Recent Developments in New York Commercial Law

In the past couple of weeks, the Commercial Divisions in New York (or the Appellate Division, First Department in reviewing Commercial Division decisions) have issued a few interesting decisions clarifying commercial law.

First, on May 13, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Board of Managers of the Chocolate Factory Condominium v. Chocolate Partners, LLC, 2014 NY Slip Op. 50754(U), held that a best efforts claim can be enforced even if the circumstances constituting what would be best efforts needed to be inferred. Thus, she refused to dismiss a breach of contract claim because the best efforts clause upon which it relied did not contain express guidelines for those efforts.

In Board of Managers of the Chocolate Factory Condominium, the plaintiff sued the defendants in connection with a condominium conversion. The defendants moved to dismiss, arguing, inter alia, that the “best efforts” clause in the offering plan was unenforceable because it was too vague. The court rejected this argument:

Defendants, in seeking dismissal of the Board’s first cause of action for breach of contract, point to the fact that the contractual provision in the Offering Plan upon which it is predicated requires that the Sponsor use its “best efforts” to obtain the J-51 benefits. They rely upon Strauss Paper Co. v RSA Exec. Search (260 AD2d 570, 571 [2d Dept 1999]), in which the Appellate Division, Second Department, held that where a clause in an agreement expressly provides that a party must use its best efforts, it is essential that the agreement also contain clear guidelines against which to measure such efforts in order for such clause to be enforced. Defendants argue that the Offering Plan does not contain any such guidelines against which to measure whether it used “best efforts” to obtain the J-51 tax benefits, and that this clause is, therefore, unenforceable.
Defendants’ argument, however, must be rejected. Initially, it is noted that, as recently observed in Cruz v FXDirectDealer, LLC (720 F3d 115, 124 [2d Cir 2013]), the New York Court of Appeals has not endorsed the requirement that the contract must contain clear guidelines before a best efforts clause can be enforced. Rather, numerous courts, including the New York Court of Appeals and the Second Department, have applied an express best efforts provision without articulated objective criteria. Noting that the cited cases appeared to conflict with the holding in Strauss Paper Co. (260 AD2d at 571) and other cases regarding the requirement for clear guidelines, Judge Battaglia observed that the cases can be reconciled by recognizing that there is no a priori rule precluding enforcement of a best efforts obligation even in the absence of articulated criteria, and that the obligation will be enforced where sufficient content may otherwise be read into it against which the promisor’s performance may be measured. This court concurs that the law does not require that best efforts criteria be defined by the contract. If external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase best efforts, the clause can be enforced.
While defendants rely upon language in the recent case of DirecTV Latin Am., LLC v RCTV Intl. Corp., 38 Misc 3d 1212[A] [Sup Ct, NY County 2013], affd 115 AD3d 539 [1st Dept 2014]) that for a promise to exert best efforts to be enforceable, there must be clear guidelines against which such efforts can be evaluated, such reliance is misplaced as the issue there was not best efforts, per se, but whether an enforceable agreement had been reached. Indeed, in affirming the dismissal of counterclaims in that case, the Appellate Division, First Department, found that the memorandum at issue lacked the definiteness as to material terms required in order to be a legally enforceable contract.
Under New York law, a best efforts clause imposes an obligation to act with good faith in light of one’s own capabilities, and apply such efforts as are reasonable in the light of that party’s ability and the means at its disposal and of the other party’s justifiable expectations. Best efforts can only be defined contextually. Thus, the court finds that a best efforts provision may be enforced even in the absence of contractually articulated criteria where the contractual language and the circumstances permit an inference as to the applicable criteria for performance.

(Internal quotations and citations omitted) (emphasis and hyperlinks added).

Second, on May 13, 2014, the First Department issued a decision in Forty Central Park South, Inc. v. Anza, 2014 NY Slip Op. 03453, reversed a dismissal, holding that disclaimers in performance reports that induced the plaintiffs to make further investments did not shield the defendant as a matter of law from a fraud claim.

In Forty Central Park South, the trial court granted the defendant’s motion to dismiss the fraud claim against it. The First Department reversed, explaining:

Plaintiffs allege that in the monthly reports, generated after the operating agreement was entered into, defendant misrepresented that the business venture had been profitable and that plaintiffs had been earning positive returns on their investment; that defendant in fact did not invest the funds as promised; and that they relied on the monthly reports in continuing their investment in the company. These allegations state a cause of action for fraud. The disclaimers set forth in each monthly report do not preclude a finding of justifiable reliance since the alleged misrepresentations in the reports concerned facts peculiarly within defendant’s knowledge.

(Internal quotations and citations omitted) (emphasis added).

Third, on April 2, 2014, Justice Emerson of the Suffolk County Commercial Division issued a decision in Motherway v. Cartisano, 2014 NY Slip Op. 31215(U), holding that a prevailing plaintiff in a derivative action is entitled to fees, but from the corporation, not the losing defendant, even if such a defendant is a tort-feaser who harmed the corporation.

In Motherway, the plaintiff prevailed on derivative claims against the defendants and sought “an award of attorney’s fees pursuant to § 626(e) of the Business Corporation Law in the amount of $250,000″ to be paid by the defendants. The court denied the request:

The general rule regarding attorney’s fees under New York law is that the prevailing party may not collect them from the loser unless such an award is authorized by an agreement between the parties or by a statute or court rule.
Business Corporation Law § 626 (e) provides as follows:

If the action on behalf of the corporation was successful, in whole or in part, or if anything was received by the plaintiff or plaintiffs or a claimant or claimants as the result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff or plaintiffs, claimant or claimants, reasonable expenses, including reasonable attorney’s fees, and shall direct him or them to account to the corporation for the remainder of the proceeds so received by him or them. This paragraph shall not apply to any judgment rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage sustained by them.

Although Business Corporation Law § 626(e) provides that a successful plaintiff in a shareholder derivative action may recoup legal expenses and attorney’s fees from the proceeds of any judgment, compromise, or settlement in favor of the corporation, it does not authorize the imposition of such expenses on the losing party. The basis for an award of attorney’s fees in a shareholder derivative suit is to reimburse the plaintiff for expenses incurred on behalf of the corporation. Those costs should be paid by the corporation, which has benefitted from the plaintiff’s efforts and which would have borne the costs had it sued in its own right. Thus, an award of legal expenses and attorney’s fees to the innocent shareholder who brought the action is payable out of the award to the corporation.

(Internal quotations and citations omitted) (emphasis added).

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