Case Title: Michael Israel and Steven Israel v. Surinder S. Chabra

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2009-03-26T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 26  
Michael Israel and Steven Israel,
            Respondents, 
        v. 
Surinder S. Chabra, 
            Appellant, 
Paran Realty Corp., 
            Defendant.
Howard W. Burns Jr., for appellant.
Alan L. Sklover, for respondents.
GRAFFEO, J.:
In this certified question case from the United States
Court of Appeals for the Second Circuit, we are asked to
determine whether General Obligations Law § 15-301(1) affects the
interpretation and enforcement of a contract.  We begin with the
facts underlying the contract dispute.
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Plaintiffs Michael and Steven Israel were formerly
employed by AMC Computer Corporation.  In the spring of 2000, AMC
was in the process of merging with a third-party investor. 
Because plaintiffs -- a father and son -- were key employees, the
investor sought assurances that they would remain with AMC for at
least three years after the merger.  On May 1, 2000, plaintiffs
entered into separate but virtually identical three-year
employment agreements with AMC.  Defendant Surinder "Sonny"
Chabra, the president of AMC, executed the contracts in his
corporate capacity.  In addition, Chabra signed a "Letter of
Intent" agreeing that, if the merger went forward, "Steven and
Michael Israel each will be entitled to a $2 million bonus
payment, for past services rendered, to be paid by Sonny Chabra." 
The payments were to be made in equal monthly installments over
the period covered by the employment contracts.
The employment agreements and the letter of intent were
modified on July 31, 2000 in documents known as "Amendment No. 1
to Employment Agreement" and "Amendment No. 1 to Letter of
Intent."  The amendments reduced plaintiffs' bonuses to $1.75
million and transferred the obligation to make the payments from
Sonny Chabra, in his personal capacity, to AMC.  In the amended
letter of intent, the parties further agreed that Chabra would
personally guarantee the bonus payments and, about a month later,
Chabra executed personal guarantees requiring him to cover any
default upon 60 days notice of AMC's failure to make an
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installment payment to either of the Israels.  The guarantees
stated that Chabra's liability was "absolute and unconditional"
regardless of "any change in the time, manner or place of
payment" (a provision referred to as the "advance consent
clause") or of "any rescission, waiver, or modification of any of
the terms or provisions of the Employment Agreement."  The last
sentence of the guarantees (referred to as "the writing
requirement") provided: "References to the Employment Agreement
shall mean the Employment Agreement immediately after the
execution of Amendment No. 1 and shall not be affected by
subsequent amendments to the Employment Agreement unless
Guarantor has agreed in writing to such amendments."
The merger occurred on August 30, 2000 and, under the
amended agreements, plaintiffs began to receive bonus payments
later that year.  Over the next two and a half years, AMC failed
to make certain installment payments, causing plaintiffs to issue
default notices to AMC and Chabra.  To resolve the disputes over
the missed payments, AMC entered into a "Second Amendment to
Employment Agreement" with each plaintiff that included a new
payment schedule for the balances due on the bonuses.  The
parties also agreed that Chabra's personal guarantees would
remain in effect.  Chabra signed these amendments as President of
AMC but not in his personal capacity.
AMC made some payments under the new schedule but
ultimately ceased making any payments, prompting plaintiffs to
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forward default notices to AMC and Chabra.  After an unsuccessful
effort to arbitrate, plaintiffs pursued this action in the United
States District Court for the Southern District of New York
seeking enforcement of the Chabra guarantees.  The parties cross-
moved for summary judgment and the District Court granted
judgment in favor of plaintiffs, holding that Chabra was
personally obligated to pay the remaining balances on the bonus
payments.  
On appeal, the Second Circuit disagreed with the
District Court's analysis in several respects (Israel v Chabra,
537 F3d 86 [2d Cir 2008]).  Relevant to this appeal, since Chabra
had signed the second amendment documents only in his capacity as
President of AMC, the Second Circuit rejected the District
Court's finding that he was personally bound by the new payment
schedule.  The Court further reasoned that plaintiffs' failure to
send default notices when payments were not made under the prior
schedule might preclude recovery of some installments.  
Focusing on the language in the Guaranty documents, the
Second Circuit viewed the advance consent clause as an agreement
by Chabra to be bound by subsequent changes in the "time, manner
or place of payment."  But the Court found this provision
irreconcilable with the writing requirement, construing the
latter to preclude the enforcement of unsigned modifications of
the employment agreement which, in light of Chabra's failure to
sign in his personal capacity, included the revised payment
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schedule.  The Court interpreted New York law to require that
when two provisions in a contract conflict, the provision that
appears earliest in the contract should be given effect.  In this
case, that would mean that the advance consent clause would
govern.  But the Second Circuit was concerned that New York
General Obligations Law § 15-301(1) -- a statute that provides
for the enforcement of "no oral modification" clauses in
contracts -- might require that the writing requirement supersede
the advance consent clause.  Thus, the Second Circuit certified
the following question to us:
"Does New York General Obligations Law § 15-
301(1) abrogate, in the case of a contract
where the second of two irreconcilable
provisions requires that any modifications to
the agreement be made in writing, the common
law rule that where two contractual
provisions are irreconcilable, the one
appearing first in the contract is to be
given effect rather than the one appearing
subsequent?" (id. at 102).
The Second Circuit authorized our Court "to expand, reformulate,
or modify this question" (id.) and we have accepted both the
certification and the invitation to reframe the inquiry.  We now
reformulate the question to read:
Where the second of two conflicting
provisions in a Guaranty requires that any
modification to the agreement underlying the
Guaranty be made in writing and signed by the
guarantor, does New York General Obligations
Law § 15-301(1) abrogate the common-law rules
of contract interpretation that are
traditionally used to determine which clause
governs? 
We answer this question in the negative.
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General Obligations Law § 15-301(1) provides:
"A written agreement or other written
instrument which contains a provision to the
effect that it cannot be changed orally,
cannot be changed by an executory agreement
unless such executory agreement is in writing
and signed by the party against whom
enforcement of the change is sought or by his
agent."
The statute indicates that where a contract contains a "no oral
modification" clause, that clause will be enforceable.  The
Second Circuit has inquired whether the statute does more than
merely allow for the enforcement of a clause banning oral
modifications, questioning whether, in the event of a conflict,
the statute might require that a "no oral modification" provision
takes precedence over other contract terms.  We conclude that the
language in the statute does not support that interpretation, nor
does the legislative history reveal any such legislative intent.
Under the common law, a contractual "no oral
modification" clause was not enforceable because contracting
parties were viewed as being able to waive such a clause, thereby
orally amending their written agreement.  As Judge Cardozo
explained in Beatty v Guggenheim Exploration Co. (225 NY 380,
387-388 [1919] [internal citations and quotation marks omitted]):
"Those who make a contract, may unmake it. 
The clause which forbids a change may be
changed like any other.  The prohibition of
oral waiver, may itself be waived.  Every
such agreement is ended by the new one which
contradicts it . . . What is excluded by one
act, is restored by another.  You may put it
out by the door, it is back through the
window.  Whenever two men contract, no
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1 Originally, under the common law, a seal was an impression
made in wax or embossed on paper and affixed to a document
(Garner, A Dictionary of Modern Legal Usage, at 784-785 [2d ed
1995]).
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limitation self-imposed can destroy their
power to contract again." 
Since "no oral modification" clauses were not given
effect under the common law, the only way to ensure that a
written contract could not be changed through oral modification
was to enter it under "seal" (see Cammack v Slattery & Bro., 241
NY 39, 45-46 [1925]).1  But, by the early twentieth century, use
of the seal had become increasingly obsolete, as we noted in
Cammack:
"While much has been said about the
anachronistic absurdity of giving to seals at
the present day the solemnity and force which
they once justly possessed and while courts
have undoubtedly been quite ready to escape
from an alleged invalidity of a contract
predicated upon failure to use a seal,
nevertheless this court has been unwilling to
make a decision generally annulling and
destroying well-settled rules pertaining to
the use of seals . . . If the use of seals as
now required is to be generally discontinued
this result should be accomplished by the
Legislature, which could make proper
reservations preserving the integrity and
force of contracts already executed" (id. at
45-46).
Accepting this Court's suggestion, the Legislature
passed a series of statutes in the 1930s that were intended to
reduce the significance of the seal in some situations and
altogether remove its effect in others.  Yet there were
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2 The law stated: "Except as otherwise expressly provided by
statute, the presence or absence of a seal upon a written
instrument hereafter executed shall be without legal effect" (L
1941, ch 329, § 2; former Civil Practice Act § 342).
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ambiguities in these provisions that resulted in uncertainty
concerning their enforcement (1941 NY Legis Doc No. 65, at 12,
discussing Cochran v Taylor, 273 NY 172 [1937]).  It was against
this backdrop that the Legislature passed the predecessor to
General Obligations Law § 15-301(1).
In 1941, at the recommendation of the New York Law
Revision Commission, a statute was enacted that clearly abrogated
the significance of the sealed document except in certain limited
situations.2  At the same time, the Legislature adopted the
predecessors to General Obligations Law § 15-301(1) -- two
identically worded provisions that were codified as former Real
Property Law § 282 and former Personal Property Law § 33-c:
"An executory agreement hereafter made shall
be ineffective to change or modify, or to
discharge in whole or in part, a written
agreement or other written instrument
hereafter executed which contains a provision
to the effect that it cannot be changed
orally, unless such executory agreement is in
writing and signed by the party against whom
enforcement of the change, modification or
discharge is sought" (L 1941, ch 329, §§ 4
and 5).
There is no doubt that this language "was intended in
part to compensate for the demise of the seal" (DFI
Communications v Greenberg, 41 NY2d 602, 606 [1977]).  In its
report urging enactment, the Law Revision Commission explained:
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"The seal has degenerated into an L.S. or other scrawl which, in
modern practice, is frequently a printed L.S. upon a printed
form.  To the average man it conveys no meaning, and frequently
the parties to instruments upon which it appears have no idea of
its legal effects" (1941 NY Legis Doc No. 65, at 15).  The
Commission asserted that "a method more appropriate than the use
of the seal for permitting a party to a written agreement to
protect himself against the danger of false claims of an oral
modification would be to make binding a stipulation to this
effect contained in the original written instrument" (id.).  This
stance was echoed by the Association of the Bar of the City of
New York, which supported the proposed legislation and observed
that it "would change the effect of such decisions as that of
Beatty v Guggenheim Exploration Co." (Bill Jacket, L 1941, ch
329, Mem of Assn. of the Bar of the City of NY, at 7). 
Five years after passage of the "no oral modification"
statutes, we decided Green v Doniger (300 NY 238 [1949]), a case
involving the interpretation of a written contract between a
salesperson and his employer.  The contract contained both a "no
oral modification" clause and a provision that allowed either
party to terminate the agreement upon 30 days written notice to
the other.  Although plaintiff, the salesperson, was not entitled
to a bonus under the terms of the written contract, he alleged
that he and his employer had mutually agreed to abandon the
written contract one month after it was executed in favor of an
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oral agreement that provided him with a bonus.  The employer
moved to dismiss plaintiff's claim, arguing that, since there was
no evidence that either party had notified the other in writing
of an intent to terminate the contract, the written agreement
remained in effect and its "no oral modification" clause
precluded any bonus.
We held that former Personal Property Law § 33-c(1) --
a predecessor to General Obligations Law § 15-301(1) -- did not
prevent plaintiff from pursuing his claim.  The Court reasoned
that, if the "no oral modification" clause had been the only
relevant provision in the contract, the statute would require its
enforcement, thereby defeating plaintiff's claim under the
purported subsequent oral contract.  But the "no oral
modification" clause was necessarily limited by the provision
allowing termination upon 30 days written notice.  Under the
termination clause, either party could unilaterally discharge the
contract without the signature or consent of the other.  We
therefore determined that the "no oral modification" statute
applied only to the extent that the parties had incorporated it
into their contract; it had no independent effect on the parties'
obligations, nor did it trump competing provisions within the
same document.  Since plaintiff's theory was not that the parties
had orally modified the written agreement but that the written
agreement had been vacated by mutual agreement -- with the
employer having waived the written notice requirement in the
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termination clause -- we concluded that the employer could not
rely on the "no oral modification" clause to defeat plaintiff's
claim.
In the aftermath of Green, the Legislature added
provisions to the statute specifically addressing "termination
upon written notice" clauses (L 1952, ch 831).  The new
subdivisions provided that, when parties agree that a written
contract can be a terminated on written notice (or that the
agreement cannot be terminated orally), the requirement that the
notice be written cannot be waived except in writing, nor can the
parties mutually consent to abandon the contract and substitute
another in its place unless there is a writing signed by the
party against whom the termination or abandonment is sought to be
enforced (L 1952, ch 831; adding provisions currently codified at
Gen. Obligations Law § 15-301[2],[3],[4]).  And, without altering
the substance of the provision, the Legislature also reorganized
the language in the "no oral modification" subdivision so that it
reads as it does today.
The Legislature's response to Green is notable not
solely because of what it did but also because of what it did not
do.  In amending the statute, the Legislature addressed the
"termination on written notice" issue raised in Green.  But it
did not disturb our determination that the statute's impact on a
dispute, if any, depends entirely on the language the parties
chose in their contract.  As a proponent of the legislation, the
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Law Revision Commission concurred with this aspect of the Court's
analysis, acknowledging that "the intent of the parties, as
ascertained from the terms of the contract, governs the
applicability of the statute" (1951 NY Legis Doc No. 65, at 18).  
This legislative history reveals that, in drafting 
General Obligations Law § 15-301(1), the Legislature did not
intend to interfere with the ability of parties to craft specific
contract terms governing their rights; if parties decide to
include a "no oral modification" clause in their agreement, the
statute is intended to facilitate its enforcement.  Section 15-
301(1) places this type of clause on the same footing as any
other term in a contract.  However, nothing in the history of the
statute suggests that the Legislature sought to abrogate other
common-law rules related to the interpretation of contracts,
other than to extinguish the Beatty rule.  As Green makes clear,
when a "no oral modification" clause purportedly conflicts with
another clause in a contract, every attempt should be made to
harmonize the two provisions using common-law tools of contract
interpretation.  But section 15-301(1) does not compel the
enforcement of a "no oral modifications" clause at the expense of
other aspects of the parties' agreement.
Turning to the contract in this case, the writing
requirement in the Guaranty differs from the typical "no oral
modifications" clause.  As the statute suggests, such clauses
commonly preclude oral modification of the agreement in which
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3 As stated in 11 Lord, Williston on Contracts § 32:15:
"Historically, one of the first answers provided by the courts
for how to deal with conflicting clauses was to enforce the
earlier clause and disregard the later.  This approach is still
followed today.  Because of the arbitrary and artificial quality
of this rule of interpretation, it is not universally followed
and will only be accepted as a rule of last resort . . .  The
better and apparent majority rule for resolving irreconcilable
differences between contract clauses is to enforce the clause
relatively more important or principal to the contract.  This
rule is tempered by the corollary that the more specific clause
controls the more general" (11 Lord, Williston on Contracts 
§ 32:15, at 507-510 [4th ed]).
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they appear.  But the writing requirement here does not discuss
modification of the Guaranty; rather, it is directed to
subsequent amendments to the employment agreements.  There is no
claim in this case that the Guaranty was modified, nor was the
adoption of a new payment schedule necessarily an amendment of
the Guaranty since the latter does not contain a payment
schedule.  In any event, assuming the writing requirement falls
under the purview of the statute, we conclude that General
Obligations Law § 15-301(1) plays no role in determining whether
the advance consent clause or the writing requirement takes
precedence.
Finally, although we have not been asked to interpret
the language in the Guaranty, we note that this Court has not
endorsed the "first clause governs" view of contract
interpretation and we decline to do so now.3  Therefore, we have
modified the certified question to remove any reference to that
principle. 
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Accordingly, as reformulated, the certified question
should be answered in the negative.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   * 
Following certification of a question by the United States Court
of Appeals for the Second Circuit and acceptance of the question
by this Court pursuant to section 500.27 of the Rules of Practice
of the New York State Court of Appeals, and after hearing
argument by counsel for the parties and consideration of the
briefs and the record submitted, certified question, as
reformulated, answered in the negative.  Opinion by Judge
Graffeo.  Judges Ciparick, Read, Smith, Pigott and Jones concur.
Chief Judge Lippman took no part.
Decided March 26, 2009