Outlining the scope of an attorney’s retainer agreement is important.

Outlining the scope of an attorney’s retainer agreement is important. This sets forth the nature of the work to be rendered by an attorney on behalf of his client. In Attallah v Milbank, Tweed, Hadley & McCloy, LLP, 2019 NY Slip Op 00583 [2d Dept Jan. 30, 2019], the court held:

An attorney may not be held liable for failing to act outside the scope of a retainer (see AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428, 834 N.Y.S.2d 705, 866 N.E.2d 1033). Therefore, since the defendant’s alleged failure to negotiate with the school, its alleged failure to commence litigation against the school, and its alleged failure to properly advise the plaintiff on the efficacy of a defamation action against nonschool parties fell outside the scope of the parties’ letter of engagement, dismissal of the cause of action alleging legal malpractice was warranted, pursuant to CPLR 3211(a)(1), on documentary evidence grounds.

R. A. Klass
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Employment agreement termination

Employer’s termination of employment agreement must comply with contract provisions

When an employment agreement specifies certain acts or actions to be performed to effectuate a termination, the employer must follow the procedure as outlined in the employment agreement, or it is deemed a breach of the agreement. Kalus v. Prime Care Physicians, 20 A.D.3d 452 [2d Dept. 2005]; Scudder v. Jack Hall Plumbing, 302 A.D.2d 848, 850 [3d Dept. 2003]; Hanson v. Capital District Sports, 218 A.D.2d 909, 911 [3d Dept. 1995] (“If there was cause, plaintiff could not be discharged absent compliance with the relevant provisions of the employment contract. In view of defendant’s demonstrated noncompliance, in either case, the discharge would be ineffective and plaintiff would be entitled to the relief demanded in the complaint.”).

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Frustration of purpose

Contract may be voided when there is a frustration of its purpose.

Frustration of Purpose

“To invoke frustration of purpose as a defense for nonperformance, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.” PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 AD3d 506, 508 [1st Dept 2011] (quotation marks omitted); Crown IT Servs., Inc. v. Koval–Olsen, 11 AD3d 263, 265 [1st Dept 2004]; see also Rockland Dev. Assocs. v. Richlou Auto Body, Inc., 173 A.D.2d 690, 691 [2d Dept 1991] (the doctrine of frustration of purpose applies when the frustration is substantial). “The doctrine applies when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.” PPF Safeguard, 85 AD3d at 508 (emphasis added), quoting Restatement (Second) of Contracts Section 265, Comment a. Gelita, LLC v. 133 Second Ave., LLC, 42 Misc 3d 1216(A) [N.Y. Sup Ct 2014].

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Waiver of a contract right

Waiver of a contract right is knowingly giving up a right.

The essence of a waiver is when a party intentionally relinquishes a known right. It is well settled that when there is a no oral modification clause, the doctrines of waiver, release and estoppel do not apply. (“ Waiver is an intentional relinquishment of a known right and should not be lightly presumed. ”) Gilbert Frank Corp. v. Fed. Ins. Co., 70 N.Y.2d 966, 968 [1988]; Brooklyn Fed. Saving Bank v. 9096 Meserole St. Realty LLC, 29 Misc 3d 1220(A) [Kings Sup Ct 2010].

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Monetary damages for breach of employment contract

The damages payable for breach of an employment contract are measured, prima facie, by the wages that would have been paid during the remainder of the contract term (see Cornell v. T.V. Development Corp., 17 N.Y.2d 69, 74, 268 N.Y.S.2d 29, 215 N.E.2d 349; Rebh v. Lake George Ventures, 241 A.D.2d 801, 803, 660 N.Y.S.2d 901). This, however, is only the prima facie measure. “The actual damage is measured by the wage that would be payable during the remainder of the term reduced by the income which the discharged employee has earned, will earn, or could with reasonable diligence earn during the unexpired term” (Hollwedel v. Duffy–Mott Co., 263 N.Y. 95, 101, 188 N.E. 266; see Cornell v. T.V. Development Corp., 17 N.Y.2d at 74, 268 N.Y.S.2d 29, 215 N.E.2d 349). Tendler v. Bais Knesses of New Hempstead, Inc., 112 AD3d 911, 911 [2d Dept 2013].

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Employee breach of good faith and loyalty

Appellate Division Second Department case law is clear that “an employee owes a duty of good faith and loyalty to an employer in the performance of the employee’s duties.”  Is. Sports Physical Therapy v. Burns, 84 AD3d 878, 878 [2d Dept 2011].

While there is duty of good faith and loyalty owed to an employer, “an employee may create a competing business prior to leaving her or his employer without breaching any fiduciary duty unless she or he makes improper use of the employer’s time, facilities or proprietary secrets in doing so.” Is. Sports Physical Therapy v. Burns, 84 AD3d 878, 878 (2d Dept 2011) (citing Schneider Leasing Plus v. Stallone, 172 A.D.2d 739, 741, 569 N.Y.S.2d 126).

A common example of a breach of a duty of good faith and loyalty is when an employee solicits his or her employer’s customers or otherwise compete during the course of his or her employment with the employer by the use of the employer’s time, facilities or proprietary information.  30 FPS Productions, Inc. v. Livolsi, 68 AD3d 1101, 1102 [2d Dept 2009]; A & L Scientific Corp. v. Latmore, 265 AD2d 355, 355 [2d Dept 1999}; Schneider Leasing Plus, Inc. v. Stallone, 172 AD2d 739 [2d Dept 1991].

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Oral modification to contract?

Oral modification: Changes to a contract must be in writing and not oral.

“Parties to a written agreement who include a proscription against oral modification are protected by subdivision 1 of section 15-301 of the General Obligations Law. Any contract containing such a clause ‘cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement is sought.’ Put otherwise, if the only proof of an alleged agreement to deviate from a written contract is the oral exchanges between the parties, the writing controls. Thus, the authenticity of any amendment is ensured ( see 1283 DFI Communications v. Greenberg, 41 N.Y.2d 602, 606-607, 394 N.Y.S.2d 586, 589-590, 363 N.E.2d 312, 315-316 [1977]).” Rose v Spa Realty Assoc., 42 NY2d 338, 343 [1977].

“In order to be valid, oral agreement modifying time of payment of original note must be supported by sufficient consideration and part payment on a note which is due does not fulfill these requirements since neither a promise to do that which promisor is already legally bound to do, nor the performance of an existing legal obligation, constitutes a valid consideration for an agreement.” Fed. Deposit Ins. Corp. v Hyer, 66 AD2d 521 [2d Dept 1979]. Moreover, if the contract contains a no waiver clause, failure to honor a party’s demand for compliance with the contract’s unambiguous terms will constitute a breach in spite of what the course of performance has been. DeCapua v Dine-A-Mate, Inc., 292 AD2d 489, 491 [2d Dept 2002].

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Part performance of a contract can be a valid modification.

Although courts have held that if there is partial performance under an oral modification and as a result, the doctrine of equitable estoppel would apply, such modification would have to have been agreed to by both parties. Beacon Term. Corp. v Chemprene, Inc., 75 AD2d 350, 354 [2d Dept 1980]. Additionally, for a course of performance to demonstrate mutual assent to a modification, it must be unequivocally referable to the modification. Nassau Beekman, LLC v Ann/Nassau Realty, LLC, 105 AD3d 33, 35 [1st Dept 2013].

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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.com 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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