In the case of Obstfeld v. Thermo Niton Analyzers the Appellate Division of the Supreme Court of New York, Second Department examined a dispute over a breach of contract that involved two common issues often seen in contract litigation – rescission and time-barring. Rescission is the undoing of a contract and returning the parties to the status quo ante or position in which they originally started before entering into the contract.
Time-barring is a general legal concept often applicable in litigation. Under this concept, an otherwise valid cause of action is deemed to be invalid by the courts simply due to the passage of too much time. Justifications for this form of bar arise out of concepts of efficiency and undue delay. Someone who has been wronged must act efficiently to litigate it, within a time period provided for by law. Undue delay actually may harm the other side – as evidence is lost or thrown out, key witnesses retire or pass away, memory fades simply due to the passage of time. In one simple example, the Internal Revenue Service has a seven year period in which to audit an individual’s tax return. If the audit occurs after more than seven years, the individual may simply assert that the claim is time-barred by statute. A simple justification is that under this rule, individuals know they have to save their tax information for seven years – but not indefinitely. The economic burden of requiring everyone to save their tax information permanently would simply be too high – a problem addressed by statutes of limitation (another term for time bars.)
Background of the Case
The plaintiffs filed this case to recover certain damages from the defendant for breach of contract. The main issue of this case is the many affirmative defenses and counterclaims filed by the defendant over the same contract.
An affirmative defense is a way by which the defendant may negate or counteract elements of the plaintiff’s case. The reason this category of defense is known as affirmative is that the defendant must actively work to establish this defense – the burden is on the defense to show by at least a preponderance of the evidence (i.e. more likely than not) that this defense exists. For example, an affirmative defense to an allegation of copyright violation would be fair use – the evidentiary showing that the defendant had a right to use the material in question for a legally recognized purpose, perhaps for education or political criticism. As one might imagine, there are a great deal of affirmative defenses in contract litigation, all of them rather technical.
A counterclaim is simply a claim brought by the defendant against the plaintiff. A counterclaim could always be theoretically filed as its own separate court case (with the defendant in case #1 being the plaintiff in case #2); however, courts like efficiency. It simply makes more sense to hear both claims and counterclaims in the same case, since the same exact facts are in dispute, and it saves the State the time and expense of a second, more or less identical trial. Most states, including New York, actually require defendants to bring counterclaims in the same trial, or risk losing the right to bring them in a subsequent trial.
The defendant wanted rescission of the contract, relieving them of liability. Their argument was that the contract violated Section 15 of the Securities and Exchange Act. In general, a contract that violates any law may likely be rescinded by a court for public policy reasons. However, there are exceptions and one of them applies.
Section 29 of the same Act provides a time limit for the rescission of a contract made in violation of Section 15. Here the court ruled that although the contract DID violate Section 15, because the statutory time limit given in Section 29 had expired, the claim for rescission was (absolutely) time-barred. Because the contract could not be un-made, the case must move forward to a trial on the merits of breach of contract.
Rescission and time-barring are both traps for the unwary. Thus it is important to retain competent counsel both when entering into contracts and litigating disputes over breach of contract. Please do not hesitate to contact our office for a consultation.