News & Noteworthy

Can Filing a Lawsuit Breach a Contract?

Posted on January 10, 2018

When a party to a contract tells the other side that it has no intent of performing its contractual duties, the other party is typically entitled to either damages or a court order directing performance of the contract.  This is referred to as an “anticipatory breach” or “anticipatory repudiation.”  But what happens when a contract has been amended and a party only wants to disregard its obligations under the amendment and perform under the original contract?  The Court of Appeals, New York’s top appellate court, recently offered some guidance on this previously unaddressed issue, but in so doing likely created more questions than it answered.

In Princes Point LLC v. Muss Dev. L.L.C., 30 N.Y.3d 127, 65 N.Y.S.3d 89 (2017), plaintiff contracted with defendants to purchase a waterfront commercial property in Staten Island for $36 million with $1.9 million down.  Sellers were obligated within 18 months to provide certain government approvals necessary for purchaser to develop the property.  Following Hurricane Katrina, the government required the sellers to rebuild a retaining wall at the property, making timely delivery of the permits impossible.  The parties amended the contract several times to allow sellers time to rebuild the retaining wall, while increasing the purchase price and down payment, agreeing to share the cost of remediation and pushing out the approvals deadline and closing date.

One month before the new closing date, purchaser sued sellers seeking an order from the court rescinding, or cancelling, the amendments.  Purchaser alleged sellers fraudulently induced purchaser to enter into the amendments.  Purchaser wanted the amendments stricken and the parties to perform under the original.  In short, purchaser wanted to pay the original, lower purchaser price and not contribute to the cost of rebuilding the wall.  Sellers claimed that purchaser’s lawsuit was an anticipatory breach because purchaser was seeking to avoid performance of the amendments.  The Appellate Division, First Department affirmed the trial court’s holding that the amendments were inseparable from the contract and purchaser’s commencement of the lawsuit evidenced its intent to disavow its contractual duty to perform.  The Court of Appeals disagreed and reversed the First Department’s decision.  The Court of Appeals held that purchaser sought only to rescind the amendments and perform under the original contract.  Accordingly, the lawsuit did not constitute an unequivocal repudiation of purchaser’s obligations.  The Court held that “the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.”  In essence, the Court said that just because the purchaser asked a court to let it off the hook, it did not mean the purchaser would not perform if the court said “no.”

The Court of Appeals was careful to limit its holdings to the specific facts of this case and, as such, created more questions than it answered.  Does a lawsuit seeking to rescind an unamended contract constitute an anticipatory breach?  What if the lawsuit seeks to avoid performing only certain provisions of a contract?  Every scenario requires independent analysis, which should be addressed prior to taking any action that could result in liability.  If you have any questions concerning contract performance and enforceability, please do not hesitate to contact us.