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Kamco Supply Corp. v. On the Right Track, LLC - 2017 NY Slip Op 02025, 149 A.D.3d 275, 49 N.Y.S.3d 721 (App. Div. 2nd Dept.)

Rule:

Under the doctrine of election of remedies, when a party materially breaches a contract, the non-breaching party must choose between two options: it can elect to terminate the contract or continue it. If the non-breaching party chooses to continue to perform or accept performance, it loses its right to terminate the contract based on the prior breach. While courts have occasionally attempted to draw a distinction between a waiver and an election of remedies, these distinctions are mostly a matter of semantics. In the ordinary case, an election of remedies is merely a species of waiver. Thus, a party that continues to perform or accept performance despite the failure of a condition precedent established for its benefit may be said--provided that such party's intent is clearly expressed--either to have elected to affirm the contract despite the failure of the condition, or to have waived the satisfaction of the condition. Whether viewed as an election or as a waiver, the result is the same: the party is barred from terminating the contract based on the failure of the condition precedent and may be held liable if it subsequently fails to perform.

Facts:

In 2005, On the Right Track, LLC (OTRT), Southeastern Metal, Inc. (SEM), and Trakloc International, LLC (TI). entered into two supply distribution agreements (Agreements) with the plaintiff/third-party defendant, Kamco Supply Corp., and the third-party defendants Kamco Supply Corp. of Boston, Kamco Supply Corp. of New England, and Kamco Building Supply Corp.2Link to the text of the note (the Kamco parties). The Agreements required the Kamco parties to purchase a minimum of 15 million linear feet of Trakloc by December 31, 2005. For the calendar year 2006, the Agreements required the Kamco parties to purchase an annual minimum of 164.4 million linear feet of Trakloc, and, in the course of satisfying that annual minimum purchase requirement, to purchase a minimum of 8 million linear feet of Trakloc in each month of 2006. The Kamco parties did not meet their annual minimum purchase requirement for 2005, nor any of their monthly minimum purchase requirements for 2006. In April or May 2006, Kamco approached OTRT about ending the relationship. At that point, Kamco and OTRT agreed that Kamco would return $47,709.92 worth of Trakloc to SEM. At no time up to that point, or even during the following several weeks, did anyone at OTRT or SEM ever send the Kamco parties a notice of default regarding their failure to meet the minimum purchase requirements, or a reservation of OTRT's and SEM's rights to seek damages for past breaches or require strict compliance with such requirements going forward. Subsequently, Kamco filed an action against OTRT seeking to recover damages for breach of contract. OTRT asserted counterclaims, and, in a third-party action against the Kamco parties and TI, OTRT and SEM sought to recover substantial damages for the Kamco parties' failure to meet the minimum purchase requirements under the Agreements. At the conclusion of a nonjury trial, the Supreme Court resolved the counterclaims and the third-party action in favor of the Kamco parties and against OTRT and SEM. While the court also found that the minimum purchase requirements were binding, and that the Kamco parties had consistently failed to meet them, it concluded, in relevant part, that OTRT and SEM had no right to sue for the breach. OTRT and SEM moved pursuant to N.Y.C.P.L.R. 4404 (b), in effect, to set aside so much of a judgment entered upon the decision as dismissed the counterclaims and the third-party complaint insofar as asserted against the Kamco parties. They argued that the evidence presented at trial did not support an inference that they had waived their contractual right to enforce the minimum purchase requirements under the agreements. The Supreme Court disagreed and denied the motion, giving rise to the present appeal.

Issue:

Were OTRT and SEM estopped from asserting their rights under the Agreements?

Answer:

Yes.

Conclusion:

The appellate court held that OTRT and SEM’s continuing acceptance of Kamco parties’ failure to meet the monthly requirements, without any formal reservation of rights or notice of default, constituted a prospective waiver of executory minimum monthly and annual purchase requirements. Under U.C.C. §§ 2-208 and 2-209, a party may, through its course of performance, waive a term of the contract prospectively in connection with an executory obligation. According to the Court, a prospective waiver of a breached provision would, unless effectively retracted in accordance with U.C.C. § 2-209(5), serve to bar an action based on a subsequent breach of that provision. Here, the record supported the view that OTRT and SEM, by electing early on to continue the agreements despite the Kamco parties’ breach of the annual minimum purchase requirement of the first year of the contract, waived their right to terminate the agreements based on that initial breach. Such conduct, without more, did not evince a clear manifestation of intent prospectively to waive the monthly or annual minimum purchase requirements of the second year of the contract. As time went on, however, and as OTRT and SEM continued to accept Kamco parties’ failure to meet monthly minimum purchase requirements, the situation eventually reached a tipping point where OTRT and SEM’s conduct became so inconsistent with anintent to enforce the remaining minimum purchase requirements as to leave no opportunity for a reasonable inference to the contrary. Moreover, Kamco parties’ persistent and repeated failure to meet minimum purchase requirements, coupled with OTRT and SEM’s continued acceptance of such conduct without any reservation or protest until a few weeks before the expiration of the agreements, equitably estopped OTRT and SEM from invoking the benefit of the agreements' no-oral-waiver provision.

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