In the Matter of Schlaifer v. Kaiser, 61 N.Y.2d 752 (1984)

Whether a subsequent agreement constitutes a novation or merely a modification of a prior contract depends on the parties’ intent; absent extrinsic evidence, this determination is a question of law for the court, assessed by comparing the agreements.

Summary

This case concerns whether a 1976 agreement between Schlaifer and Kaiser was a novation that extinguished their 1974 contract, or simply a modification. The Court of Appeals held it was a modification. The court also addressed the timeliness of Kaiser’s demand for arbitration seeking rescission based on fraud. The court determined that the arbitration demand was time-barred under CPLR 213(1) and 203(f) because it was filed more than six years after the contract date and more than two years after Kaiser discovered the alleged fraud. Therefore, the Court affirmed the Appellate Division’s decision to stay arbitration.

Facts

Schlaifer and Kaiser entered into a contract on June 18, 1974. Later, in 1976, they entered into another agreement. In August 1981, Kaiser served a demand for arbitration, seeking rescission of the 1974 contract based on allegations of fraud.

Procedural History

Kaiser sought arbitration of the 1974 agreement based on fraud. The Appellate Division stayed the arbitration. The Court of Appeals reviewed the Appellate Division’s order pursuant to Section 500.4 of the Rules of the Court of Appeals and affirmed the stay.

Issue(s)

1. Whether the 1976 agreement constituted a novation of the 1974 agreement, or merely a modification.
2. Whether Kaiser’s demand for arbitration, seeking rescission of the 1974 agreement based on fraud, was timely.

Holding

1. No, the 1976 agreement was a modification, not a novation, because comparison of the two agreements indicates an intent to modify rather than extinguish the 1974 contract.
2. No, the demand for arbitration was untimely because it was served more than six years after the contract date and more than two years after the discovery of the alleged fraud, exceeding the limitations periods specified in CPLR 213(1) and 203(f).

Court’s Reasoning

The Court reasoned that whether the 1976 agreement was a novation or a modification depends on the intent of the parties. Absent extrinsic evidence of intent, the determination is a question of law for the court. The Court stated, “Comparison of the two agreements establishes that what was intended was modification rather than extinguishment of the 1974 contract.” The court relied on Mallad Constr. Corp. v County Fed. Sav. & Loan Assn., 32 NY2d 285, 288, 293 for the principle that intent determines whether a subsequent agreement is a novation or modification. The Court further reasoned that arbitration of a claim for rescission for fraud must be commenced within six years after the date of the contract, or within two years after the fraud was or with reasonable diligence could have been discovered, citing CPLR 213(1) and 203(f), as well as 35 Park Ave. Corp. v Campagna, 48 NY2d 813. Because Kaiser’s demand was served after both of these deadlines, the Court found the Appellate Division was correct in staying arbitration.