decision in Matter of County of Rockland (Primiano Constr. Co.), which held that the architect’s authority is centered on the operational phases of construction, and a claim for delay damages asserted after substantial completion need not be submitted to the architect.
    The court reasoned that the controlling factor is whether the architect is still responsible for supervising the contractor’s performance. “Whether the contractor’s services have terminated because of substantial completion of the work or on the ground that he has substantially violated the terms of the contract is not controlling. In either instance the architect’s responsibility to supervise the contractor’s performance and, by extension initially mediate his disputes, is at an end.”
    The court distinguished Section 14.2.1 of the General Conditions, which imposes a residual responsibility on the architect to certify the amount to be paid to the discharged contractor or owner. This calculation, to be made after the project is completed, was not intended to serve as a condition precedent to arbitration. The obligation imposed on the architect pursuant to section 14.2.1 is essentially unrelated to this problem. That section simply imposed on the architect the residual responsibility of certifying the amount, if any, to be paid to the discharged contractor or the owner as a result of the work done prior to the contractor’s discharge. It does not expressly require the architect to resolve disputes or assume the role of an on-the-spot mediator for discharged contractors in order to help expedite completion of the project.

  • Fletcher v. Greiner, 106 A.D.2d 504 (1984): Corporate Officer Liability for Contract Termination

    Fletcher v. Greiner, 106 A.D.2d 504 (1984)

    A corporate officer is not personally liable for causing the corporation to terminate an employment contract unless their activity involves individual, separate tortious acts.

    Summary

    This case addresses the liability of corporate officers for the termination of an employee’s contract and the valuation of a shareholder’s interest in the corporation. The plaintiff, Fletcher, was awarded damages for his interest in the corporation and lost salary following his discharge. The Appellate Division reversed the trial court’s decision, holding that the corporate officers were not personally liable for the salary award because the plaintiff’s employment was with the corporation, not the individuals. Furthermore, there was no basis for awarding the value of Fletcher’s corporate interest in the absence of a contract or a dissolution proceeding.

    Facts

    Fletcher, the plaintiff, sued individual defendants (Greiner and others) and two corporations, claiming damages for the value of his one-third interest in the corporations and for salary he would have earned in the 52 weeks following his discharge. The trial court awarded Fletcher $39,000 for his corporate interest and $31,200 for lost salary. The defendants had offered to buy out Fletcher’s interest, but no agreement on value was reached.

    Procedural History

    The trial court awarded judgment to the plaintiff. The individual defendants appealed, and the Appellate Division reversed the trial court’s decision regarding the individual liability of the corporate officers for the salary award and the valuation of the plaintiff’s corporate interest. The appeal was made pursuant to leave granted by the higher court.

    Issue(s)

    1. Whether corporate officers are personally liable for causing the corporation to terminate an employment contract.
    2. Whether a court can determine the value of a shareholder’s interest in a corporation outside of a contract or dissolution action.

    Holding

    1. No, because a corporate officer is not personally liable for causing the corporation to terminate an employment contract unless their activity involves individual, separate tortious acts.
    2. No, because sections 1104-a and 1118 of the Business Corporation Law authorize a determination of value only in an action for dissolution of the corporation.

    Court’s Reasoning

    The court reasoned that the salary award against the individual defendants could not stand because the plaintiff’s employment was with the corporation. Quoting A. S. Rampell, Inc. v Hyster Co., the court stated that a corporate officer is not personally liable for causing the corporation to terminate an employment contract “unless his activity involves individual separate tortious acts.” The court emphasized that there was no finding of such tortious acts in this case. Further, the award for the value of Fletcher’s interest in the corporation was infirm because there was no agreement as to the value of his interest. The court held that sections 1104-a and 1118 of the Business Corporation Law did not authorize the trial court’s valuation because those sections apply only in actions for corporate dissolution, which was not the case here.

  • Fahey v. County of Ontario, 44 N.Y.2d 934 (1978): Liberal Amendment of Pleadings and Contract Termination

    Fahey v. County of Ontario, 44 N.Y.2d 934 (1978)

    Leave to amend pleadings should be freely granted absent prejudice or surprise, and summary judgment is inappropriate when genuine issues of material fact exist regarding contract termination.

    Summary

    This case concerns a contract dispute between Fahey and the County of Ontario. The County sought to amend its answer to include a defense based on a contractual time limitation for commencing an action. The trial court denied the amendment, and the Appellate Division reversed, granting the County summary judgment. The Court of Appeals held that the trial court abused its discretion in denying the amendment because there was no showing of prejudice or surprise to the plaintiff. However, the Court of Appeals also found that summary judgment was inappropriate because there were triable issues of fact regarding whether and when the contract was terminated.

    Facts

    Fahey and the County of Ontario were parties to a contract. A dispute arose, with each party claiming the other had breached the contract. The contract contained a time limitation requiring any action to be commenced within six months of termination. Neither party gave formal notice of termination.

    Procedural History

    The trial court denied the County’s motion to amend its answer to include the defense of failure to comply with the contractual time limitation. The Appellate Division reversed, granting the motion to amend and also granting the County’s motion for summary judgment, dismissing the complaint. Fahey appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the trial court abused its discretion in denying the defendant’s motion to amend its answer to include the defense of failure to comply with a contractual time limitation.
    2. Whether summary judgment was appropriate when there were triable issues of fact regarding whether and when the contract was terminated.

    Holding

    1. No, because there was an abuse of discretion as a matter of law by the Trial Term to deny the defendant’s motion to amend its answer because there was nothing in the papers indicative of prejudice to or surprise of plaintiff.
    2. No, because whether the action was timely commenced turns on whether in fact the contract was terminated and, if so, when, and these questions present triable issues of fact barring summary judgment.

    Court’s Reasoning

    The Court of Appeals reasoned that CPLR 3025(b) states that leave to amend pleadings “shall be freely given” absent prejudice or surprise resulting directly from the delay. Because the amendment sought to plead failure to comply with the contractual time limitation and there was no indication of prejudice or surprise to the plaintiff, the trial court’s denial of the motion to amend was an abuse of discretion as a matter of law. The court cited Fahey v County of Ontario, 44 NY2d 934, 935.

    However, the Court of Appeals also found that the Appellate Division erred in granting summary judgment. Because each party claimed the other had breached the contract, and neither gave formal notice of termination, whether the action was timely commenced depended on whether the contract was terminated and, if so, when. These questions presented triable issues of fact, making summary judgment inappropriate. The key was that contract termination was disputed and not formally executed. This lack of a clear termination date created a factual question for the jury. The court reasoned that a trial was necessary to determine the timeline of events and definitively establish the termination date, if any.

  • Freedman v. Chemical Construction Corporation, 43 N.Y.2d 910 (1978): Economic Duress and Contractual Rights

    43 N.Y.2d 910 (1978)

    A contract may be voided for economic duress only if the complaining party was compelled to agree to its terms by a wrongful threat that precluded the exercise of free will, and exercising a contractual right does not constitute a wrongful threat.

    Summary

    Freedman sued Chemical Construction Corporation, alleging economic duress in a settlement agreement. Freedman claimed Chemical Construction threatened to terminate their original contract unless Freedman agreed to the settlement. The court held that Chemical Construction’s threat to exercise its contractual right to terminate the contract did not constitute economic duress because Chemical Construction was acting within its legal rights. The court found no basis for Freedman to demonstrate the threat was wrongful.

    Facts

    Freedman and Chemical Construction Corporation had an existing contract. A dispute arose between the parties. Chemical Construction Corporation threatened to terminate the original contract. To avoid termination, Freedman entered into a settlement agreement with Chemical Construction Corporation. Freedman later sued to void the settlement agreement, alleging economic duress based on Chemical Construction Corporation’s threat to terminate the original contract.

    Procedural History

    The trial court dismissed Freedman’s complaint. The Appellate Division affirmed the dismissal. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether Chemical Construction Corporation’s threat to terminate the original contract constituted economic duress, allowing Freedman to void the settlement agreement.

    Holding

    No, because Chemical Construction Corporation was acting within its contractual rights when it threatened to terminate the original contract; such action does not constitute a wrongful threat necessary to establish economic duress.

    Court’s Reasoning

    The court stated that “[a] contract may be voided on the ground of economic duress where the complaining party was compelled to agree to its terms by means of a wrongful threat which precluded the exercise of its free will.” The court emphasized that Freedman failed to allege that Chemical Construction Corporation was not within its contractual rights to exercise the termination clause. The termination clause gave Chemical Construction the right to cancel the contract upon an architect’s certificate of substantial breach. The court found that Chemical Construction Corporation preserved its rights by following the termination clause while seeking accommodation with Freedman, who was facing financial difficulties. Because the threat to cancel was explicitly permitted by the contract, it could not be considered a wrongful threat. The court determined that the “only reasonable inference that can be drawn from the complaint and the affidavits is that the plaintiff is unable to prevail.”

  • Arc Electrical Construction Co. v. George A. Fuller Co., 24 N.Y.2d 102 (1969): Enforceability of Contract Terms After Termination

    Arc Electrical Construction Co. v. George A. Fuller Co., 24 N.Y.2d 102 (1969)

    A party’s own act of terminating a contract can prevent them from relying on conditions precedent that the other party could no longer fulfill due to the termination.

    Summary

    Arc Electrical Construction Company sued George A. Fuller Company for failing to pay for work performed under a subcontract. Fuller terminated the contract, arguing Arc was not entitled to payment because the project architect hadn’t approved the work as required by the contract’s payment terms. The New York Court of Appeals held that Fuller’s termination of the contract prevented Arc from obtaining the architect’s approval, thus Fuller could not rely on the lack of approval to avoid payment for work substantially performed. This case illustrates that a party cannot avoid its contractual obligations by preventing the other party from fulfilling a condition of the contract.

    Facts

    Arc was the electrical subcontractor for a sugar refinery construction project, with Fuller as an intermediate contractor. The contract stipulated two payment methods: (1) monthly progress payments (90%) subject to architect approval, and (2) full payment if Fuller terminated the contract before completion, without mentioning architect approval. Arc began work in March 1965 and received payment for the first eight requisitions. In December 1965, the architect stopped approving Arc’s requisitions. Fuller then terminated the contract in February 1966, instructing Arc to cease work. Arc sued for payment of work performed since November 1965, plus the 10% reserve.

    Procedural History

    The Supreme Court awarded Arc the full amount claimed. The Appellate Division unanimously affirmed the trial court’s decision. Fuller appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether Fuller could require the architect’s approval for payment under the termination provision (Article XXXIII) when Fuller itself terminated the contract, preventing Arc from obtaining such approval.

    Holding

    1. No, because Fuller’s termination of the contract made it impossible for Arc to satisfy the condition precedent of obtaining the architect’s approval.

    Court’s Reasoning

    The court reasoned that the contract provided separate methods for computing payments under articles XXXI and XXXIII. While progress payments required architect approval, the termination provision did not. The court stated that after termination, preventing the subcontractor from curing any defects, the contract should be construed as providing for payment for all work actually performed. The court emphasized that Fuller could not rely on a condition precedent (architect’s approval) when its own actions (terminating the contract) prevented Arc from fulfilling that condition. Citing O’Neil Supply Co. v. Petroleum Heat & Power Co., 280 N. Y. 50, 56, the court reiterated that “the defendant cannot rely on [a] condition precedent… where the non-performance of the condition was caused or consented to by itself”. The court further noted that there was no evidence of defects in Arc’s work that would justify the architect’s failure to approve the requisitions. The court cited Nolan v. Whitney, 88 N. Y. 648, stating, “When [the plaintiff] had substantially performed his contract, the architect was bound to give him the certificate, and his refusal to give it was unreasonable, and it is held that an unreasonable refusal on the part of an architect in such a case to give the certificate dispenses with its necessity ” (p. 650).

  • Fair Pavilions, Inc. v. First Nat. City Bank, 19 N.Y.2d 518 (1967): Sufficiency of Affidavit to Terminate Letter of Credit

    Fair Pavilions, Inc. v. First Nat. City Bank, 19 N.Y.2d 518 (1967)

    An affidavit submitted to a bank to terminate a letter of credit must specify the grounds for termination with sufficient detail to allow the beneficiary to understand and remedy the alleged default.

    Summary

    Fair Pavilions, Inc. contracted to construct a building for Exhibitions de France, Inc., with payments guaranteed by a letter of credit from First National City Bank, based on an application from Willard International Financial Co. The letter of credit allowed termination if the bank received an affidavit from Willard stating that certain events under the construction contract (clause XV) had occurred. Willard submitted a conclusory affidavit stating that such events occurred, without specifying which ones. The bank then terminated the letter of credit. The New York Court of Appeals held that the affidavit was insufficient because it failed to specify which event under clause XV had occurred, thus preventing Fair Pavilions from remedying the alleged default. The court reversed the lower court’s denial of summary judgment for Fair Pavilions.

    Facts

    Fair Pavilions, Inc. (plaintiff) contracted with Exhibitions de France, Inc. (“Exhibitions”) to build a structure at the New York World’s Fair.
    The contract (clause XV) outlined conditions for termination of plaintiff’s performance.
    Exhibitions was obligated to provide an irrevocable letter of credit guaranteeing installment payments.
    Exhibitions arranged for Willard International Financial Co., Ltd. (“Willard”) to issue the letter of credit.
    Willard applied to First National City Bank (defendant) for the letter of credit in favor of plaintiff for $2,030,000.
    Paragraph 6 of the letter of credit allowed termination if the bank received an affidavit from a Willard officer stating that events in clause XV of the construction contract occurred.
    The bank received an affidavit from Willard stating, in conclusory form, that “One or more of the events described in clause XV * * * have occurred,” without specifying the event.
    The bank notified plaintiff that the $400,000 final payment was terminated.

    Procedural History

    Plaintiff sued the bank to recover the $400,000 via a motion for summary judgment in lieu of complaint.
    Special Term denied the motion, citing factual issues regarding the bank’s duty to verify defaults and the truth of the affidavit.
    On reargument, both plaintiff’s and defendant’s motions for summary judgment were denied because of factual issues over whether events described in clause XV had occurred justifying Willard’s affidavit. The court directed that proper pleadings be served.
    The Appellate Division held the bank was not obliged to determine the accuracy of Willard’s representation.
    The Court of Appeals reviewed the Appellate Division’s decision.

    Issue(s)

    Whether an affidavit submitted to a bank pursuant to a letter of credit, which states that events allowing termination of the underlying contract have occurred, must specify which event has occurred to be sufficient to terminate the credit.

    Holding

    Yes, because the affidavit must identify the alleged default with enough specificity to allow the beneficiary of the letter of credit to understand and remedy it.

    Court’s Reasoning

    The Court of Appeals reasoned that the documents presented to the bank, including the affidavit, must be sufficient on their face to justify the bank’s action in refusing to pay on the letter of credit. The court emphasized that this is especially important given the drastic consequences of canceling the credit for the plaintiff. The court interpreted paragraph 6 of the letter of credit, read in conjunction with clause XV of the building contract, to mean that the affidavit must identify the alleged defect before the credit can be canceled, allowing the plaintiff an opportunity to remedy it. The court stated, “The meaning of paragraph 6 of the letter of credit was not that Willard could terminate the credit at will.” The court found the affidavit’s conclusory statement that “One or more of the events described in clause XV…have occurred” insufficient because it did not specify which event had occurred, making it impossible for Fair Pavilions to remedy the unspecified default. The court contrasted paragraph 6 with paragraph 7 of the letter of credit, which expressly allowed Willard to cancel the credit at will during a specific period, but only on payment of a substantial sum to Fair Pavilions. The court concluded that interpreting paragraph 6 to allow cancellation based on an unspecific affidavit would place one party at the mercy of another, which is against the general policy of the law. The court found that “It is not reasonable to interpret paragraph 6 of the letter of credit in a manner which permits cancellation by means of an affidavit so unspecific that the alleged default is kept secret and the beneficiary rendered powerless to cure it.”

  • Tibbetts Contracting Corp. v. O & E Contracting Co., 15 N.Y.2d 324 (1965): Mechanic’s Lien Rights and Waiver of Contract Termination

    Tibbetts Contracting Corp. v. O & E Contracting Co., 15 N.Y.2d 324 (1965)

    A party’s acceptance of work performed under a subcontract constitutes a waiver of a previously issued notice of termination of the principal contract, entitling the subcontractor to payment through the general contractor’s recovery.

    Summary

    Tibbetts Contracting Corp. (plaintiff), a subcontractor, sought to foreclose on a mechanic’s lien against Vioe Realty Corp. (defendant), the property owner. Vioe had contracted with O & E Contracting Co. for site work, and O & E subcontracted with Tibbetts for drainage work. Vioe claimed it terminated its contract with O & E, but Tibbetts continued working. The court held that Vioe’s acceptance of Tibbetts’ work waived the contract termination, entitling Tibbetts to recover payment from Vioe through O & E’s recovery for breach of contract. This case clarifies the importance of conduct in waiving contractual rights and the derivative nature of a subcontractor’s lien rights.

    Facts

    Vioe contracted with O & E for excavation, grading, and drainage work.
    O & E subcontracted with Tibbetts to lay drainage pipes.
    Vioe notified O & E of contract termination due to alleged breaches.
    Tibbetts continued and completed the drainage work with Vioe’s knowledge.
    O & E failed to pay Tibbetts, who then filed a mechanic’s lien.
    Vioe re-let the unfinished contract work to County Asphalt Corporation who completed the work.

    Procedural History

    Tibbetts sued to foreclose the mechanic’s lien; Vioe sued O & E for breach of contract; the cases were consolidated.
    The trial court found in favor of O & E and Tibbetts, holding that Vioe breached the contract and that Tibbetts had a valid lien.
    The Appellate Division modified, finding Vioe justified in terminating the contract, denying the lien’s validity, but awarding Tibbetts a judgment against Vioe on a quasi-contract theory.
    All parties appealed to the New York Court of Appeals.

    Issue(s)

    Whether Vioe’s acceptance of Tibbetts’ continued performance under the subcontract constituted a waiver of its notice of termination of the principal contract with O & E.
    Whether Tibbetts can recover directly from Vioe in the absence of a direct contractual relationship.

    Holding

    Yes, because by permitting Tibbetts to continue with the performance of its subcontract at the same time insisting that Tibbetts could look only to O & E for remuneration, Vioe waived its notice of termination of the principal contract with O & E.
    No, because Tibbetts’ right to recover from Vioe is derivative through O & E’s right to payment under the contract; Tibbetts’ remedy is to assert a lien against the funds owed by Vioe to O & E.

    Court’s Reasoning

    The Court of Appeals favored the trial court’s findings, concluding that Vioe breached the contract with O & E.
    The court reasoned that Vioe’s conduct in allowing Tibbetts to continue working after the alleged termination indicated a waiver of that termination. As stated by the court, “By permitting Tibbetts to continue with the performance of its subcontract at the same time insisting that Tibbetts could look only to O & E for remuneration, Vioe waived its notice of termination of the principal contract with O & E.”
    The court emphasized that no direct contract existed between Vioe and Tibbetts and specifically stated, “No contract between them could be implied in fact, inasmuch as Vioe has disclaimed any such relationship throughout and Tibbetts acquiesced in that interpretation by billing Vioe only for the drains which it laid under contract with Vioe, and billing O & E under the subcontract after the work was completed.”
    Tibbetts’ recovery against Vioe was derivative, based on O & E’s entitlement to payment from Vioe. The court found that Tibbetts, as a subcontractor, was entitled to a lien on the proceeds owed by Vioe to O & E, pursuant to Lien Law §§ 4, 70, and 71.
    The court found the contract between Vioe and O & E was an entire contract, not severable and that Vioe could not accept benefits of the contract without recognizing that O & E (through Tibbetts) was continuing performance of the underlying contract. The court quoted the trial court opinion, stating “The assertion of a repudiation of the contract is nullified by a subsequent acceptance of benefits growing out of the contract”.