Breach of Contract

Elements of a cause of action for breach of contract

The elements of a cause of action for breach of contract are (1) formation of a contract between the plaintiff and defendant; (2) performance by plaintiff; (3) defendant’s failure to perform; and (4) resulting damage. See, Palmetto Partners LP v. AJW Qualified Partners LLC, 83 AD3d 804 [2 Dept. 2011].

The elements of a cause of action for breach of contract are, “The existence of a contract, the plaintiff’s performance pursuant to that contract, the defendants’ breach of their obligations pursuant to the contract, and damages resulting from that breach (see JP Morgan Chase v. J.H. Elec. of N.Y., Inc., 69 A.D.3d 802, 893 N.Y.S.2d 237; Furia v. Furia, 116 A.D.2d 694, 498 N.Y.S.2d 12). Elisa Dreier Reporting Corp. v. Global Naps Networks, Inc., 84 AD3d 122, 127 [2d Dept 2011]; Harris v. Seward Park Housing Corporation, 79 A.D.3d 425 [1st Dept. 2010].

Breach of contract has a 6 year statute of limitations.

A breach of contract claim has a statute of limitations of six years, and which the “clock” begins to tick, not at the inception of the agreement, but at the inception of the default. Brooklyn Union Gas Co. v. Interboro Surface Co., Inc., 87 AD2d 833, 833 [2d Dept 1982]; see also, Guild v. Hopkins, 271 App.Div. 234, 244, 63 N.Y.S.2d 522 [1st Dept 1946]; Edlux Construction Corp. v. State of New York, 252 App.Div. 373, 300 N.Y.S. 509, affd. 277 N.Y. 635, 14 N.E.2d 197 [1938]).

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Employment Agreement held too Restrictive.

Underwater explosion next to the USS Arkansas illustrating article by Richard Klass about an employment agreement and restrictive covenants

Blown out of the water!
Employment Agreement held too Restrictive.

She was hired as a salesperson for a company that sold water purification systems. The company also installed and maintained those systems (known as “reverse osmosis” or “RO” systems). The company had a policy that all salespeople had to sign its Independent Business Owner contract, which laid out the retention terms including the salesperson’s right to sales commissions and restrictive covenants (or promises) in favor of the company.

The contract stated several restrictive covenants to be agreed upon by the salesperson, including: (1) not to use or disclose any commercial information received from the company; (2) not to act in any way that could be harmful to the company’s goodwill; and (3) for a period of two years following termination, not to engage in the production, distribution, sale or advertisement of products similar to those produced and distributed by the company (“i.e. water purification and filtration systems and equipment”). The contract also stated that, in the event of any breach by the salesperson, the company could pursue both monetary damages against the salesperson and injunctive relief to restrain the person from the forbidden conduct.

The salesperson left the company to start a different company that sold water “ionizers.” As described by industry experts, a water ionizer allows water (whether purified or not) in a home to flow through its system, ionizing the water as it passes through to make it more alkaline, to produce ionized anti-oxidant water (ionized water is touted as having certain health benefits.) Indeed, it was explained that a water ionizer is not sold as an alternative to a water purifier but rather as an adjunct to the RO systems sold by the company and other similar systems. Once she started the new business, the water purification company sued her, claiming that she violated the restrictive covenants in the contract.

Restrictive covenants in employment agreements

It is the common practice of many businesses that use employment contracts to include “restrictive covenants” in those contracts. “Restrictions” placed upon a prospective employee or independent contractor may include not soliciting customers of the business (non-solicitation); not revealing trade secrets or methods developed by the business (confidentiality provisions); not hiring away other employees to competitors (non-poaching); and not dealing in the same industry or geographic area (non-competition). Restrictive covenants not to compete “are justified by the employer’s need to protect itself from unfair competition by former employees.” Scott, Stackrow & Co. CPA’s PC v. Skavina, 9 AD3d 805 [3 Dept. 2004] lv. denied 3 NY3d 612 [2004].

Restriction must be “Reasonable”

Courts recognize that there is a balance between a business’ right to protect itself from unfair competition and an employee’s right to earning a living after leaving the business. To effectively completely box a person out of an entire industry may or may not be justified depending upon whether the restriction imposed is “reasonable.” Reed, Roberts Associates Inc. v. Strauman, 40 NY2d 303 [1976]. In BDO Seidman v. Hirshberg, 93 NY2d 382 [1999], the New York State Court of Appeals, in providing guidance as to what constitutes a reasonable restrictive covenant, held that the modern prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test. A restraint is reasonable only if it:

  1. is no greater than is required for the protection of the legitimate interest of the employer;
  2. does not impose undue hardship on the employee; and
  3. is not injurious to the public.

A violation of any of the three prongs renders the restrictive covenant invalid. With respect to the three factors laid out in the oft-cited BDO Seidman case, a restrictive covenant will be enforced only if reasonably limited both temporally and geographically.

Covenants were too “restrictive”

To defend the lawsuit, the salesperson retained Richard A. Klass, Esq., Your Court Street Lawyer, who presented several defenses, including that the (a) contract did not contain any geographic limitations (it could have been interpreted as including the entire world); (b) restriction in the contract only applied to competitors who sold systems similar to the company’s (and water ionizers are inherently different from RO systems); and (c) skills of a salesperson are not so “unique” that she should be prevented from working in any way in the entire water industry.

In granting summary judgment dismissing the entire case, the court held that the contract was unenforceable. The judge found that the salesperson was not engaged in the sale or production of products similar to those stated in the contract (“water purification and filtration systems and equipment”); specifically, the judge held that a restrictive covenant against competition must be strictly construed and should not be extended beyond the literal meaning of its terms (citing to Elite Promotional Mktg. v. Stumacher, 8 AD3d 525 [2 Dept. 2004]. In general, whenever there is an ambiguity in a contract, its meaning will be resolved against its drafter. Battenkill Veterinary Equine PC v. Cangelosi, 1 AD3d 856 [3 Dept. 2004].

Importantly, the court held that the fact that the contract lacked any geographic limitation doomed its enforcement. The court declined to partially enforce the contract in favor of the company pursuant to the “blue pencil” rule, where a court can strike out the unenforceable parts of a contract and enforce the remainder. (Partial enforcement may be justified when an employer proves the absence of overreaching, coercive use of its dominant bargaining power or other anticompetitive misconduct. Brown & Brown Inc. v. Johnson, 25 NY3d 364 [2015].) Ultimately, the court decision dismissing the case validated the salesperson’s basic argument that enforcement of an unreasonable, onerous restrictive covenant would have imposed a severe hardship on her, basically denying her of the right to earn a living in the entire water industry.

— Richard A. Klass, Esq.

Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York. He may be reached by phone at (718) COURT●ST or e-mail at richklass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

© 2016 Richard A. Klass
Image on page one: U.S.S. Arkansas, Camera Operator: PH1 Toon, U.S. Navy


R. A. Klass
Your Court Street Lawyer

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A Day Late and a Dollar Short

Color sketch of the image Felicitas in the mosaic frieze at the Palais Pringsheim, Berlin by Anton von Werner. Shows monk on right, working at a desk with blue prints, looking at activity to the left. On the left is a man in old fashioned brown clothing, with drawings under one arm, looking at and touching the cheek of a baby which is being held by a sitting woman who has two other children next to her.

A comprehensive medical practice was opening up in an office building and needed extensive renovations in the space. The medical practice hired a construction company to handle the build-out of the office at a cost of over $250,000. The construction contract specified that the contractor would achieve “substantial completion” of the project within 3 months after work began in April 2012. Unfortunately, the project took a lot longer than anticipated (about 9 months). Finally, on January 16, 2013, the project was confirmed by the contractor as complete, and the work was approved by the county. There was even a confirming email from the contractor to the medical provider stating “We Passed!!!” An invoice marked “Final Billing” was rendered, and a Certificate of Compliance was issued by the Building Inspector on January 31, 2013.

Since the project took much longer to complete than anticipated and agreed-upon in the construction contract, the medical provider withheld final payment, claiming it suffered heavy losses including loss of business, substantial rent payments to the landlord for the unusable space and additional overhead expenses.

Mechanic’s Lien Filed

Instead of directly addressing the client’s concerns, on October 8, 2013, the contractor simply filed a “Notice of Mechanic’s Lien” with the County Clerk. New York’s Lien Law Section 10 provides a powerful collection tool to a home improvement or commercial contractor—the right to place a lien upon someone’s house or building:

Section 10(1) Notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within eight months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished; provided, however, that where the improvement is related to real property improved or to be improved with a single family dwelling, the notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within four months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished.

The “Eight Month” Rule

One of the fundamentals of the Lien Law is that its procedures are to be strictly followed by the lienor. Unlike other areas of law, in which harmless errors can be glossed over, the Lien Law requires punctilious compliance; otherwise, the lien will be invalid. This is mainly because the right to place a lien on someone’s house is such a harsh remedy.

After being directed by the landlord to remove the mechanic’s lien, the medical provider retained Richard A. Klass, Your Court Street Lawyer. The first step was to analyze the lien notice itself—and determine whether a proceeding could be brought to discharge the mechanic’s lien under Lien Law Section 19(6) for being “facially invalid.” This means that, from looking at the face of the notice of lien itself, it may be determined that the lienor does not have a valid lien.

In the lien notice, the contractor had stated that the last item of work was performed on “February 13, 2013.” However the court ruled that all work was completed by January 31, 2013. Thus, the October 8, 2013, lien notice was filed more than 8 months afterward (late filing). This late filing would make the mechanic’s lien invalid under the Lien Law. In Ren. Reh. Systems Co., Inc. v. Faulkner, 85 AD3d 752 [2 Dept. 2011], the court held that the failure of a mechanic’s lien to be timely filed pursuant to the Lien Law was fatal to the mechanic’s lien.

Extra Work Doesn’t Count

In response to the proceeding brought by the medical provider to discharge the mechanic’s lien, the contractor claimed that it sent a subcontractor to the premises to perform some work in March 2013; thus, its filing of the lien was timely. The medical provider challenged this claim by showing the court that the subcontractor only performed a normal service call for “no heat.” It was argued that the court should follow the rule in Nelson v. Schrank, 273 AD72 [2 Dept. 1947], that a mechanic’s lien is not timely filed when measured from the last date that extra work was performed when the extra work was not part of the original contract, anticipated when the original contract was made, or done in continuance of the work under the contract.

In discharging the mechanic’s lien, the court held that there was no proof that the extra work completed was part of the original contract, was anticipated when the original contract was made, or constituted work completed under the original contract. Accordingly, the court granted the petition to discharge the mechanic’s lien.

— by Richard A. Klass, Esq.

———–
copyr. 2015 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-mail to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

Credits: Photo of Richard Klass by Robert Matson, copyr. Richard A. Klass, 2011.
Marketing services by The Innovation Works, Inc. www.TheInnovationWorks.com.
Image at top: Felicitas, by Anton von Werner, 1872.


R. A. Klass
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Cause of Action for Interference with Contract

A cause of action is properly alleged against defendants for their interference with contract when the following elements are set forth:

The Second Department held, in Miller v. Theodore-Tassy, 92 AD3d 650 [2012], that:

To prevail on a cause of action alleging tortious interference with contract, a plaintiff must establish “the existence of a valid contract between the plaintiff and a third party, defendant’s knowledge of that contract, defendant’s intentional procurement of the third-party’s breach of the contract without justification, actual breach of the contract, and damages resulting therefrom” citing Lama Holding Co. v. Smith Barney, 88 NY2d 413, 424.

— by Richard A. Klass, Esq.

———–
copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.


R. A. Klass
Your Court Street Lawyer

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