If you don’t use it, you lose it – don’t risk losing your right to terminate a contract by failing to timely notify your counterparty of material breaches
July 03, 2019
In a recent decision in Inferno Restaurant & Pizzeria, Inc. v SW Michaels Pizzeria, Inc., 2019 NY Slip Op 50995(U) (June 13, 2019), the Supreme Court, Albany County, found that where a defendant knew of a plaintiff’s material breaches of a contract and failed to timely notify the plaintiff of these material breaches, the defendant, thereby, lost its right to terminate the contract based on the alleged breaches.
The plaintiff, Inferno Restaurant and Pizzeria, Inc. (“Inferno”), owns and operates several pizzerias in New York. In April 2018, Inferno sold one of its pizzeria businesses to defendant, SW Michaels Pizzeria, Inc. (“Michaels”). According to a promissory note, Michaels paid Inferno one-half of the purchase price at the closing and agreed to pay the balance of the purchase price in monthly installments continuing until April 2023, at which point the note would become payable in full. Inferno also took a security interest in the assets sold to Michaels. After only six months, Michaels stopped making its monthly payments to Inferno. Accordingly, Inferno moved for summary judgment in lieu of complaint, seeking immediate payment of the remaining balance and interest of the note, and Michaels opposed the motion.
Michaels did not deny defaulting on the payments to Inferno but did claim that Inferno materially breached the parties’ agreement by: 1) failing to properly train Michaels’ staff in the operation of the business; 2) failing to provide Michaels with all of the pizzeria’s recipes; and 3) making false assurances that there were no violations pending against the pizzeria. Michaels further claimed that Inferno’s material breaches of the contract caused Michaels to incur $75,000 in expenses and, ultimately, resulted in the pizzeria’s closure. Inferno responded to Michaels’ accusations by noting that Michaels never complained to Inferno about the training, missing recipes, or any health code issues and, thereby, waived its claim for breach of contract. In fact, Michaels did not notify Inferno of the alleged breaches until it filed the opposition papers.
A waiver is a voluntary and intentional abandonment of a known right (Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175 ). The doctrine of “election of remedies,” requires a non-breaching party in a contract dispute to “choose between two remedies: it can elect to terminate the contract or continue it. If it chooses the latter course, it loses its right to terminate the contract because of the default” (Awards.com v Kinko’s, Inc., 42 AD3d 178, 188 [1st Dept 2007], affd 14 NY3d 791 , citing Bigda v Fischbach Corp., 898 FSupp 1004, 1011 [SDNY 1995], affd 101 F3d 108 [2d Cir 1996]).
“But New York law does not treat as inconsistent the right to continue to perform and to accept performance under a contract (on the one hand) and the right to sue for damages based on a breach (on the other)” (Luitpold Pharm., Inc. v Ed. Geistlich Söhne A.G. Für Chemische Industrie, 784 F3d 78, 934 [2d Cir 2015]). “‘A party to an agreement [that] believes [the agreement] has been breached may elect to continue to perform the agreement’ and later sue for the alleged breach, so long as that party does not waive its right to sue by, inter alia, failing timely to notify its counterparty of the breach” (id., quoting Capital Med. Sys. Inc. v Fuji Med. Sys., U.S.A. Inc., 239 AD2d 743, 746 [3d Dept 1997]).
Here, the Court found that Michaels lost its right to terminate the contract based on the alleged breaches when it elected to operate the pizzeria and continue to make monthly payments to Inferno rather than notify Inferno of the material breaches. Ultimately, Michaels could not rely on the breaches as a basis for affirmative relief or as a defense for nonperformance when it failed to timely notify Inferno of the alleged material breaches.
Takeaway: If you believe that an agreement (which you are a party to) has been breached, make sure to timely notify the breaching party of the material breach. Don’t risk waiving your right to sue or losing your right to terminate the contract based on the material breach.