September 15, 2009
NY Court of Appeals Hears Contract Damages Case
The 2009-2010 term of the New York Court of Appeals begins today, and scheduled for oral argument is St Lawrence Factory Stores v. Ogdensburg Bridge and Port Authority, a case about contract damages.
St. Lawrence Factory Stores, a partnership of Frank Arvay and Richard Lepine, entered into an option contract with the Ogdensburg Bridge and Port Authority (OBPA) in February 1990 for an option to buy 12 acres of land to develop a retail factory outlet center. The contract also provided, "Since the objective of [OBPA] in offering this option is not merely the sale of land but rather to encourage the development of this specific project, [Factory Stores] shall erect a retail factory outlet and related facilities on said TRACT and said TRACT shall not be used by [Factory Stores] for any other purpose or purposes." Arvay, who eventually held an 85 percent interest in the partnership, sought financing and tenants for the project and exercised the option in July 1991. OBPA sent a letter to the partners in October 1991 expressing "concern about the viability of your project and your ability to perform" and threatening to void the contract if they did not provide proof of adequate financing by the end of the month. The partnership responded that, under the contract, securing financing was not a condition precedent to closing, which was scheduled for January 1992. At the closing, Arvay tendered his 85 percent share of the $298,000 purchase price, but Lepine refused to tender his share and walked out. Arvay then offered his personal check for the remaining 15 percent, but OBPA refused to accept it and declined to close.
The Factory Stores partnership sued for breach of contract seeking, among other things, reliance damages for recoupment of its investment costs. Supreme Court partially granted OBPA's summary judgment motion by dismissing the partnership's claims for reliance damages and lost profits. The Appellate Division, Third Department affirmed. Regarding reliance damages for costs incurred by Factory Stores in preparing to develop the site, the Appellate Division said, "The contract in question does not require plaintiff to engage in any of the preparatory tasks for which it seeks to be compensated. Simply put, this is a contract for the sale of land requiring plaintiff to tender defendant the sale price upon closing. Accordingly, plaintiff's reliance damages would encompass only those ordinarily incurred regarding such a contract, such as a title search, survey and attorney's closing fees."
After a bench trial, Supreme Court found that OBPA had breached the option contract in bad faith, but it awarded no damages. The Appellate Division affirmed.
Factory Stores argues that it should have been allowed to recover reliance damages because its expenses "were incurred in reliance upon the contract, they are ascertainable, and they arose naturally from defendant's breach in the ordinary course of things." It contends the Appellate Division mischaracterized the contract as one solely for the sale of land, saying the option contract "not only mandated the purchase and sale of the subject property, it also contractually obligated the plaintiff to develop/build, at its own cost, the very outlet center that plaintiff intended to develop/build anyway." Factory Stores also argues it is entitled to damages for lost profits and benefit of the bargain damages.
[Meredith R. Miller]
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