Are “consequential damages” available on contract claim against an insurer in an action brought by an insured for breach of a commercial liability policy? In D.K. Prop., Inc. v. National Union Fire Ins.,  a recent case out of the First Department, the answer is a resounding “yes”.  There, the complaint alleged two causes of action, namely, breach of contract for failure to pay for covered losses and branch of the implied covenant of good faith and fair dealing.  Plaintiff sought consequential damages on both claims, and attorney’s fees as to the “bad faith” claim.

The insurer argued that consequential damages were unavailable in a breach of contract claim against a carrier when the policy itself covers only “direct and physical loss” to the building.   Indeed, as the complaint outlines, the insured is claiming damages for the carrier’s “unreasonable” and “burdensome” informational requests during the investigatory period which extended over a three-year period.  Engineering costs, ,water abatement equipment because of delays in repairs, monitoring equipment  and interim repairs were only a few of the “types” of damages alleged.

On a pre-answer motion to dismiss, the defendant insurer sought dismissal of the claim for consequential damages on the ground they did not state a claim, namely, that the pleading did not provide a detailed factual showing of why the damages, which do not flow directly from the breach, are recoverable.  The motion court, the Hon. Robert Reed agreed, and dismissed the claim for consequential damages.  On appeal, the First Department in an unanimous decision, reversed the dismissal and reinstated the claim for consequential damages, holding such claims are not subject to any degree of heightened pleading.  The foreseeability of such damages is not for a motion to dismiss, but rather proof at trial.  The court made clear that an insured has a claim against a carrier for consequential damages when a carrier doesn’t provide coverage “if such damages (“risks”) were foreseen or should have been foreseen when the contract was made.”

In one line, the court also rejected the insurer’s argument that a breach of contract claim and “bad faith” claim were duplicative:  such claims can coexist, so long as the claims allege different conduct which they did here.

The Takeaway:  “consequential” damages need not be particularized in your pleading in connection with contractual based claims (breach of contract or implied covenant).  Don’t worry, neither CPLR 3015 (pleading particularity with respect to specific matters) nor 3016 (pleading particularity in specific actions) apply.    A detailed pleading nevertheless should be alleged setting forth at least the types of damages sought that flow from the claimed breach.

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Your client wants to recover damages for breach of contract and demands that you assert as many causes of action as possible.  In addition to the breach cause of action, you consider a declaratory judgment claim, right?  Wrong!   The Second Department has held time and time again that “[a] cause of action for a declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate, alternative remedy in another form of action, such as breach of contract” (see BGW v. Mount Kisco; Stuckey v Lutheran Care Found. Network, Inc.; and Alizio v Feldman).

Recently, the Second Department in Tiffany Tower Condominium, LLC, et al. v Insurance Company of the Greater New York reaffirmed this principle. There, Tiffany Tower Condominium, LLC (“Tiffany Tower”) sustained damage to its condominium during Superstorm Sandy. Insurance Company of the Greater New York (the “insurer”) paid Tiffany Tower’s original claim for the damage sustained to the condominium under Tiffany Tower’s insurance policy but when Tiffany Tower submitted a supplemental claim for the additional losses sustained to the condominium as a result of the storm, the insurer denied coverage. As a result, Tiffany Tower initiated a lawsuit seeking, among other things, to recover damages for breach of contract and for a judgment declaring that coverage for the supplemental claim was improperly denied.  The insurer moved to dismiss Tiffany Tower’s second, third, and fourth causes of action for breach of breach of contract, judgment declaring that coverage was improperly denied, and violation of General Business Law § 349, respectively. Justice Ash denied the insurer’s motion to dismiss these causes of action and the insurer appealed.

In its recent decision, the Second Department held that the Supreme Court erred and should have dismissed Tiffany Tower’s cause of action for a declaratory judgment. The Court held that where plaintiff has an “an adequate, alternative remedy in another form of action,” i.e., the breach of contract claim, the declaratory judgment cause of action is thus “unnecessary and inappropriate.”

Interestingly, the First and Fourth Departments have also dismissed declaratory judgment causes of action where plaintiff had an “adequate, alternative remedy in another form of action, such as breach of contract.”  (see Main Evaluations, Inc. v. State; Apple Records, Inc. v. Capital Records, Inc.) The Third Department, however, has had no similar holdings.

I made two observations coming out of Grand Central Station during my morning commute last week. First, the city really stinks after a string of oppressively hot and humid summer days. Second, there appears to be a temporary taxi stand, perhaps occasioned by the ongoing construction of the new One Vanderbilt building, just outside the south entrance of Grand Central Terminal on 42nd Street under the Park Avenue Viaduct.

This latter observation was rather rudely forced upon me when the precarious position of one such cab nearly caused me to traverse its front-end Bo and Luke Duke style. The site of the mangled NYC taxi medallion fastened to the cab’s dented hood was a striking metaphor for the current state of the taxi industry given the increasing popularity of ride-sharing services like Uber and Lyft.

The plight of the cabbie was on display in a recent decision from the Honorable O. Peter Sherwood of the Manhattan Commercial Division in a case called Capital One Equip. v Deus, in which the cabbie-defendants, after defaulting on a promissory note representing more than $400,000 borrowed to purchase a taxi medallion, attempted to rest on the traditional contractual defense of impracticability or impossibility of performance in a summary proceeding under CPLR 3213.

The essence of Defendants’ claim was that “due to the economic change in the medallion and taxi industry of New York by ride sharing applications like Uber and Lyft, there is an impossible hurdle for the defendants to overcome, making the repayment of the loan impossible.”

Readers may recall from their law-school hornbook days that the impossibility defense contemplates truly unexpected circumstances. As the plaintiff-lender in the Deus case put it, “the impossibility defense . . . only excuses a party’s contractual performance where there has been destruction or obstruction by God, a superior force, or by law.”

The cabbies, however, likened their situation to the kind of critical condition contemplated by the traditional defense, describing the industry as being “on life support with little to no chance for a reversal of its current dire situation.”

“At the heart of the problems facing the NYC Taxi industry,” cried the cabbies, “is the emergence of companies such as Uber and Lyft which are exempt from the regulatory framework burdening the medallion owners.” As a result, “ridership in New York City yellow taxi cabs has dropped almost 30%” and “NYC taxi medallions, which were selling for in excess of $1,000,000 as recently as 2013, have plummeted in market value” – all of which has led to a “collapse of unprecedented proportions.”

A creative argument to be sure, but the court wasn’t buying it. Citing New York case law going back to the late 1960’s, the court ultimately held for the plaintiff-lender, finding that “performance of a contract is not excused where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship. Economic hardship alone cannot excuse performance; the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”

Coming on the heels of several driver suicides in recent months, the Deus decision is just more bad news for the NYC taxi industry. While market forces created by the advent of ride-sharing services may not be “superior” enough to satisfy the impossibility defense, one thing’s for sure: it’s a difficult time to be a taxi driver in New York City.

**UPDATE**  Perhaps the cabbies are seeing a little light after all. Around the time this post was published last week, news broke that the New York City Council had tugged the reigns of the Uber/Lyft ride-sharing industry by passing minimum-wage requirements for drivers, as well as a one-year freeze on the licensing of participating vehicles in the city. The first-of-their-kind bills, particularly the cap on e-hail cars, was driven in large part by increased problems related to city-street congestion. Today, Mayor de Blasio signed the bills into law.

 

In commercial litigation, it is not at all unusual for courts to be called upon to determine whether an unsigned agreement is binding.  The federal courts have a long line of cases dealing with this very issue, and perhaps the seminal one in this area is the Second Circuit’s decision in Winston v Mediafare Enter. Corp., a case considering whether an unsigned settlement agreement was enforceable.  The court there identified several factors to be considered in determining whether an agreement — in that case, a settlement — is binding:  “(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.”

New York courts take a similar approach.  They have long recognized that a binding agreement may be found, even though a contract was not signed, so long as it is not proscribed by New York’s statute of frauds, NY Gen. Obligs. L. 5-701.  In  Brown Bros. Elec. Contrs. v Beam Constr. Corp., for example, the Court of Appeals held that “[i]n determining whether the parties entered into a contractual agreement and what were its terms, it is necessary to look . . . to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds.” See also Flores v. The Lower East Side Service Center, Inc.  Not exactly a recipe suitable for summary judgment.

Recently, in 223 Sam, LLC v. 223 15th Street, LLC, the Appellate Division, Second Department affirmed the trial court’s order denying defendants’ motion for summary judgment seeking to dismiss breach of contract claim.  The case arose out of plaintiff’s claim for breach of contract based upon an unexecuted amendment to an operating agreement.  The amendment added plaintiff as a 50% member of defendants, and also acknowledged plaintiff as a co-manager.  The damages sought reflect the management fees allegedly earned.

Defendants argument, made in the context of a motion for summary judgment was simple:  the amendment was never executed by the parties, and therefore is not binding.

In rejecting defendants’ argument, the court first noted that New York has long recognized the rule that parties will not be bound if  they state their intent not to be bound unless and until the agreement is signed by all.  However, if the parties reach agreement on “all the substantial terms” and nothing material is left for the future, then even if the parties intended to reduce the agreement but did not, this may nevertheless create a binding agreement between them.  Express reservation is the key.  The ultimate question of whether the parties intended to be bound is a question of fact.

In denying defendants’ motion, the court referred to emails exchanged between the parties which simply “failed to eliminate triable issues of fact as to whether the parties had agreed upon the major terms of the agreement and whether the parties began to perform . . . .”

The hard lesson:  be careful in exchanging drafts, revisions and amendments (1) without expressly reserving the right not to be bound unless and until signed by all, and (2) partially performing before the agreement is signed.  Otherwise, once all material terms are agreed upon, you may indeed have a binding agreement.

 

 

 

In a recent Commercial Division decision, Pozner v Fox Broadcasting Company, (2018 NY Slip Op 28102 [Sup Ct, NY County Apr. 2, 2018]), Justice Saliann Scarpulla declined to extend the application of the faithless servant doctrine to a circumstance where no New York court has applied it before.

Cliff Pozner (“Pozner”), a former Executive Vice President at Fox Broadcasting Company (“Fox”), was terminated from his employment based on sexual harassment complaints from several current and former Fox employees.  He then commenced an action against Fox for allegedly breaching his employment agreement and discriminating against him on the basis of his religion.  In response, Fox asserted two counterclaims against Pozner: breach of contract based on Pozner’s alleged failure to abide by the company’s policies regarding sexual harassment, and breach of fiduciary duty, which, according to Fox, included the duty to refrain from conduct inconsistent with Fox’s policies regarding a harassment-free workplace.

Pozner moved to dismiss the counterclaims.  With respect to Fox’s breach of fiduciary duty claim, Pozner argued that he did not violate any duty owed to Fox under the faithless servant doctrine or as a breach of fiduciary duty, since he did not unfairly compete, divert business opportunities, or accept improper kickbacks.

Justice Scarpulla sustained Fox’s first counterclaim for breach of contract, but held that Fox’s breach of fiduciary duty counterclaim was “not tenable.”  As the Court explained, although Pozner, as a Fox executive and employee, owed a duty of loyalty to Fox, that duty “has only been extended to cases where the employee ‘act[s] directly against the employer’s interests – as in embezzlement, improperly competing with the current employer, or usurping business opportunities.’”  Accordingly, the Court held that sexual harassment by an executive, without more, cannot form the basis of a breach of fiduciary duty claim resulting in the employer’s recovery of the employee’s salary under the faithless servant doctrine.

In reaching its conclusion, the Court noted the lack of New York case law on point and easily distinguished the cases relied upon by Fox.  For example, in Astra USA, Inc. v Bildman, (455 Mass 116 [2009]), which the Court acknowledged was not controlling, the Massachusetts court found that the CEO and President of plaintiff’s company had, in addition to engaging in sexual harassment, committed acts directly against the company’s interest, including stealing company funds, financial records and other documents, destroying company property, and erasing data from computers (id. at 123-124, & n 13).

Similarly, in Colliton v Cravath, Swaine & Moore, LLP (2008 WL 4386764, 2008 US Dist LEXIS 74388 [SD NY Sept. 24, 2008]), the Court found the plaintiff’s admitted criminal activity (which resulted in a plea allocution) constituted a violation of his ethical duties under the New York Rules of Professional Responsibility.  Given these ethical violations, the plaintiff in Colliton was not ethically permitted to work as an attorney and thus, “his employment was the product of fraudulent concealment” (id. at *15).

Recognizing Fox’s failure to plead allegations of fraud, financial waste, or embezzlement, Justice Scarpulla declined to extend the faithless servant doctrine to cover instances where the only wrongdoing alleged is sexual harassment.  While it is possible that Fox’s counsel was looking to extend the law in light of recent news events, Justice Scarpulla was not so inclined.

Generally speaking, a fraud claim that is “duplicative” of a breach of contract claim will be dismissed. But when is a fraud claim sufficiently duplicative of a breach of contract claim so as to warrant its dismissal? The New York County Commercial Division (Sherwood, J.) recently answered this question in xLon Beauty, LLC v Day, 2018 NY Slip Op 30142(U) (Sup Ct, NY County Jan. 24, 2018).

In that case, the plaintiff, xLon Beauty, LLC (“Plaintiff”), a manufacturer of an “anti-aging” product (the “Product”), entered into a series of agreements (collectively, the “Contracts”) with the defendant, Doris Day, M.D. (“Defendant”), a publicly-known dermatologist regularly featured on radio and television shows. Pursuant to the Contracts, Defendant granted Plaintiff the right to license and utilize Defendant’s name and likeness to promote the Product in exchange for a 7% royalty fee.

Defendant ultimately sought to terminate the Contracts on the grounds that she (i) was not being adequately compensated, despite her efforts to promote and market the Product; and (ii) was receiving multiple complaints from customers concerning the quality and efficacy of the Product. Thereafter, Plaintiff commenced an action against Defendant alleging, among other things, breach of contract and fraudulent inducement.

Plaintiff’s breach of contract claim alleged that Defendant failed to “make herself available . . . for photographs, speaking engagements and/or commercials in video format” in accordance with the terms of the Contracts. The fraudulent inducement claim centered on Defendant’s purported representations prior to entering into the first agreement that she would use her business connections and acumen to help promote the Product.

Specifically, Plaintiff alleged that prior to entering into the Contracts, Defendant made certain oral promises to Plaintiff that she would “use her media connections to promote the Product if Plaintiff entered into the [Contracts],” but that Defendant was “insincere” because “she did not intend to fulfill her promises to promote the Product when she made them.” However, in a sworn affidavit, Defendant admitted that during that meeting, Defendant “never made any promises or representations to [Plaintiff] – beyond that which [she] agreed to in the written contracts [the parties] entered – concerning [her] endorsement or promotion of [the Product].”

In dismissing Plaintiff’s fraudulent inducement cause of action as duplicative of the breach of contract claim, the Court explained that a fraud claim may only be asserted in conjunction with a breach of contract claim when the alleged misrepresentation is “extraneous to the contract and involve[s] a duty separate and apart from or in addition to that imposed by the contract.” When the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract, the fraud-based cause of action is duplicative of a breach of contract claim, and will be dismissed. Applying these principles, the Court dismissed Plaintiff’s claims, finding that the “alleged deceit here was integral to the contract, not extraneous or collateral to it as is required in order to make out a claim for fraudulent inducement.”

In sum, a cause of action for fraudulent inducement may be sustained on the basis of an allegation that the defendant made a promise to undertake some action separate and apart from his or her obligations under the contract. However, where a fraud claim arises out of the same facts as the breach of contract claim, and the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract, the fraud claim is duplicative and will be dismissed.