The Court of Appeals recently issued three decisions that, when considered both individually and together, hold business people to the terms of their written agreements.

In the first case, J. D’Addario & Co., Inc. v. Embassy Indus., Inc, The Court held that the party’s language specifying that the seller’s ‘sole remedy’ was liquidated damages and the seller had ‘no further rights’ against the defaulting purchaser, “trump[ed] language in CPLR 5001(a) directing that statutory interest be awarded in a contract dispute.”

The liquidated damages clause of the contract provided that “the seller’s ‘sole remedy’ and the purchaser’s ‘sole obligation’ would be the $650,000 down payment plus bank-accrued interest.” The Court held that the terms of the contract were controlling and that the defendant was not entitled to the higher rate of statutory interest.

The second decision, in Schron v. Troutman Sanders LLP, involved the validity and enforceability of an option contract.

The subject transaction involved two contracts: an option agreement to purchase membership units in a limited liability company (“LLC”) and a loan by a third-party entity to the LLC. The option agreement contained a provision that is often called an “entire agreement clause.”

The appellant sought to introduce extrinsic (parol) evidence, defined by the Court as “evidence outside the four corners of the document,” to substantiate a claim that the phrase “Other good and valuable consideration” in the option agreement related to the obligation to fund the loan.

The Court of Appeals explained that parol evidence is only admissible if the Court finds an ambiguity in the contract. In this instance, the Court found that it was not admissible, stating that if a contract contains a merger clause and the option agreement unambiguously provides that the mutually-beneficial covenants in the option agreement were considered by both parties, the importation of another obligation, such as the separate loan obligation, would impermissibly alter the writing in violation of the parol evidence rule.

The Court admonished that “had the sophisticated business entities, represented by counsel, intended to make [repayment of the loan] a condition to the enforceability of the option, they easily could have included a provision to that effect.”

The third lawsuit, Fundamental Long Term Care Holdings, LLC v. Cammeby’s Funding LLC, related to the option agreement at issue in the Shron case. The option agreement permitted one party to acquire one third of another party’s membership interest in an LLC for “a strike price of $1,000[.]” The party holding the option exercised this right to purchase the other party’s interest, but the party whose interest was being bought rejected exercise of the option on the grounds that the buyer had not complied with the “capital contributions requirement” of a separate and subsequently-signed operating agreement.

The Court of Appeals rejected the argument that the option agreement and the operating agreement were inextricably intertwined and must be read together. The Court found instead that if the parties meant for a provision of the operating agreement to come into play upon exercise of the option, then “this is not the sort of term these sophisticated, counseled parties would have left out of the option agreement.”

J. D’Addario & Co., Inc. v. Embassy Indus., Inc., 2012 NY Slip OP 07850 [20 NY3d 113] November 19, 2012.

Schron v. Troutman Sanders LLP, 2013 NY Slip Op 00952, February 14, 2013.

Fundamental Long Term Care Holdings, LLC v. Cammeby’s Funding LLC, 2013 NY Slip Op 00951, February 14, 2013.