No Explanation Needed for Cancellation

New York's highest court says an attorney who cancels a purchase contract during a recognized attorney review period doesn't have to give a reason.

May 1, 2009

In the case (Moran v. Erk, N.Y. Court of Appeals, 2008), the buyers signed an agreement to purchase a home for $505,000. The agreement contained a clause giving the attorney for either party the right to void the agreement within three business days. The buyers had reservations, so their attorney, acting within the required time frame, voided the contract. The sellers eventually sold their home, although for considerably less.

The sellers filed a lawsuit, arguing that the attorney review clause was limited by an implied covenant of good faith and fair dealing, requiring the buyers’ attorney to identify a legitimate reason for canceling the agreement. They sought the difference in price between the buyers’ original offer and the eventual selling price, plus carrying costs. The trial court and later the appellate court ruled in the sellers’ favor.

But the Court of Appeals of New York reversed earlier rulings, saying the buyers and their attorney were merely exercising their contractual rights. The aim of the implied covenant is to prevent parties from taking action that will prevent the other party from enjoying the "fruits" of the contract, the court said. The contractual "fruits" were contingent upon the attorney review clause, and no requirement for the attorney to identify the reason is part of that.

The court also said creating such a requirement could open the door to legal challenges whenever a party exercised this clause. What’s more, it could force courts to investigate confidential attorney-client communications to determine whether the clause was exercised in good faith.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.