Moran v. Erk
11 N.Y.3d 452 (2008)
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Rule of Law:
Where a real estate contract contains an attorney approval contingency, an attorney for either party may timely disapprove the contract for any reason or no reason at all, unless the contract's language explicitly limits that discretion. The implied covenant of good faith and fair dealing does not impose such a limitation.
Facts:
- On December 13, 1995, Mehmet and Susan Erk signed a contract to purchase a house from James and Kathleen Moran for $505,000.
- The contract included a standard rider with an 'ATTORNEY APPROVAL CONTINGENCY,' which stated the contract was void if either party's attorney disapproved it within a three-day period.
- After signing the contract, the Erks had misgivings about the purchase and decided to buy a different home.
- The Erks instructed their attorney to disapprove the contract.
- On December 28, 1995, within the specified three-day period, the Erks' attorney formally disapproved the contract.
- The Morans, who had already moved out, kept the house on the market and eventually sold it nearly three years later for $385,000.
Procedural Posture:
- James and Kathleen Moran sued Mehmet and Susan Erk in New York Supreme Court (trial court) for breach of contract.
- Following a bench trial, the trial court found in favor of the Morans and entered a judgment against the Erks for $234,065.75.
- The Erks, as appellants, appealed the judgment to the Appellate Division of the Supreme Court (intermediate appellate court).
- The Appellate Division affirmed the trial court's decision.
- The Erks, as appellants, were granted leave to appeal to the New York Court of Appeals (the state's highest court).
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Issue:
Does the implied covenant of good faith and fair dealing limit an attorney's discretion to disapprove a real estate contract under a standard attorney approval contingency, thereby creating a cause of action for breach of contract when a party instructs their attorney to disapprove based on a change of heart?
Opinions:
Majority - Read, J.
No. The implied covenant of good faith and fair dealing does not limit an attorney's absolute discretion to disapprove a real estate contract under a standard attorney approval clause. The plain language of an unambiguous attorney approval contingency means what it says: no vested rights are created by the contract until the contingency period expires without disapproval. The 'fruits' of the contract that the covenant of good faith protects were themselves contingent on attorney approval, so there was nothing for the covenant to protect. Reading a 'bad faith' exception into these clauses, as lower courts had done, undermines the clarity and predictability essential to real property law by inviting subjective factual inquiries into the client's motives. Such inquiries would also threaten the attorney-client privilege by forcing attorneys to testify about their confidential communications with clients, creating a perverse incentive for attorneys to be less than candid. Therefore, a timely disapproval by an attorney under such a clause is valid regardless of the reason, rendering the contract void by its own terms.
Analysis:
This decision decisively rejects the 'bad faith' exception for attorney approval clauses that some lower New York courts had adopted. It establishes a clear, bright-line rule that prioritizes the plain text of the contract and predictability in real estate transactions over subjective inquiries into a party's motives. The ruling strengthens the power of attorney approval contingencies, confirming them as a valid 'escape hatch' for parties who have second thoughts, provided their attorney acts within the specified timeframe. By highlighting the threat to attorney-client confidentiality, the court also reinforces the importance of that privilege in transactional settings.
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