Issue:
In this case, commercial tenants who unambiguously agreed to waive the right to commence a declaratory judgment action as to the terms of their leases ask the court to invalidate that waiver on the rationale that the waiver is void as against public policy.
Held:
Here, the declaratory judgment waiver is clear and unambiguous, was adopted by sophisticated parties negotiating at arm's length, and does not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract. The declaratory judgment waiver in the lease is therefore enforceable and the action was properly dismissed. The Appellate Division’s decision is affirmed.
Facts:
The Plaintiffs, 159 MP Corp. and 240 Bedford Ave Realty Holding Corp. executed two commercial leases for a total durational period of twenty years with the predecessor-in-interest of defendant Redbridge Bedford LLC, the current owner of the subject building
-The leases contained a standard form, its terms were not accepted as boilerplate but rather contained numerous handwritten additions and deletions, initialed by the parties. More specifically, each lease also incorporated a 36-paragraph rider, which was also replete with handwritten additions and deletions. Paragraph 67(H) of the rider provides:
"Tenant waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease . . . It is the intention of the parties hereto that their disputes be adjudicated via summary proceedings"
In March 2014, the defendant sent notices to the plaintiffs alleging various defaults and stating that plaintiffs had fifteen days to cure the violations in order to avoid termination of the leases.
Procedural History:
Before the expiration of the cure period, plaintiffs commenced this action by way of order to show cause in Supreme Court seeking, a declaratory judgment that they were not in default. Additionally, the plaintiffs also sought a Yellowstone injunction in order to prevent the owner from terminating the leases or commencing summary proceedings during the pendency of the declaratory judgment action.
The Defendant answered and cross-moved for summary judgment dismissing the complaint, arguing that the action and, thus, the request for Yellowstone relief were barred by the waiver clause in the leases. In response, plaintiffs asserted, among other things, that if interpreted in the manner urged by the owner, the waiver clause was unenforceable and that the waiver was premised on mutual mistake concerning the scope of summary proceedings.
The Supreme Court of NY denied plaintiffs' motion for a Yellowstone injunction, granted defendant's cross motion for summary judgment, and dismissed the action in its entirety. The Appellate Division, with one Justice dissenting, affirmed, determining that the declaratory judgment waiver was enforceable and barred plaintiffs' claim. The Appellate Division granted plaintiffs leave to appeal to the Court of Appeals, certifying the question whether its order was properly made, and Court of Appeals affirmed the Appellate Division’s decision.
Rule:
The right to commence a declaratory judgment action, although a useful litigation tool, does not reflect such a fundamental public policy interest that it may not be waived by counseled, commercial entities in exchange for other benefits or concessions. Entities like those party to this appeal are well-situated to manage their affairs during negotiations, and to conclude otherwise would demean sophisticated parties and destabilize their contractual relationships — contrary to New York's strong public policy in favor of freedom of contract.
Reasoning:
The Court of Appeals looked to Vermont Teddy Bear v 538 Madison Realty Co. which found that when parties set down their agreements in a clear, complete document, their writing should be enforced according to its terms. As noted in Vermont Teddy Bear, a case involving a commercial lease, this rule has special value in the context of real property transactions, where commercial certainty is a central concern, and where the instrument was negotiated between sophisticated, counseled, business people negotiating at arms length. Further the Court of Appeals found that in the case at hand, the lease provision in question clearly waived the Plaintiffs right to bring a declaratory judgment with respect to any provision in the lease or any notice sent pursuant to a provision of the lease. Thus, by applying well-settled contract law principles, the Court of Appeals found that this unambiguous waiver clause reflects the parties’ intent that the plaintiffs be precluded from commencing precisely the type of suit they initiated here.
Freedom of contract is a deeply rooted public policy of the state of NY and because NY is the commercial center in the US, and NY courts have long deemed the enforcement of commercial contracts according to the terms adopted by the parties to be a pillar of common law. Thus, freedom of contract prevails in an arm's length transaction between sophisticated parties and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain. (Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 695 [1995].
In general, the public policy favoring freedom of contract does not mandate that the language of an agreement be enforced in all circumstances. Contractual provisions entered unknowingly or under duress or coercion may not be enforced. The doctrine of unconsionability also protects against unjust enforcement of onerous contractual terms which one party is able to impose upon the other because of a significant disparity in bargaining power. The Court of Appeals noted that Plaintiff in the case at hand raised none of these defenses.
The Court of Appeals further noted that here, plaintiffs assert that the declaratory judgment waiver is unenforceable because it is void as against public policy. Thus, the plaintiffs' challenge is not predicated on the circumstances surrounding the making of this particular agreement, such as allegations of unequal bargaining power, coercive tactics, lack of counsel, or other claims pertinent to other well-established contract defenses.
Rather, plaintiffs' contention is that the right to bring a declaratory judgment action is so central and critical to the public policy of this state that it cannot be waived by even the most well-counseled, knowledgeable or sophisticated commercial tenant. The Court of Appeals rejected this argument.
Here, the declaratory judgment waiver is clear and unambiguous, was adopted by sophisticated parties negotiating at arm's length, and does not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract. Although plaintiffs argue otherwise, there is simply nothing in contemporary statutory, constitutional, or decisional law indicating that the interest in access to declaratory judgment actions or, more generally, to a full suite of litigation options without limitation, is so weighty and fundamental that it cannot be waived by sophisticated, counseled parties in a commercial lease.
Moreover, CPLR 3001 enables the Supreme Court to grant declaratory judgments in the context of justiciable controversies but in no way indicates that sophisticated parties may not voluntarily waive the right to seek such relief. The waiver clause at issue here does not preclude access to the courts but leaves available other judicial avenues through which plaintiffs may adjudicate their rights under the leases. The waiver permits plaintiffs to raise defenses to allegations of default in summary proceedings in Civil Court, under Real Property Actions and Proceedings Law (RPAPL) article 7, and specifically states that "it is the intention of the parties that their disputes be adjudicated via summary proceedings.
The Court of Appeals further noted that the Court permits parties to waive the right to substantive review of their disputes in Court by entering arbitration arrangements supports the conclusion that is reached here: that there is no overriding public policy preventing sophisticated entities from waiving the right to commence a declaratory judgment action, which presents merely one tool for litigating a dispute.
Nor was this declaratory judgment waiver rendered unenforceable because, under the circumstances presented here, it resulted in an inability to obtain Yellowstone relief.
Here, because the Plaintiffs' declaratory judgment action was barred by the lease waiver, there was no pending action in which to adjudicate the parties' rights and to support interim relief in the form of a Yellowstone injunction. Plaintiffs' inability in this case to obtain Yellowstone relief does not prevent them from raising defenses in summary proceedings if commenced and thus vindicating their rights under the leases if the owners' allegations of default are baseless. The owner cannot evict plaintiffs without commencing a summary proceeding and establishing that plaintiffs materially breached the leases. Absent such a proceeding, plaintiffs remain in possession of the premises and their rights under the leases are undisturbed.
But there is no strong societal interest in the ability of commercial entities to seek such a remedy that would justify voiding an unambiguous declaratory judgment waiver negotiated at arm's length, merely because this incidentally precluded access to Yellowstone relief. Moreover, neither statutory nor decisional law suggests otherwise. The Legislature has made certain rights nonwaivable in the context of landlord-tenant law (see e.g. General Obligations Law § 5-321 [right to seek damages for injury caused by landlord's negligence]; RPAPL 235-b [right to habitability]; RPAPL 236 [right of a deceased tenant's estate to assign the lease when reasonable]) but has not precluded a commercial tenant's waiver of interim Yellowstone relief.
By disfavoring judicial upending of the balance struck at the conclusion of the parties' negotiations, our public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements. The Court of Appeals mentioned that it has cautioned that when a court invalidates a contractual provision, one party is deprived of the benefit of the bargain. By disfavoring judicial upending of the balance struck at the conclusion of the parties' negotiations, the public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements.
The public policy favoring freedom of contract does not mandate that the language of an agreement be enforced in all circumstances. Contractual provisions entered unknowingly or under duress or coercion may not be enforced. Further, the doctrine of unconscionability also protects against "unjust enforcement of onerous contractual terms which one party is able to impose upon the other because of a significant disparity in bargaining power.” Plaintiffs in the case at hand raised none of these defenses.
The Court of Appeals also stated that it has deemed a contractual provision to be unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public policy (Oppenheimer & Co., 86 NY2d at 695). But, because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after "balancing" the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger (see New England Mut. Life Ins. Co., 73 NY2d at 81). Only a limited group of public policy interests have been identified as sufficiently fundamental to outweigh the public policy favoring freedom of contract. In some circumstances, the Legislature has identified the benefits or obligations recognized in constitutional, statutory or decisional law that are so weighty and critical to the public interest that they are nonwaivable.
Dissent- Justice Wilson:
The dissenting justice voiced that declaratory relief serves the important societal function of providing certainty in contractual relationships and that the tenant's ability to litigate in summary proceedings commenced by the owner was not a sufficient substitute for the ability to commence a declaratory judgment action.
Justice Wilson stated that the public policy at play requires the Court to disallow contractual provisions depriving a party of the ability to seek a declaratory judgment, is the freedom of contract itself. Further, a contractual provision that forecloses a party from timely knowing its contractual obligations and instead forcing parties to gamble on the contract's meaning, undermines the contract and with it, society's benefit from the freedom of contract.
Moreover, the dissent voiced that the majority's decision will result in the elimination of the "Yellowstone injunction", a common-law precedent that has existed in New York for more than half a century. After this decision, commercial building owners and landlords will undoubtedly include a waiver of declaratory and Yellowstone relief in their leases as a matter of course. Those clauses will enable them to terminate the leases based on a tenant's technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations.
Notably, the waiver provision at issue here prevents only the tenant from commencing a declaratory judgment action to clarify its rights and responsibilities. The leases permit Redbridge Bedford to commence a declaratory judgment action at will. Justice Wilson believed that the majority rationalized that the plaintiff and all other commercial tenants who waive declaratory and Yellowstone relief in their leases are left with "other judicial avenues through which they may adjudicate their rights under the leases. However, the only available legal avenue left to the plaintiff, is to wait until the defendant commences summary eviction proceedings in Civil Court and then raise any defenses it may have against the allegations of default in that summary proceeding. Further Justice Wilson believed that the majority's elimination of the clearly best option — knowing one's rights before determining whether and what action to take — strikes at the very core of declaratory judgments.
The majority allows a lease provision to undo the legislature's creation of declaratory judgments, the common-law's rejection of contractual provisions purporting to remove judicial interpretation of contracts, and the longstanding efforts of our court and the lower courts thereafter in fashioning the Yellowstone injunction, which, after fifty years of unquestioned existence, itself is engrained in the common law.
The majority appears to assume that commercial tenants have a relatively higher level of sophistication and bargaining power than residential tenants, and therefore commercial tenants should be allowed to waive the availability of Yellowstone relief even though some residential tenants cannot (see RPAPL 743 [4], [5]). Indeed, the majority states several times that "sophisticated" commercial tenants should be allowed to waive their right to declaratory relief. A contract provision that violates public policy, however, cannot be enforceable regardless of the level of the sophistication of the parties.
In conclusion, the dissenting Justice Wilson believed that the waiver of declaratory judgments provision in the lease should not enforced.
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