New York Law Review

Tag: Course of Dealing

  • Evans v. Famous Music Corp., 1 N.Y.3d 450 (2004): Interpreting Contractual Deductions for Taxes When Foreign Tax Credits Exist

    Evans v. Famous Music Corp., 1 N.Y.3d 450 (2004)

    When interpreting a contract involving deductions for taxes, courts examine the plain meaning of the contract language and the parties’ course of dealing, especially when one party possesses superior information, to determine whether reimbursed tax payments should be considered actual deductions.

    Summary

    This case concerns royalty contracts between songwriters and Famous Music Corporation. The contracts stipulated that the songwriters would receive a percentage of royalties and a portion of the “net sums” Famous received from other sources, less deductions for taxes. Famous exploited the compositions abroad via subpublishing contracts. It took foreign tax credits on its U.S. income taxes for foreign taxes paid on behalf of the songwriters. The songwriters sued, claiming they were entitled to a share of these tax credits. The New York Court of Appeals held that based on the contract language and the parties’ conduct, Famous was not required to share the foreign tax credits with the songwriters, reversing the Appellate Division’s decision.

    Facts

    Famous Music Corporation entered into royalty contracts with songwriters in the mid-20th century. These contracts provided for royalties from specific uses of the songs and a 50% share of “net sums” from other sources, “less all deductions for taxes.” Famous entered into subpublishing agreements abroad, and these foreign subpublishers paid foreign taxes. In some instances, Famous claimed foreign tax credits on its U.S. income taxes based on these foreign tax payments, effectively reimbursing itself for the taxes. The songwriters were initially unaware of Famous taking these credits.

    Procedural History

    The songwriters sued Famous, seeking a share of the foreign tax credits. The Supreme Court granted the songwriters’ motion for summary judgment. The Appellate Division affirmed. The New York Court of Appeals reversed, holding that Famous was not required to share the foreign tax credits.

    Issue(s)

    Whether, under the royalty contracts between Famous Music Corporation and the songwriters, Famous was required to share foreign tax credits it received with the songwriters, considering the contractual language “less all deductions for taxes” and the parties’ course of dealing.

    Holding

    No, because the contract language, viewed in the context of the parties’ conduct and industry custom, did not require Famous to share the foreign tax credits with the songwriters.

    Court’s Reasoning

    The Court of Appeals emphasized interpreting contracts based on the parties’ reasonable expectations, focusing on the objective meaning of the contract language and the parties’ conduct. The Court found the contracts did not explicitly address foreign tax credits, and the songwriters did not demand a showing of any credits until 1997. The court noted Famous was evasive, but the lack of prior demands weighed against the songwriters’ claim. The court relied on music industry custom and practice, where music publishers typically only share foreign tax credits when the contract contains an explicit clause requiring them to do so.

    The dissenting opinion argued the phrase “less all deductions for taxes” should be interpreted to include only actual, unreimbursed tax outlays. The dissent criticized the majority for excusing Famous’s lack of transparency and for failing to acknowledge Famous’s superior access to information regarding the tax credits. The dissent argued that Famous had a heightened obligation of good faith and fair dealing, especially given the unequal bargaining power. The dissent stated, “[i]f the contract is more reasonably read to convey one meaning, the party benefitted by that reading should be able to rely on it; the party seeking exception or deviation from the meaning reasonably conveyed by the words of the contract should bear the burden of negotiating for language that would express the limitation or deviation.”

    The majority distinguished its holding from cases involving breaches of good faith by noting that the songwriters were sophisticated parties represented by counsel and could have negotiated for a specific provision regarding foreign tax credits. The Court stated, “[w]e conclude that, under the parties’ contracts and course of dealing, Famous was not required to share its foreign tax credits with the [songwriters].”

  • Kornblum Metals Co. v. Intsel Corp., 38 N.Y.2d 376 (1975): Enforceability of Arbitration Clauses in Oral Contracts

    Kornblum Metals Co. v. Intsel Corp., 38 N.Y.2d 376 (1975)

    An arbitration clause included in a written purchase order can be enforced when the evidence supports a finding that the oral contract between the parties included an agreement to arbitrate.

    Summary

    Kornblum Metals Co. (seller) sought to stay arbitration demanded by Intsel Corp. (purchaser) regarding a zinc sales agreement. The dispute arose after the seller failed to deliver the zinc. The purchaser claimed the oral agreement included an arbitration clause detailed in a purchase order. The New York Court of Appeals held that there was sufficient evidence for the jury to find that the oral contract included the arbitration provision, emphasizing the parties’ prior dealings, industry custom, and the seller’s acknowledgment of the purchase order with the arbitration clause when requesting a payment modification. The court affirmed the denial of the stay of arbitration.

    Facts

    The seller and purchaser had a 15-year business relationship. On September 21, 1973, they orally agreed to the sale of 250 tons of zinc at 32 cents per pound. The purchaser sent a purchase order containing an arbitration clause to the seller. On September 24, the parties reaffirmed the agreement, and the seller requested a modification to the payment terms but made no objection to the arbitration provision. The seller later failed to deliver the zinc as agreed, leading the purchaser to initiate arbitration proceedings.

    Procedural History

    The seller initiated a proceeding in Supreme Court to stay arbitration and vacate the demand for arbitration. The Supreme Court ordered a trial on all issues. A jury found for the purchaser, denying the stay of arbitration. The Appellate Division affirmed the Supreme Court’s judgment. The seller then appealed to the New York Court of Appeals.

    Issue(s)

    Whether there was sufficient evidence to support the jury’s finding that the oral contract between the seller and purchaser included an agreement to submit disputes to arbitration.

    Holding

    Yes, because there was sufficient evidence for the jury to conclude that the arbitration provision in the purchase order was a term of the oral contract made by the parties.

    Court’s Reasoning

    The court held that the jury was entitled to find that the oral contract, confirmed on September 24, included the arbitration clause set forth in the purchase order. The court emphasized the parties’ prior course of dealing, where similar purchase orders containing arbitration provisions had been used. The seller’s confirmation of the agreement while having the purchase order, including the arbitration clause, in front of him, and only requesting a modification as to payment terms, suggested an acceptance of all other terms, including arbitration. The court stated, “This is not an instance in which it was sought, subsequent to the completion of the contract, to add an arbitration provision as an additional term to a pre-existing contract. The jury was certainly entitled on this record to conclude that the arbitration provision was one of the terms of the contract when initially made by the parties.” The court further noted that the seller’s requested jury instruction, that mere receipt of a purchase order with an arbitration clause is insufficient to establish an agreement to arbitrate, was an inaccurate analysis of the legal issues presented in this case, as it failed to account for the specific evidence and circumstances. Therefore, the court affirmed the order denying the stay of arbitration.

  • Williams Press, Inc. v. State, 37 N.Y.2d 434 (1975): Interpreting Ambiguous Contract Terms Based on Prior Dealings

    Williams Press, Inc. v. State, 37 N.Y.2d 434 (1975)

    When contract language is ambiguous, a court may consider prior dealings between the parties to ascertain their intent at the time of contracting, especially when one party drafted the ambiguous language.

    Summary

    Williams Press, a printing corporation, sued the State of New York after the state deducted $87,701.85 from payments due under a 1971 contract, alleging overcharges from 1965-1970 based on ambiguous bidding specifications for legislative printing. The ambiguity stemmed from a change in the 1961 contract format regarding amended budget bills. The Court of Appeals reversed the lower court’s ruling, holding that the specifications were indeed ambiguous and that the prior course of dealing between Williams Press and the State supported Williams Press’s interpretation of the contract. The court emphasized that contracts should be interpreted to give effect to their overall purpose and that the State, as the drafter of the ambiguous specifications, should not benefit from an inequitable interpretation.

    Facts

    Williams Press had been the primary printer for the New York State legislature for many years. A dispute arose over the interpretation of the specifications for budget and amended budget bill printing, specifically from 1965 to 1970. The core issue concerned how Williams Press bid on and invoiced for amended budget bills, given changes made in the 1961 contract specifications. Before 1961, the state had separate bid lines for Senate and Assembly amended budget bills. In 1961, the state consolidated these into a single line, creating ambiguity. Williams Press continued to invoice each house separately, charging half the total bid price to each. In 1972, the State claimed this was an overcharge and offset the amount from a subsequent contract payment.

    Procedural History

    Williams Press sued the State in the Court of Claims. The Court of Claims found in favor of the State, holding that the contract specifications were unambiguous and that Williams Press had overcharged the State. The Appellate Division affirmed, with a divided court. Williams Press appealed to the New York Court of Appeals.

    Issue(s)

    Whether the contract specifications for legislative printing, specifically regarding amended budget bills from 1965-1970, were ambiguous.

    Holding

    Yes, because the change in the contract specifications in 1961 created an ambiguity as to how amended budget bills should be bid and invoiced, and the prior course of dealing between the parties supported Williams Press’s interpretation.

    Court’s Reasoning

    The Court of Appeals found that the lower courts erred by focusing solely on the budget bill paragraph in isolation, ignoring the broader context and prior dealings between the parties. The court emphasized that a contract must be read as a whole to give effect to its general purpose, quoting Empire Props. Corp. v Manufacturers Trust Co., 288 NY 242, 248-249: “A written contract will be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose.’ (3 Williston on The Law of Contracts, § 618.)” Because of this ambiguity, the court considered the prior course of dealings between Williams Press and the State. The court noted that the State had honored Williams Press’s invoices for several years, suggesting that the State also initially interpreted the contract in the same way. The court found it significant that Williams Press bid $9.33 per page for each 2,000 copies delivered to each house, totaling $18.66 for 4,000 copies, which was consistent with prior bidding practices. The court rejected the State’s argument that Williams Press should have explicitly doubled its bid, stating that this would have been “hazardous and misleading” given the specifications. The court concluded that the State received exactly what it bargained for and should not benefit from its own ambiguously worded specifications. “The State received exactly what it bargained for, and, in the words of one of the dissenting Justices at the Appellate Division, ‘is attempting to advance a construction of the contract which not only is erroneous in light of prior bids for the same work but unfair to claimant who did the work on a reasonable assumption based on prior bidding that it would be paid $9.33 per page for each 2,000 copies printed.’”