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University of South Dakota School of Law

Thursday, August 7, 2008

Second Circuit Certifies Contract Modification Question to New York Court of Appeals

New_york_state_flagThe Second Circuit has certified a contract question to the New York Court of Appeals in Israel v. Chabra. In that case, Michael and Steven Israel sued to recover a bonus for services rendered to AMC Computer Corp. The Israels sued AMC's Chief Executive Officer Surinder "Sonny" Chabra, who had personally guaranteed the bonus payments. An article at explains:

Southern District Judge Denny Chin found Chabra liable for the debts and he ordered Chabra to pay the Israels $332,816 each and a total of $299,890 in attorney fees.

Chabra appealed to the 2nd Circuit, where the case was reviewed by Judges Guido Calabresi, Reena Raggi and Peter Hall.

Hall wrote that the issue was whether a post-guarantee agreement between AMC and the Israels to modify the bonus payment schedule discharged Chabra's obligations under the guarantee.

Complicating matters was the fact that Chabra signed the first amendment modifying the bonus payment schedule twice, in both his personal and corporate capacities, but only signed a second amendment once. Chabra argued that the sole signature was proof that he was acting solely in his corporate capacity.

"Unlike the district court, we find that this question cannot be answered by mere reference to the fact of the signature," Hall said. The circuit then found that Chabra did not agree to the second amendment by signing it.

But Hall said that "try though we have," the circuit could not reconcile two competing clauses.

The first, relied on by the Israels, is a consent clause which said Chabra's obligations under the guaranty "are absolute and unconditional irrespective of ... any change in the time manner or place of payment."

The second, relied on by Chabra, was a "writing requirement" stating that references to the "employment agreement shall mean the employment agreement immediately after the execution of Amendment No. 1 and shall not affect subsequent amendments to the Employer Agreement unless Guarantor has agreed in writing to such amendments."

Hall said the common law rule is that "where two clauses of the agreement are so totally repugnant to each other that they cannot stand together, the first of such clauses in the contract will be received and the subsequent one rejected."

The problem, he said, was that while the common law rule would lead to rejecting the writing requirement as secondary to the consent clause, "doing so would require us to disregard a private statute of frauds" created by New York General Obligation Law §15-301(1) to assure the authenticity of an amendment by requiring that a contractual modification be sealed with a "formal writing."

New York law, he said, "presumes that statutory law does not abrogate the common law unless it evinces a 'clear and specific legislative intent' to do so."

"We are unable to determine whether, in enacting §301(1), the New York State Legislature sought to abrogate the common law to the extent that the common law would give effect to a contractual provision at odds with the writing requirement," Hall said.

So the question sent to the Court of Appeals was: Does §301(1) "abrogate, in the case of a contract where the second of two irreconcilable provisions requires that any modifications to the agreement be made in writing, the common law rule that where two contractual provisions are irreconcilable, the one appearing first in the contract is to be given effect rather than the one appearing subsequent?"

[Meredith R. Miller]

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Interesting case. What was the basis of awarding attorney fees? Was it in the part of the contract that was not in dispute? Gavin Craig

Posted by: Gavin Craig | Aug 8, 2008 5:12:59 AM

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