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Impeding the Counterparty’s Ability to Satisfy a Condition Precedent Could Result in Liability

Justice Jeffrey K. Oing in the Commercial Division handed down a decision recently that discusses frustration of the occurrence of a condition precedent by parties to commercial contracts.  Nesconset ZJ 1 v. Nesconset Acquisition, LLC, No. 652719/2015, 2016 BL 339908 (Sup. Ct. Oct. 4. 2016).  The dispute in Nesconset involved agreements between buyers and sellers of nursing homes and related health care facilities.  The main issue in the case was whether the buyers could seek specific performance of the sales contract when the sellers’ conduct allegedly frustrated the satisfaction of condition precedents to the contract.  Justice Oing held that a seller who frustrates the buyer’s ability to satisfy a condition precedent will be unable to rely on the failure to satisfy that condition as justification to avoid the contract and will be subject to a claim for breach of the implied covenant of good faith and fair dealing. 

In so holding, the Commercial Division reasoned that a buyer cannot rely on the seller’s failure to perform a condition precedent where the buyer itself has frustrated or prevented the occurrence of the condition.  According to the Commercial Division, if the buyer has not taken part in frustrating a condition, the seller who frustrated the occurrence of a condition is precluded from trying to avoid the agreement due to the lack of satisfaction of the condition.   The Court noted that a party who frustrates the occurrence of a condition precedent exposes itself to a claim for breach of the implied covenant of good faith and fair dealing, which is implicit in all agreements.  According to the Court, that good faith covenant is “breached when a party acts in a manner that—although not expressly forbidden by any contractual provision—would deprive the other party of receiving the benefits under the agreement.”  Id. at *8 (quoting Sorenson v. Bridge Capital Corp., 52 AD3d 265, 267 (1st Dep’t 2008).  The covenant would encompass any promises that a reasonable person would believe were included in the agreement.  

The Commercial Division found that the sellers had prevented the buyers from satisfying the condition precedent of obtaining agency approval for the sale by asking the approving agency to deny the buyer’s requests.  As a result, Justice Oing held that the sellers’ action supported the buyers’ claim for breach of the implied covenant of good faith and fair dealing. 

By Ashley Ochs and Stephen P. Younger