'Granite' decision is a significant declaration of the right to specific performance.
March 12, 2012.
In August 2011, Marriott International Inc. and Granite Broadway Development announced that they had signed an agreement to develop a 68-story skyscraper, housing two different hotels, at 1717 Broadway at 54th Street. This marked a turning point in what has been a true New York real estate story, involving litigation up to New York's highest appeals court.
Even more important to New York's development and legal community than the addition of this new building to New York's skyline is the First Department decision that preceded it. While short in length, this decision resulted in a significant declaration of the right to seek specific performance of construction and real estate development contracts.
While the Court of Appeals 1960 decision, Grayson-Robinson Stores v. Iris Construction Corp.,1 opened the door to specific performance relief for breach of construction contracts, there were no reported subsequent cases in which such relief was awarded. That changed with the case of Granite Broadway Development LLC v. 1711 LLC.2 In this case, in which the authors represented 1711 LLC, the First Department upheld a trial court's judgment, based upon a detailed opinion, requiring a developer to construct a hotel, garage and retail space pursuant to a real estate development contract. The decision was left intact by the Court of Appeals when it declined to hear an appeal. While Granite and 1711 ultimately resolved to allow Granite to develop the property on its own, the scope of the trial court's specific performance decree, the trial record and the Appellate Division's decision are instructive to litigation and transactional counsel alike.
Historically, New York courts, like courts in other states, have been reluctant to order specific performance relief of construction contracts. While courts have not hesitated to order a party to convey contractually-promised real estate or require other vendors to live up to their sales contracts, they generally have denied awards of specific performance of construction or development contracts.
In traditional cases involving specific performance, the party seeking the relief must prove that monetary damages would be insufficient to make it whole. Often, the claim is made that the contract at issue involves the sale of something unique, such as real estate or a product that is not available elsewhere. With construction contracts, whether an adequate remedy at law was available was not the central concern. Instead, the defense traditionally argues that specific performance will necessitate continuous judicial supervision of a complex process, rendering judicial control too difficult.3 This perspective is based on a general rule enunciated more than 100 years ago by the Court of Appeals in Standard Fashion Co. v. Siegel-Cooper Co.:4
Contracts that require the performance of varied and continuous acts, or the exercise of special skill, taste and judgment, will not, as a general rule, be enforced by equity, because of the execution of the decree would require such constant superintendence as to make judicial control a matter of extreme difficulty.
Up through the 1950s, lower courts followed this rule and applied it to construction contracts. The analysis in the Supreme Court case Berne v. Payson is typical.5 There, the Court observed that construction contracts involve details and decision-making that would necessitate judicial oversight and for that reason a specific performance remedy would not lie:
To hold otherwise would necessitate judicial supervision and superintendence of the work of demolition and construction, the determination of the type of building and approval of its plans, screening of the financial set-up and many other factors necessarily involved in the construction of a building.
In 1960, the New York Court of Appeals in Grayson-Robinson Stores v. Iris Construction Corp. revisited the issue.6 The case arose in the aftermath of an arbitration award in which the arbitrators directed specific performance of a construction contract that included an arbitration agreement in which, among the powers given to arbitrators, the power to direct specific performance was provided. In the proceeding to confirm the arbitration award that included an order of specific performance, the defaulting party under the construction contract argued that enforcement of the award would violate the public policy against decrees that require "continuous judicial supervision and control of performance." Quite simply, the argument went, performance of a contract to construct a building…is never ordered by courts of equity…."7
The Court, however, observed that to deny specific performance would "frustrate the whole arbitration process" since the parties had agreed the arbitrators could award specific performance. The Court then proceeded to address and reject the rule that performance of a contract to construct a building should never be ordered by courts of equity.
First, the Court acknowledged that there was "an old tradition or approach according to which courts have been reluctant to enforce contracts which require the performance of varied and continuous acts, or the exercise of special skill, taste and judgment" because "the execution of the decree would require such constant superintendence as to make judicial control a matter of extreme difficulty." As a result, the Court noted that "in some instances courts of equity in other States have for some such reasons refused to order specific performance of building contracts."8
Nonetheless, the Court of Appeals concluded that "there is no universal rule that courts of equity never will enforce a contract which requires some building to be done." They have enforced such contracts "from the earliest days to the present time." The modern trend, according to the Court, was toward specific performance and the view that the "difficulty of enforcement idea is exaggerated." The Court noted that there is nothing extraordinary about such relief: The party "is simply being required to fulfill its promise." For this reason, the Court held that "[c]learly there is no binding rule that deprives equity of jurisdiction to order specific performance of a building contract. At most there is discretion in the court to refuse such a decree."9
Since that decision, appellate and trial courts of other jurisdictions have relied upon Grayson-Robinson for the proposition that real estate development contracts may be subject to specific performance relief. For example, in O'Neil v. Lipinski, the Montana Supreme Court held that courts have the authority to order "full and complete specific performance of…construction contract[s]," quoting Grayson-Robinson at length.10 In City Stores Co. v. Ammerman, the District of Columbia federal district court relied on the rationale articulated in Greyson-Robinson and ordered specific performance of a contract to build and lease a large store within a shopping center.11 The Superior Court of Pennsylvania, in Easton Theatres Inc. v. Wells Fargo Land and Mortgage Co. Inc., affirmed a lower court's award of specific performance of a construction contract under the reasoning of Grayson-Robinson.12
When evaluating whether to grant specific performance in these cases, the courts generally will grant specific performance "unless the difficulties of supervision outweigh the importance of specific performance to the plaintiff."13 Courts are particularly likely to grant specific performance "where the construction is to be done on land controlled by the defendant, because in that circumstance the plaintiff cannot employ another contractor to do the construction for him at defendant's expense."14 A court may also consider
whether the standards to be observed in construction…are set out in the [agreement]…with sufficient particularity as to make design and approval of plaintiff's [project] a fairly simple matter, if the parties deal with each other in good faith and expeditiously.15
Ultimately, the approach to be advocated in these instances harkens back to the U.S. Supreme Court's decision in Joy v. City of St. Louis, which is one of the earliest cases on specific performance of contracts where the relations between the parties were of a complex nature and might require continuous supervision by the court granting the decree.16 The Supreme Court, even then, recognized that "in the increasing complexities of modern business relations, equitable remedies have necessarily and steadily been expanded, and no inflexible rule has been permitted to circumscribe them." The Court went on to remind litigants and lower courts that "it is not unusual for a court of equity to take supplemental proceedings to carry out its decree, and make it effective under altered circumstances." Today, it should not be surprising that courts will fashion the remedy to redress the injury even if it requires supervision and future evaluation to ensure that it is effective as circumstances evolve.
In the wake of Grayson-Robinson and the cases that followed its ruling, the Restatement of Contracts was drafted to acknowledge that, even where "continued supervision" might be required, a court may order specific performance:17
When the plaintiff's need is great, especially after part performance rendered, or the public interest is involved, the court does not shrink from the difficulties involved in continued supervision. In such cases, structures may be ordered to be built and the continued maintenance of railway facilities may be compelled. Increasing experience has shown that less hesitation on the score of difficulty of enforcement or length of supervision need by felt, and that attention may well be concentrated on the character of the contract and the purposes to be attained by granting or refusing specific enforcement.
In 2001, Granite Broadway Development and 1711 LLC entered into an agreement for the development of a multi-use high rise in mid-Manhattan. 1711 LLC had negotiated purchase rights to three continuous parcels that, when combined, provided substantial frontage on Broadway. The agreement provides that 1711 would assign to Granite Development the contract right to the three parcels. In return, Granite agreed to develop a multi-use building consisting of three condominiums: a hotel condominium, a parking garage condominium and a retail space condominium. Once the building had been completed, Granite, which would be in charge of development, would convey to 1711 the retail and parking condominiums essentially for the cost of construction plus a share of the land cost. As required, 1711 assigned its purchase rights to Granite and Granite acquired title to the site. But the project floundered.
Granite charged that 1711 had violated its obligation under the agreement to timely provide plans and specifications for its garage and retail space, and 1711 counterclaimed, charging that Granite had violated its contract obligations by refusing to proceed with development for the purpose of driving 1711 out of the project.
The case was brought in the Supreme Court, New York County, and a bench trial was held on Granite's claim and 1711's counterclaims, including a counterclaim for specific performance requiring Granite to proceed with the development of the three parcels.
During the trial, there was little to no focus on the complexities involved in constructing the buildings at the development site. Granite's counsel did not introduce evidence that would support a conclusion that the design process would be difficult to supervise. Nor was evidence introduced regarding the day-to-day complexities of demolishing the existing buildings or constructing the new building on the site. Accordingly, there was little or no explicit evidence upon which Granite could argue that enforcing a specific performance order would be unworkable. Instead, Granite's counsel argued for a blanket prohibition against specific performance in construction contracts.
In contrast, there was evidence that 1711 had materially performed by transferring rights to the property to Granite, which is a relevant factor in awarding specific performance in development disputes. There was also evidence that 1711 had the right to control the design of its space and Granite was obligated to build 1711's space according to those designs. The trial record also evidenced Granite's efforts to escape its obligations and terminate 1711's rights based on pretextual complaints regarding the sufficiency of 1711's design efforts.
After Granite rested its case, the trial court dismissed Granite's forfeiture and damage claims, and ultimately issued a written decision after trial. In that decision, the court held, among other things, that Granite, not 1711, had breached the parties' agreement by preventing the project's development. The trial court went on to award, along with money damages to remedy delay injury, specific performance requiring Granite to develop the property and convey the condominiums for which 1711 bargained.18
Granite appealed to the Appellate Division, and argued that Grayson-Robinson was limited to the confirmation of arbitration decisions, and noted that no trial court had since then awarded specific performance of a complex construction project.
After oral argument, the Appellate Division delivered a unanimous opinion affirming the specific performance order. The Appellate Division held that "contrary to plaintiff's assertion, there is no blanket prohibition against a court ordering the equitable relief of specific performance in a case involving breach of a construction contract." Rather, the court explained "at most, courts are vested with discretion to refuse such relief."19
Arguing that the trial court's and the Appellate Division's decision represented a departure from well-established law and raised issues of public importance, Granite sought leave to appeal from the Court of Appeals. Granite's request was recently denied.20
Lawyers and clients would be well advised not to assume that trial courts lack the authority to award specific performance of construction and real estate development contracts. Well established precedents exist in many jurisdictions and now in New York that developers and construction companies cannot avoid their obligations to develop a property by arguing that the court is powerless to order specific performance. Instead, each side to the dispute will be left to convince the court as to whether the circumstances justify equitable specific performance relief.
Noah Weissman is a partner at Bryan Cave in New York, and Herbert Teitelbaum is co-founder of Siegel Teitelbaum & Evans. The authors represented 1711 LLC in the 'Granite Broadway Development LLC v. 1711 LLC' case mentioned herein.
1. Grayson-Robinson Stores v. Iris Construction Corp., 8 N.Y.2d 133 (1960).
2. Granite Broadway Development LLC v. 1711 LLC, 44 A.D.3d 594, 845 N.Y.S.2d 10 (1st Dept., 2007), leave to appeal denied, 10 N.Y.3d 702 (2008).
3. Berne v. Payson, 155 N.Y.S.2d 696, 698 (Sup. Ct., N.Y. Co., 1956); Savitt v. Ronclare Homes Inc., 100 N.Y.S.2d 882, 883 (Sup. Ct. Queens Co., 1951); Blitman Constr. Corp. v. Denebel Realty & Constr. Co., 13 Misc.2d 888, 891 (Sup. Ct., N.Y. Co., 1958).
4. Standard Fashion Co. v. Siegel-Cooper Co., 157 N.Y. 60, 66 (1898).
5. Berne, 155 N.Y.S.2d at 698.
6. Grayson-Robinson, 8 N.Y.2d at 133.
7. Id. at 136.
9. Id. at 137-38.
10. O'Neil v. Lipinski, 173 Mont. 332, 337 (Sup Ct. Mont., 1977).
11. City Stores Co. v. Ammerman, 266 F. Supp. 766, 777 (D.D.C. 1967).
12. Easton Theatres Inc. v. Wells Fargo Land and Mortgage Co. Inc., 265 Pa. Super. 334 (Super. Ct. Pa., 1979).
13. City Stores Co., 266 F. Supp. at 777; see 5 Williston on Contracts §§777, 1423 (Rev.Ed.1937).
15. Id. at 778.
16. Joy v. City of St. Louis, 138 U.S. 1, 11 S.Ct. 243, 34 L.Ed. 843 (1890).
17. Rest. Cont. §371, cmt. a.
18. Granite Broadway Development, Decision After Trial, (Hon. Karla Moscowitz, Sup. Ct., N.Y. Co., March 13, 2006).
19. Granite Broadway Development, 44 A.D.3d at 595, 845 N.Y.S.2d at 11.
20. Granite Broadway Development, 10 N.Y.3d at 702.