Asset Purchase Agreement Causes Sale to Break Down
In a recent case in the state of New York, an issue arose regarding the Asset Purchase Agreement (APA). The defendants were in the business of installing, servicing and monitoring fire alarm systems. The plaintiff sought to purchase the defendants’ business pursuant to an APA, which was signed by the parties.
The purchase price was dependent on the revenues received from existing customers, and the APA required the parties to work together to determine which contracts were to be included in the purchase price. The details of the contracts were to be compiled in a “Closing Date Statement” that was to be generated by November 20 for a December 1 closing.
The APA required that customer accounts included in the Closing Date Statement be supported by binding written contracts between the customer and defendants that were automatically renewable “without any action by or on behalf of any person.” Pursuant to the General Obligation Law of New York, contracts that are automatically renewable for a period of more than one month must provide that the customer be notified that the contract is being automatically renewed. Therefore, the provisions of the APA requiring automatic renewal of existing customer contracts meant that some customer contracts conflicted with the General Obligations Law.
The plaintiff’s attorney informed the defendants’ attorney that 80 percent of the defendants’ customer contracts were deemed unenforceable by virtue of the General Obligation Law, and, consequently, the defendants would not be compensated for them.
The defendants decided they no longer wanted to sell and failed to deliver the Closing Date Statement on November 20. The plaintiff advised the defendants that this constituted a breach of the APA. The attorney for defendants replied that the APA was not binding because the parties did not agree to the purchase price and which customer contracts and accounts were eligible for inclusion in the calculation of the purchase price.
A Closing Statement was delivered to the plaintiff in January of the following year, accompanied by the defendants advising the plaintiff they had decided to “move forward” with the transaction. The plaintiff commenced an action to recover damages for breach of contract. The defendants counterclaimed for reformation and rescission. The plaintiff moved the court for summary judgment, alleging breach of contract and dismissing the defendants’ counterclaims.
The Supreme Court of New York granted the plaintiff’s motion for summary judgment and denied the defendants’ cross-motion.
On appeal the court pointed out the plaintiff failed to establish the absence of material issues of fact, thus precluding the award of summary judgment. The defendants committed an anticipatory breach, leaving the plaintiff with a choice of either treating the contract as terminated and seeking damages, or ignoring the breach and waiting to see if the defendants would perform. The Supreme Court found that the anticipatory breach became an actual breach when the defendants failed to deliver a Closing Date Statement by November 20. However, the court pointed out that the APA did not make time of the essence. Further, the plaintiff did not terminate the contract on November 20 and the Closing Date Statement was ultimately provided on January 20 of the following year.
The plaintiff’s submission revealed the existence of triable issues of fact as to whether the defendants’ failure to deliver the original Closing Date Statement constituted a material breach of the APA, or whether the Closing Date Statement that was ultimately delivered was incomplete. Therefore, plaintiff’s motion for summary judgment was denied.
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Normally, the limitation of liability or liquidated damage clause would protect you in the event the system failed to operate properly or, if in fact, your company was negligent in reporting an alarm. In this situation, the damage or loss was not caused by a failure of the system or by a failure of your company to respond or to otherwise act. The damage that was done had no relationship to the performance of the alarm system.
I doubt whether your insurance company — assuming that you are insured — would cover you under the normal errors and omissions (E&O) coverage. However, if your policy(s) covered liability beyond the E&O, then you should be covered by your insurance policy. If, in fact, you do not have liability insurance, then your company could have exposure.