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Breach of contract37

Under New York law, a party establishes a breach of contract where it proves the existence of a valid contract, breach by the other party, that the non-breaching party fully performed its obligations and that the non-breaching party sustained damage as a result of the breach. The non-breaching party must demonstrate that the other party committed a material breach of the contract. A breach is material if it deprives 'the injured party of the benefit it justifiably expected' under the contract. Conversely, '[i]f the party in default has substantially performed, the other party's performance is not excused'.

Courts will look at several factors to determine whether substantial performance has occurred, including the amount of performance completed, the magnitude of the default, whether the purpose of the contract has been frustrated and whether the non-breaching party has received a substantial benefit of the contract.

In New York, parties to a contract are also bound by the implied duty of good faith and fair dealing. This common law principle is intended to address situations where 'there is not a breach of contract, but where one party has attempted to undermine the contract or deprive the other of the benefit of the bargain'. Despite the fact that New York generally recognises the covenant of good faith and fair dealing, courts have presented conflicting signals when applying the doctrine to contracts that afford one party sole discretion to take or refrain from taking a particular action. For example, some New York courts have held that the covenant is not violated if a party chooses to exercise its contractual right to 'terminate the contract 'in its sole discretion' and for 'any reason whatsoever', while other courts in New York have allowed claims to proceed notwithstanding such language. Whether the covenant was allegedly breached, however, often is fact-specific and dependent on the nature of the act that violated it. As a general rule, courts are more likely to find a party breached an express term of an agreement rather than the implied covenant of good faith.

Anticipatory breach or repudiation of a contract is a breach 'that occurs before performance by the breaching party is due'. An anticipatory breach can be a statement by the repudiating party to the non-repudiating party that the former will breach, or a 'voluntary affirmative act' rendering the repudiator unable to perform without breach. The repudiator's expression of intent not to perform must be 'positive and unequivocal'. When faced with an anticipatory repudiation, the non-repudiating party may elect to 'treat the repudiation as an anticipatory breach and seek damages for breach of contract'; or 'continue to treat the contract as valid and await the designated time for performance before bringing suit'.

Defences to enforcement

There are also a number of defences that may be available to a defendant facing a breach of contract claim. The reader should be cautioned, however, that New York courts are generally reluctant to set aside the terms of a contract that parties have willingly entered. Unfavourable terms or terms that lead to inequitable performances are insufficient bases for courts to rewrite the contract. To avoid enforcement of contractual obligations or defend against a claim of breach, a party in New York generally must demonstrate that the terms were not sufficiently definite or agreed to, unless there is some other defence.

i No enforceable contract was formed

To be enforceable, a contract must contain definite assent and include clear, material terms. New York courts have determined that a mere 'agreement to agree' without material terms is unenforceable. However, courts have found enforceable a contract that contemplates a future, more detailed agreement if the material terms of that agreement are set forth, and it can be reasonably inferred from the contract that the parties intended to be bound by it. Courts also will enforce clauses in preliminary agreements such as memoranda of understanding regarding confidentiality and exclusive negotiation periods.

ii Limitation period unenforceable

The statute of limitations to assert a breach of contract claim in New York is six years. '[A] breach of contract cause of action accrues at the time of the breach.' Parties to a contract may, however, agree to a shorter time period within which a claim must be asserted. Even if sophisticated parties have agreed to terms that are plainly stated in the agreement, New York courts may deem unenforceable a contract with an unreasonable limitation period. However, if the limitations period is clear and unambiguous, is not derived from a contract of adhesion or overreaching and is not unreasonably short, New York courts may enforce the contractual limitation period. By contrast, parties may not agree to extend the statute of limitations period prior to the accrual of a claim, as such contractual provisions are barred by New York's law and public policy. However, once a claim has accrued, parties may then postpone the limitations period.

iii Lack of consideration

As explained above, agreements must contain consideration to be enforceable. Though the lack of the presence of consideration may be used as a basis to dispute contract enforcement, the adequacy of the substance of that consideration is generally not reviewable, and New York courts will hold parties to the terms of the contract even where the consideration is heavily disproportionate.

iv Enforcement is contrary to public policy

New York courts will not enforce contracts that are contrary to the public policies of New York. Public policy is to be determined by reference to 'laws and legal precedents' rather than 'general considerations of supposed public interests'. Contracts that are contrary to public policy include contracts allowing a contracting party to benefit from a criminal enterprise or contractual choice-of-law provisions applying foreign laws that are 'truly obnoxious'. 'Further, as a general rule, illegal contracts are unenforceable.' However, New York courts typically endeavour to protect the clear and unambiguous terms of a mutual contract, and the burden to prove that public policy would be violated by the enforcement of a contract is high.

v Duress

Although New York courts generally enforce contracts with clear terms, it will not do so if those terms were made while one party was under duress. Although duress is often asserted where the defendant is an individual, 'economic duress' can also be a viable defence to enforcement of a contract when asserted by businesses as well. Economic duress arises when 'one party has unjustly taken advantage of the economic necessities of another and thereby threatened to do an unlawful injury'. However, if a party voluntarily entered into a payment agreement with 'full knowledge of the facts and in the absence of fraud or mistake of material fact or law', courts may decline to find duress and instead require enforcement under the voluntary payment doctrine.

vi Impossibility or impracticality

'[I]mpossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.' Generally, the impossibility defence is limited to situations where the means of performance is destroyed, such as through an 'act of God', or by law.

For example, a governmental order preventing a party from performing will typically constitute sufficient grounds for impossibility. In addition, in the residential mortgage-backed securities context, New York courts have found that where equitable relief is the only remedy provided for in the contract, a court may award damages where equitable relief is impracticable or impossible. However, New York courts have also found that parties cannot avoid enforcement where impossibility arises from 'financial difficulty or economic hardship'.

vii Frustration of purpose

The doctrine of frustration of purpose 'offers a defence against enforcement of a contract when the reasons for performing the contract cease to exist due to an unforeseeable event which destroys the reasons for performing the contract'. A New York court may consider the purpose of an agreement to be frustrated where the purpose goes to the core of the contract, and without it the agreement makes little sense. Under New York law, a court will not excuse a party from a contract merely because performance has become an economic burden. For example, frustration of purpose did not apply to enforcement of a commodity swap contract following a commodity price increase because protections against instability in commodity prices were the very thing that induced the parties to enter into the contract in the first place.

viii Force majeure

A force majeure provision is generally understood as a contractually defined event, beyond the control of both parties, the occurrence of which prevents a parties' performance and excuses their obligation under the contract. These events may include natural disasters (floods, earthquakes, hurricanes), riots, strikes or wars. Force majeure clauses are narrowly construed, and 'only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused.' Generally, economic hardship alone will not be sufficient to invoke a force majeure clause. Furthermore, if a contract does not contain a force majeure clause, a court is unlikely to read one in.

Governmental action may trigger a force majeure clause where the clause includes 'governmental prohibitions' or 'government interference,' or other language to that effect. For example, one court has held that a force majeure clause containing the language 'governmental interference' applied to a contract for shipment of products to a country where the US had banned exports. There is limited precedent regarding whether a force majeure clause can be invoked in connection with a public health crisis or other epidemic. While it is unlikely for a force majeure clause to reference a flu virus as a triggering event, the covid-19 outbreak could perhaps be covered by terms such as 'epidemic' or 'pandemic'.