Court of Appeals Rules Attorney May Disapprove Contract For No Reason

The New York Court of Appeals decided the case of Moran v. Erk. This case addressed whether an attorney needs to have cause to disapprove a purchase contract pursuant to the attorney approval clause.

In this case, the Erks (buyers) entered into a real estate contract with the Morans (sellers) to purchase real property in Clarence, NY on December 22, 1995. The contract set forth the purchase price of $550,000 and contained an attorney approval contingency that stated, “This contract is contingent upon approval by attorneys for seller and purchaser by the third business day following each party's attorney's receipt of a copy of the fully executed contract (the 'approval period')... If either party's attorney disapproves this contract before the end of the approval period, it is void and the entire deposit shall be returned."

After signing the contract, the buyers decided to purchase a different property. The buyers then instructed their attorney to disapprove the contract. The attorney did so on December 28, 1995, during the term of the attorney approval period. Thereafter, the sellers kept the house on the market and eventually sold it for $385,000 in late 1998 (three years after the buyers contract and for $120,000 less). The sellers sued the buyers under a breach of contract theory for the difference in price and for “carrying costs” associated with marketing the property for an additional three years. The Supreme Court found in favor of the sellers stating, "[I]t is well settled law that where a buyer acts in bad faith by instructing his attorney to disapprove a real estate contract, the condition that the contract be approved by an attorney is deemed waived and a contract is formed." The Appellate Division affirmed the Supreme Court's decision agreeing with the “bad faith” premise. The case was further appealed to the Court of Appeals and was reversed.

In its decision, the Court of Appeals explored attorney approval contingencies and commented that attorney approval clauses are needed by real estate brokers in order to avoid the unauthorized practice of law as set forth in the Duncan v. Hill decision. The court stated that, “a real estate contract states that it is ‘subject to’ or ‘contingent upon’ the approval of each party's attorney, this language means what is says: no vested rights are created by the contract prior to the expiration of the contingency period.” The sellers argue that there is an implied limitation of good faith and fair dealing under New York law. The sellers argue that there is a limitation on the attorney’s ability to approve or disapprove a contract pursuant to the attorney approval contingency. As such, any disapproval must be made on good faith (which was defined as “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”)

The courts further explored the issue of “bad faith” and found that if such a standard were to exist, it would jeopardize the attorney's ability to communicate with their clients since if an attorney was ever asked to disapprove a contract, it could be questioned as being made in “bad faith." This would compel the attorney to testify as to the substance of the communications between them and their clients. This would be a direct conflict with the attorney's duty to preserve a client's confidences and secrets. The court found this would threaten attorney-client confidentiality, a necessity in the practice of law.

The court ruled that the attorney approval should be interpreted according to its plain meaning. If the attorney approval clause does not contain any limiting language, a contract may be disapproved for any or no stated reason.