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New York choice-of-law cheat sheet for contract negotiators

[Last edited 2015-06-13]

Assignment of a government contract requires agency consent, on pain of forfeiture

New York’s State Finance Law art. 9, § 138 requires prior agency consent to any assignment of a contract by a contractor.

If the contractor fails to obtain the consent, the agency “shall revoke and annul such contract,” with the contractor to forfeit all payments except that needed to pay employees.

See also this 2002 State Comptroller memo.

Automatic renewal may require certified-mail notice within a specific time frame

New York General Obligation Law § 5-903 is not the most clearly-drafted provision; contract drafters should consider whether it might apply to contracts providing for automatic renewal (for example, a software maintenance agreement):

§ 5-903. Automatic renewal provision of contract for service, maintenance or repair unenforceable by contractor unless notice thereof given to recipient of services.

1. As used in this section, “person” means an individual, firm, company, partnership or corporation.

2. No provision of a contract for service, maintenance or repair to or for any real or personal property

which states that

  • the term of the contract shall be deemed renewed for a specified additional period
  • unless the person receiving the service, maintenance or repair gives notice to the person furnishing such contract service, maintenance or repair of his intention to terminate the contract at the expiration of such term,

shall be enforceable against the person receiving the service, maintenance or repair,

unless the person furnishing the service, maintenance or repair,

at least fifteen days and not more than thirty days previous to the time specified for serving such notice upon him,

shall give to the person receiving the service, maintenance or repair written notice,

served personally or by certified mail,

calling the attention of that person to the existence of such provision in the contract.

3. Nothing herein contained shall be construed to apply to a contract in which the automatic renewal period specified is one month or less.

(Extra paragraphing and bullets added.) (Suggested by “randomjohn”)

[ADDED 2011-08-21:] A New York state-court case is working its way up to the New York Court of Appeals (that state’s supreme court) involving automatic renewal of Bloomberg’s rental agreement for its business-information terminals. In denying Bloomberg’s motion to dismiss, the trial court seemed to assume that this statutory provision applied, without addressing the fact that the renter was a business man who lived and worked, and rented the terminal, in Illinois. (The opinion does not indicate whether the rental agreement had a choice of law provision.) See Ovitz v. Bloomberg L.P., 2009 N.Y. Slip Op. 32397(U) (Oct. 9, 2009). The intermediate appellate court agreed on that point, but ordered dismissal on other grounds. See 2010 NY Slip Op. 07484, 77 AD3d 515 (Oct. 21, 2010). The Court of Appeals subsequently granted leave to appeal, at 16 N.Y.3d 705 (2011).

Choice-of-law clauses are liberally enforced

[ADDED 2011-07-10] In addition to the usual rules governing contractual choice of law, a New York statutory provision expressly validates a contractual choice of New York law for non-personal contracts having a value of at least $250,000, even if there is no relationship between the contract and New York. See NY Gen. Oblig. L. § 5-1401.

Construction workers have their own statute to determine employee-versus-independent-contractor status

The Construction Industry Fair Play Act (S. 5847F), enacted in August 2010, establishes a presumption that all construction workers are employees unless they meet specific criteria.

Contracts aren’t necessarily illusory just because one party can unilaterally change the key terms

In March 2012, the federal district court in New York City explained how under New York law, a contract was not necessarily illusory just because one party had the right to change key terms at will, as long as that party acts “reasonably.” In that case, subscribers to Dow Jones’s on-line service brought a (putative) class action after Dow Jones unilaterally changed its subscription terms and charged the subscribers more for continued access:

Plaintiffs allege that Dow Jones breached the Subscriber Agreement by charging plaintiffs for one-year subscriptions that included access to both WSJ Online and BOL [Barrons On Line], but then spinning off BOL without notice prior to the expiration of the subscription and charging plaintiffs more to continue to access both services. … ¶ ¶

New York courts have examined the reasonableness of a defendant’s behavior before holding a contract to be illusory. For example, in Horowitz, an inventor plaintiff argued that a contractual provision with a former employer was illusory. The contract stated that payments due to the plaintiff “may change from time to time” at the discretion of the president of the non-profit employer.

After the president changed the payment schedule, Horowitz brought suit. The court rejected Horowitz’s argument that the contract was illusory because there was no evidence that the president had exercised his discretion in an improper manner, and Horowitz was not left with an insignificant income.

Other courts applying New York law have considered similar provisions without holding them to be illusory.

Leibowitz v. Dow Jones & Co., No. 06 Civ 2198 (S.D.N.Y. Mar. 12, 2012) (granting Dow Jones’s motion for summary judgment) (extra paragraphing added, citations and additional case summaries omitted).

Resale price maintenance (“vertical price fixing”) can cause serious trouble under state law

Drafters of distributor- and reseller agreements should be extremely cautious about agreeing to the pricing that the “downstream” party will charge to its own customers. See a spring 2010 article by Scott Martin of Greenberg Traurig at http://goo.gl/eAky.

Martin Act gives state attorney general extraordinary financial fraud investigation powers

[ADDED 2010-12-22] New York’s Martin Act gives the state attorney general extraordinary powers to investigate suspected financial fraud. Attorneys general Eliot Spitzer and Andrew Cuomo each used the Martin Act aggressively, including Cuomo’s December 2010 civil-fraud lawsuit against Ernst & Young in connection with the failure of the Lehman Brothers investment banking firm.

Discovery before, and in aid of, arbitration may be available

Section 3102(c) of New York’s Civil Practice and Law Rules provides that “Before an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order. The court may appoint a referee to take testimony.”

In April 2009, a New York state court granted a petition for the issuance of subpoenas to help the petitioners “ascertain the identity of other potential parties to the contemplated arbitration proceeding.” In re VTrader Pro LLC, No. 102334/09 (N.Y. Sup. Ct. Apr. 21, 2009). (Hat tip: Brian Perryman via Paul Lurie)

Negligence exculpatory clauses will be enforced (but not for gross negligence)

The New York Court of Appeals explained that state’s policy:

As a general rule, parties are free to enter into contracts that absolve a party from its own negligence or that limit liability to a nominal sum. However, it is New York’s public policy that a party cannot insulate itself from damages caused by grossly negligent conduct. Therefore, exculpatory clauses and liquidated damages clauses in contracts are not enforceable against allegations of gross negligence. We have observed that gross negligence, when invoked to pierce an agreed-upon limitation of liability in a commercial contract must smack of intentional wrongdoing. It is conduct that evinces a reckless indifference to the rights of others.

Abacus Federal Savings Bank v. ADT Security Services, Inc., No. 33 slip. op. at 6 (N.Y. Mar. 22, 2012) (affirming most grounds of dismissal of bank’s claim against alarm-system companies after burglary, but reversing as to breach-of-contract claim against one defendant) (citations, alteration marks, and internal quotation marks omitted), available at http://goo.gl/8YFL4.

Non-competition law balances interests of employer, employee, and general public

New York law “require[s] that courts strictly construe restrictive covenants and balance the interests of the employer, employee and general public ….” Brown & Brown, Inc. v. Johnson, No. 92, slip op. at 7 (N.Y. June 11, 2015) (affirming, in pertinent part, judgment that choice-of-law clause specifying Florida law in employment agreement was unenforceable in respect to non-solicitation clause).

Powers of attorney executed by individuals may require “magic language” in certain cases

See this Kattin Muchin memo. [UPDATED 2010-10-07 to reflect technical corrections to the NY statute, as suggested by a lawyer who wants to remain anonymous]