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Wednesday, December 3, 2008

Buyer’s Remorse, Now With Bite

Coahead01Recently, the New York Court of Appeals unanimously held that the buyers of a house could back out of the deal by disapproving of the contract pursuant to an “attorney approval contingency.”

In Moran v. Erk, the Erks signed a contract to purchase the Morans' home in Clarence, New York for $505,000. The contract of sale contained a rider with an “attorney approval contingency.” That clause provided that the contract was contingent upon approval by the parties’ attorneys, and gave both seller and buyer 3 days from their attorney’s receipt of the contract to disapprove of the contract and render it void. The contract and rider were boilerplate forms copyrighted and approved by the Greater Buffalo Association of Realtors and the Bar Association of Erie County. This type of clause is common in New York real estate contracts, and is (at least in part) intended to ensure that real estate brokers avoid unauthorized practice of law.

After signing the contract, the Erks began to have second thoughts about the purchase. As a result, they instructed their attorney to disapprove of the contract, which she did within the 3-day period provided in the contract rider. The Morans eventually sold their house about 3 years later for $385,000. Shortly thereafter, the Morans sued the Erks for breach of contract and sought the difference in sale prices as well as carrying costs for the nearly 3-year period the house was on the market.

The trial court entered judgment against the Erks, holding that they acted in bad faith by instructing their attorney to cancel the contract. The Appellate Division affirmed. The New York Court of Appeals reversed, holding the language of the “attorney approval contingency” clause “means what it says: no vested rights are created by the contract prior to the expiration of the contingency period.” The Morans argued that the contract nonetheless created an implied limitation on the attorney’s discretion to disapprove the contract. Writing for the unanimous Court, Judge Read held:

Jread04

We do not ordinarily read implied limitations into unambiguously worded contractual provisions designed to protect contracting parties. The Morans, however, contend – and the lower courts apparently agreed – that the implied covenant of good faith and fair dealing implicitly limits an attorney’s ability to approve or disapprove a real estate contract pursuant to an attorney approval contingency. This argument misconstrues the implied covenant of good faith and fair dealing under New York law.

The implied covenant of good faith and fair dealing between parties to a contract embraces a pledge that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” [citations omitted]. Yet the plain language of the contract in this case makes clear that any “fruits” of the contract were contingent on attorney approval, as any reasonable person in the Morans’ position should have understood.

Further, the Court recognized the "chanciness" of a “bad faith exception” to the attorney approval contingency:

Reading a bad faith exception into an attorney approval contingency would create . . . a regime where “question[s] of fact precluding summary judgment” would “usually [be] raise[d]” by a disappointed would-be seller or buyer any time an attorney disapproved a real estate contract pursuant to an attorney approval contingency. In an area of law where clarity and predictability are particularly important, “this novel notion would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules” of plain-text contractual language.

Finally, the Court noted that a bad faith rule could pose a threat to attorney-client confidentiality: “A diligent attorney, cognizant of the risk of being subpoenaed to testify as to the basis for disapproval, would face a perverse incentive to avoid candid communications with his or her client regarding a transaction in which the attorney is supposed to represent the client’s legal interest.”

Moran v. Erk, ___ N.Y.3d ___ (Nov. 25, 2008).

[Meredith R. Miller]

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