On Oct. 9, 2018, the New York Appellate Division, First Department decided Cyprus Grp. Holdings v. Onex, — N.Y.S.3d —-, 2018 WL 4867012, wherein the First Department vacated the trial court's opinion with respect to the scope of a release provision in a stock purchase agreement and sua sponte denied defendant's motion to dismiss plaintiff's claim for breach of a third-party software license on grounds of collateral estoppel and/or res judicata. The opinion dealt with a variety of issues in contract law, including the construction of a release provision in the context of a stock acquisition, the interpretation of forward-looking and ambiguous software license provisions, and whether two breach of contract and indemnity claims are sufficiently similar that if one is precluded by a release, so too is necessarily the other. This column discusses in detail these issues and the two opinions issued to date.

Facts and Procedural History

On March 18, 2014, defendant Onex Corporation sold Cyprus Insurance Group and its subsidiaries to plaintiff Cypress Group Holdings for roughly $63 million. Pursuant to the Stock Purchase Agreement (the SPA), Onex agreed to provide Cyprus Group with a “Closing Date Statement” setting forth Cypress Insurance's book value as of the day prior to execution of the SPA. Cyprus Group could object to the “Closing Date Statement” within 90 days of receipt by submitting a “Buyer's Objection.” If a “Closing Date Statement” statement could not be resolved within 14 days, the dispute was to be resolved by a “Neutral Accounting Firm.”

In the SPA, Onex represented and warranted, inter alia, that a software application (the Software) that nonparty Systems Task Group International Ltd., d/b/a/ MajescoMastek (Majesco) had contracted to develop for Onex was in “adequate operating condition and repair.” Between the execution of the SPA and the Closing Date, Cyprus Insurance and Majesco executed a “Third Addendum to Services Agreement (Third Addendum)” (the Third Addendum) wherein Majesco gave Cyprus Insurance a “services credit” for the remainder of the term of the Third Addendum, and that Cyprus Insurance would forfeit any outstanding balance owed by Majesco in the event of early termination.

After receiving the “Closing Date Statement,” which claimed the Software should be valued at $7.5 million, Cyprus Group objected on grounds that the Software was more or less worthless. The parties could not resolve this dispute within 14 days. The “Neutral Accounting Firm” concluded that under GAAP rules, no change was necessary to Onex's valuation of the Software. On other issues, the “Neutral Accounting Firm” found for Cyprus Group and ultimately the parties agreed that a payment from Onex of roughly $1.5 million would be “payment in full satisfaction of the claims raised in [Cyprus Group's] Objection.”

Nonetheless, in 2016, Cyprus Group sued Onex alleging that: (1) Onex breached the SPA with respect to its representations and warranties concerning the functionality of the Software; and (2) Onex breached the SPA with respect to the Third Addendum, and should indemnify Cyprus Group with respect to overcharges levied under the Third Addendum, as Cyprus Group did not consent to the Third Addendum.

Onex moved to dismiss on grounds that Cyprus Group's claims were precluded on grounds of “collateral estoppel, [and/or] res judicata” given the “full satisfaction” language in the release.

Legal Analysis and Conclusions

Breach of Contract and Indemnification Claims Concerning the Software. The Supreme Court of New York, New York County (the Trial Court) denied Onex's motion to dismiss the breach of contract and indemnification claims under the SPA based on Cyprus Group's allegations that the Software was inoperable. See Cypress Grp. Holdings v. Onex, No. 653408-2015, 2017 WL 462655 (N.Y. Super. Ct. N.Y. Cnty. Feb. 3, 2017).

The New York Appellate Division, First Department, vacated this holding. The Trial Court concluded that the breach of contract and indemnification claims concerning the Software and SPA went uncovered by the Release inasmuch as the dispute resolution procedure concerning the “Closing Date Statement” was insufficiently broad to cover such claims. Rather, the procedure leading to the Release, “described under the heading [in the SPA] 'Purchase Price Adjustment' is expressly limited in scope to the determination of the sole dispute relating to the Final Adjusted Book Value of [Cyprus Insurance] based upon the Closing Date Statement” and accordingly, this “limited dispute resolution process” does not evolve into a “fullblown arbitration that has a preclusive effect as to all aspects of the parties' contract.” The Trial Court also premised its conclusion on the absence of the word “arbitration” in the relevant dispute resolution clause.

The First Department disagreed and concluded simply that the release barred these claims, as applied to the Software, as “the parties agreed that payment by Onex … fully satisfied all claims raised in [Cyprus Group's] objection.” Accordingly, the First Department dismissed Cyprus Group's breach of contract and indemnification claims based on the alleged lack of functionality of the Software.

Breach of Contract and Indemnification Claims Concerning the Third Addendum. The Trial Court did not consider Onex's res judicata and collateral estoppel defenses, as it considered those “fairly encompassed in the breach of contract claim [concerning the Software]” that it declined to dismiss. The First Department considered these defenses and found each insufficient to dismiss Cyprus Group's claims for breach of the SPA and indemnification as applied to the Third Addendum.

First, the First Department rejected Onex's res judicata defense. Res judicata could not apply to the claims rooted in the Third Addendum, as such claims could not have been included in the purchase price dispute resolution procedure. The SPA limited the scope of the disputes “to be resolved by the Neutral Accounting Firm … to whether the items in dispute that were included in … [Cyprus Group'] were prepared in accordance with the SPA.” The Third Addendum was absent from Cyprus Group's “Buyer's Objection.”

The First Department likewise rejected Onex's collateral estoppel defense to claims predicated on the Third Addendum, as such claims were also not decided in the purchase price adjustment procedure. Though it acknowledged the overlapping issues resolved in the purchase price adjustment procedure and the instant case, the First Department nevertheless concluded that the only relevant issue resolved in front of the Neutral Accounting Firm was the adjustment (or in this case, lack thereof) to the purchase price for Cyprus Insurance.

Finally, the First Department rejected Onex's claim that the Third Addendum did not damage Cyprus Group, since, according to Onex: (1) the Third Addendum did not extend the term of the underlying Services Agreement; and (2) even if Cyprus Group stopped paying Majesco, it could conceivably avoid the early termination fee. The court held that a dismissal under CPLR 3211(a)(1) based on documentary evidence was unwarranted, as such evidence did not “establish as a matter of law that the Third Addendum did not extend the term of the Services Agreement.”

Richard Raysman is a partner at Holland & Knight and Peter Brown is the principal at Peter Brown & Associates. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press).