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WWW. NYLJ.COM
FRIDAY, JUNE 20, 2014
VOLUME 251—NO. 118
Expert Analysis
COMMERCIAL DIVISION UPDATE
Interpreting Conflicting
Contractual Provisions
F
reedom to contract has long been respected by New York courts, and it is bedrock
law in New York that the intent of the
parties is paramount in interpreting contracts.1 When the contract is clear and
unambiguous, its plain meaning is given effect
because the best evidence of the parties’ intent
is the writing itself.2
Significant issues of contract interpretation
arise, however, when a seemingly direct conflict
exists between contractual provisions dealing
with the same subject matter.
Whether such conflicts are the product of
careless drafting, hard compromises at the
negotiating table, or transactional attorneys’
inattentiveness to how the terms will play out
once a dispute arises, when disputes arise over
contracts with conflicting provisions, courts
are left with the unenviable task of deciding the
contract’s meaning. New York courts generally
are loath to simply ignore any provision in a
contract.3 As the New York Court of Appeals has
directed, where clauses in a contract appear in
conflict, “every attempt should be made to harmonize the two provisions using common-law
tools of contract interpretation.”4 We examine
below some of those tools used by the Commercial Division and other courts in resolving
such conflicts.
Reasonableness
Implied in all contracts governed by New York
law is the covenant of good faith and fair dealing.
In addition, New York courts avoid interpreting
commercial contracts in a manner that would
lead to a commercially unreasonable result.5
These contractual constraints have at times
influenced the court’s interpretation of seemingly conflicting contract clauses.
GEORGE BUNDY SMITH is an arbitrator and mediator with
JAMS in New York City, and is a former associate judge
of the New York Court of Appeals. THOMAS J. HALL is a
partner and co-head of the commercial litigation practice
at Chadbourne & Parke. DIANA A. SANDERS, a litigation
associate with Chadbourne, assisted with the preparation
of this article.
By
George
Bundy Smith
And
Thomas J.
Hall
In Cross County Savings Bank v. Jakubek,6 Justice Carolyn Demarest of the Kings County Commercial Division dealt with a lease dispute where
the parties’ printed commercial lease contained
a provision that appeared to conflict with a provision in the rider to that lease. During the lease
term, the building in which the leased premises
(a bank branch) were located, was damaged by
fire. The landlord sought to terminate the lease,
relying on paragraph 9 of the main lease which
provided that the landlord “may terminate the
lease if the premises are wholly unusable or if the
building is so damaged that the owner decided
to demolish or rebuild it.” In contrast, the tenant relied on paragraph 33 of the rider which
imposed an obligation on the landlord to repair:
Supplementing Paragraph 9 of the printed
form of this Lease, and notwithstanding
any provision therein to the contrary, if, as
a result of fire or other casualty the demised
premises shall be damaged in whole or in
part, Owner agrees to commence the repair
thereof within 90 day [sic] following such
destruction.
The landlord argued that it would be irrational to read the lease as requiring it to restore
the leased space when the entire building was
structurally unsound. The tenant argued such an
obligation to repair was entirely rational given
the substantial amount it had spent on renovating its long-term leased space.
The court plainly recognized the importance of
paragraph 33 of the rider, stating “the instrument
was negotiated between sophisticated, counseled
business people negotiating at arm’s length” and
that “courts may not by construction add or
excise terms, nor distort the meaning of those
used and thereby make a new contract for the
parties under the guise of interpreting the writing.” Nevertheless, the court determined that
an evidentiary hearing was required as to the
extent of the damage.
The court observed that any obligation the
landlord had under paragraph 33 to rebuild might
be limited by the standards of commercial reasonableness and good faith, stating that “the
court must avoid an interpretation that would
produce a result that is…commercially unreasonable” or one that “would produce a result
that is absurd.” The rationale behind this is that
a commercially unreasonable or absurd result
was likely not intended by the parties at the time
they executed the agreement. The court thus
suggested that, following a hearing, those principles could be used to harmonize the competing
contractual terms.
Significant issues of contract interpretation arise when a seemingly
direct conflict exists between contractual provisions dealing with the
same subject matter.
Construing Against Drafter
Another interpretation tool used to harmonize
conflicting contractual provisions is the rule that
contracts will be construed against the party
that drafted the contract or provision at issue.
In Structural Contracting Services. v. URS Corp.,7
Justice Alan Scheinkman of the Westchester
County Commercial Division addressed conflicting provisions in a subcontract. The subcontract provided that any claims thereunder
must be brought within six months. The contract
also included a pre-litigation dispute resolution
procedure that prohibited a party from bringing
suit until it had exhausted those procedures. By
the time the plaintiff was able to complete that
pre-litigation procedure, however, the six month
FRIDAY, JUNE 20, 2014
limitations period had expired as to some claims,
presenting a case of two provisions that on their
face perhaps did not contradict each other but,
in practice, compliance with both turned out
not to be possible.
Relying on two Second Department decisions,
the court concluded that “where two provisions
of a contract conflict, the contract must be
resolved against the party who drew the contract.”8 Because the contract was initially drafted
by and benefitted the defendant, the court found
it would be inequitable to allow the defendant
to escape liability by creative drafting.
Public Policy
Public policy may also factor into the enforceability of a clause that conflicts with another in
the contract. “[I]t is well settled that a court
will not enforce a contract that violates public
policy….Courts shed their cloak of noninterference where specific terms of the…agreement
violate a defined and discernible public policy…
or where the final result creates an explicit conflict with other laws and their attendant policy
concerns.”9
In the Structural Contracting case discussed
above, Justice Scheinkman gave an additional
reason for refusing to bar the claim based on the
six month limitations period. The court found
that applying the contractual limitations period
to these specific causes of action would “unreasonably deprive[ ] the plaintiff of a course of
action.”10 While New York courts permit parties in
their contracts to shorten the applicable statute
of limitations for bringing claims thereunder, as
a matter of public policy courts do not enforce
such provisions if the altered period is unreasonably short.11 The court in Structural Contracting
thus relied on public policy that would be violated if the contract were constructed to have
effectively barred any resort to court.
The partnership agreement went on to specify
that, for the limited partners, this meant 2-½
percent for each sum of $750 invested by each
limited partner. In contrast, the certificate of partnership stated that the capital “contribution of
each Limited Partner is to be returned to him
upon the dissolution of the partnership out of
the partnership assets.”
Upon reaching the dissolution date, a dispute
arose as to the limited partners’ entitlement; the
formula in the partnership agreement would pay
them more than that in the certificate of partnership. The court found that the partnership
agreement controlled as it specifically addressed
the distribution of such assets and specifically
addressed the percentages that each partner
would receive. The court stated the “specificity of the Partnership Agreement demonstrates
the intention to include therein all the governing terms and conditions upon which the final
distribution upon dissolution of [the partnership] should be made.” The court contrasted
the partnership agreement with the certificate of
partnership which “only generally provides for
the return of the limited partner’s contribution
from partnership assets. It does not set forth
a formula for calculating the limited partner’s
compensation upon dissolution, as does the
Partnership Agreement.”
Conclusion
When drafting contracts, parties and their
attorneys should strive for clarity of intent and
consider the effect its provisions will have if
and when disputes arise. Inevitably, however,
conflicting provisions will creep into contracts.
Well-developed tools exist, however, for New York
courts to resolve such discrepancies.
•••••••••••••
One tool available to courts in interpreting conflicting provisions is the
rule of contract construction that
specific clauses prevail over more
general clauses dealing with the
same subject matter.
Specific Over General
Another tool available to courts in interpreting conflicting provisions is the rule of contract
construction that specific clauses prevail over
more general clauses dealing with the same
subject matter.
In Polner v. Monchik Realty Co.12 Justice Carolyn
Demarest dealt with an inconsistency between
a partnership agreement and a certificate of
partnership, not with inconsistency in the same
agreement. At the time of contract formation, the
limited partners of the partnership made capital contributions ranging from $750 to $2,250, in
exchange for which each received a 2-½ percent
interest for each $750 invested. The partnership
agreement provided that the partnership would
continue until January 2003 at which point it would
be dissolved. It further provided that, upon the
dissolution, the partnership’s net assets would be
shared among the general and limited partners in
accordance with the percentages of their interests
as set forth in that agreement.
partner brought an action for the dissolution of
the partnership, and defendants cross-moved for
summary judgment declaring that the death of
the partner did not dissolve the partnership.15
The partnership agreement contained conflicting provisions, one unequivocally calling for the
dissolution of the partnership upon the death of
a partner, and the other allowing the partnership
to survive the death of a partner if a new partner
is admitted within 90 days of the death.16
After ruling that the “first-clause” doctrine did
not apply in New York, the court instead reconciled the conflict by reading the clauses together;
when read together, the court concluded, the
agreement provided for the dissolution of the
partnership unless a new partner is admitted in
90 days. The court reinforced the general notion
that “where two seemingly conflicting contract
provisions reasonably can be reconciled, a court
is required to do so and to give both effect.”17
The ‘First-Clause’ Rule
One rule of construction available in some
jurisdictions but not available in New York is the
“first-clause” doctrine, which resolves conflicting
provisions by giving effect to the provision that
appears first in the contract. As stated by Williston:
Historically, one of the first answers provided
by the courts for how to deal with conflicting clauses was to enforce the earlier clause
and disregard the later. This approach is still
followed today. Because of the arbitrary and
artificial quality of this rule of interpretation, it is not universally followed and will
only be accepted as a rule of last resort….13
The First Department recently emphasized
that in New York, the order that the provisions
appear in the contract is not a relevant factor.
Rather, conflicts are to be reconciled so as to
adhere to the full intent of the parties without
rendering any provision superfluous.14 In that
case, Le Bel v. Donovan, the estate of a deceased
••••••••••••••••
1. 380 Yorktown Food Corp. v. 380 Downing Drive, 35
Misc.3d 1243(A), 957 N.Y.S.2d 267 (West. Co. 2012).
2. Millennium Holdings v. Glidden, 41 Misc.3d 1231(A), 981
N.Y.S.2d 636 (N.Y. Co. 2013).
3. See, e.g., 380 Yorktown, 35 Misc.3d 1243(A), 957 N.Y.S.2d
267 (“the court safeguards against adopting an interpretation
that would render any individual provision superfluous”);
Guggenheim Corp. Funding, LLC v. Access.1 Commc’ns Corp.NY, 26 Misc.3d 1210(A), 906 N.Y.S.2d 780 (N.Y. Co. 2009) (“the
court must avoid interpreting a contract so as to leave certain
clauses meaningless”).
4. Israel v. Chabra, 12 N.Y.3d 158, 167, 878 N.Y.S.2d 646, 652
(2009).
5. Elsky v. Hearst Corp., 232 A.D.2d 310, 648 N.Y.S.2d 592 (1st
Dept. 1996).
6. Cross Cnty. Sav. Bank v. Jakubek, 41 Misc.3d 1239(A), 983
N.Y.S.2d 202 (Kings Co. 2013).
7. Structural Contracting Servs. v. URS Corp.-NY, 31 Misc.3d
1208(A), 929 N.Y.S.2d 203 (West. Co. 2011).
8. Id. (quoting Certified Fence Corp. v. Felix Indus., 260
A.D.2d 338, 687 N.Y.S.2d 682 (2d Dept. 1999)).
9. New York State Corr. Officers and Police Benev. Ass’n
v. State, 94 N.Y.2d 321, 327, 704 N.Y.S.2d 910, 914 (1999) (emphasis in original); see also Sirota v. Champion Motor Grp., 18
Misc.3d 862, 867, 849 N.Y.S.2d 426, 430-31 (Kings Co. 2008) (refusing to enforce the contract and holding that “the contract
at issue is antagonistic to the interests of New York’s public
policy and the enforcement of the contract would result in the
circumvention of [law].”).
10. Structural Contracting Svcs., 31 Misc. 3d 1208(A), 929
N.Y.S.2d 203.
11. Certified Fence Corp., 260 A.D.2d at 339, 687 N.Y.S.2d at
682-83.
12. Polner v. Monchik Realty, 9 Misc.3d 755, 803 N.Y.S.2d 370
(Kings Co. 2005).
13. Williston on Contracts §32:15 at 507-10 (4th ed.)
14. Le Bel v. Donovan, 2014 WL 2053899, 2014 N.Y. Slip Op.
03608 (1st Dept. May 20, 2014).
15. Id.
16. Id.
17. Bd. of Managers v. Caballero, 36 Misc.3d 1219(A), at *3,
959 N.Y.S.2d 87 (N.Y. Co. 2012).
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