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How to choose New York Law and New York Courts in your Business Contracts

You may have signed a contract for your small business that you really shouldn’t have.  Or you are being asked to perform under an agreement and think that such demand is not what you agreed to or just grossly unfair.   So you ask yourself, “can I get out of that contract?”

What does your Contract say?

The other party to the agreement may demand all kinds of things, but before you get defeated, you’d better make sure that the contract actually obligates you to do what the other party demands.  Please read the agreement in its entirety.  What does it state concerning your particular problem?

Can you terminate the Contract?

Check if the language of the agreement itself offers a way out of the obligation by terminating the contract.  If so, follow that clause to the letter to terminate the contract.

What if the Contract has no Termination Clause?

Under New York law, if there is no termination clause or if the contract seems to go on indefinitely, you are allowed to terminate the contract on reasonable notice to the other party.  Obviously, that does not relieve you of your obligations if they occurred before your termination. If the service was provided, you have to pay, regardless of your termination after the service was provided.

Is the other Party in breach of the Contract?

If the other party is in breach of their obligations, you can terminate.  For example, you don’t have to pay if the party did not provide the agreed services.  Or sometimes, contractual obligations have conditions.  In other words, you don’t have to perform unless the other party has fulfilled the condition.

Is the Contract enforceable?

Next, lawyers would check if the contract you signed or the particular provision you don’t like is enforceable.  In other words, if the other party takes you to court for breach of contract, would you have a viable defense?  Would the court take that contract and enforce it against you?

Several possible scenarios come to mind that typically make an agreement or one or more of its provisions unenforceable.

Consideration

To be enforceable, a contract must be an agreement between at least two people exchanging something of value (consideration).  No consideration, no contract.  Also, if the language is so ambiguous that nobody can tell what it means and there is no indication outside of the written contract for the parties’ intention, there is no agreement to enforce.

Fraud

If you have been defrauded in the context of the contract, you may be able to avoid being obligated to perform.  The obvious example is when someone forged your signature on a contract.  Or if someone makes changes to the contract at the last minute and fails to notify you of such changes so that you literally get tricked into signing a contract that you did not approve.

Another example is when someone tricks you into signing a document by making false statements relating to the agreement.  Had you known the truth, you would have never signed the contract in the first place.

But these examples are rare and usually hard to prove.  You can protect yourself by always reading the contract before signing and making sure it states exactly what you think it should state.  You should also do your own investigations as to any representations made to you in connection with the contract.  Ideally, these representations should be repeated and explicitly being written into the contract.  Otherwise, it just may be tough to prove that you were told “such and such” before signing.

Also, watch out for a provision that states the opposite:  a disclaimer that you did not rely on any representations not specifically stated in the contract.  This puts an even greater responsibility on you to conduct appropriate due diligence before signing the contract.

Is the Contract Illegal or against Public Policy?

For obvious reasons, courts will not enforce illegal contracts; A contract to provide illegal services (think prostitution) is void.

Then some contracts or provisions are against New York public policy and therefore not enforceable.  You are more likely to encounter this scenario in day-to-day business dealings.  One example is a waiver of liability in a gym membership contract.  These are unenforceable under New York General Obligations Law Section 5-326.

The prime example of a contract provision that violates New York public policy is a provision for penalties.   New York courts will not enforce contractual penalties that have no relation to the loss suffered by the non-breaching party, and such loss would actually be possible to determine without undue difficulties.    “Public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority.”

Then some contracts could hurt competition.  Again, New York believes an undue restriction of competition in the marketplace is against its public policy.  Whenever a contract clause has the ability to restrict competition, enforceability depends on the reasonableness of such restriction. For example, it may be reasonable to restrict a seller of a business from opening the same business right next door, but it is probably unreasonable to forbid the same seller to engage in a similar business for all times and eternity.

Has the Purpose of the Contract been frustrated?

You may have heard about this excuse for getting out of a contract in the recent covid pandemic: Frustration of Purpose.  It is different from “force majeure,” which is a particular kind of provision written into a contract.  Frustration of purpose means that a basic understanding underlying the contract has gone away.  Both parties must have understood the purpose and without it, the contract makes no sense.  It is only applied in very limited circumstances.  For example, not paying rent for your gym because of the pandemic has already been found not to be “frustration of purpose.”

See also How to execute a Contract.

Call me if you have any questions about the topic!

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.