Schmidt v. Magnetic Head Corp.

Lazer, J. (concurring).

A primary issue on these appeals involves the interpretation and construction of a shareholders’ agreement that required plaintiffs to transfer their voting rights to three proxy holders who were in turn required to vote the shares for three named directors. The resignation of one of the named directors has precipitated a dispute over who possesses the power to name a replacement director. Despite plaintiffs’ assertion that it is they who have the power since the named directors were there to protect the plaintiffs’ interests, I agree with my colleagues of the majority that the agreement does not imply the power the plaintiffs seek. Since my rationale differs from that of the majority, I write separately on the replacement issue but I agree with the disposition of the other issues on these appeals.

Although the plaintiffs argue that the shareholders’ agreement is ambiguous, I do not believe it is susceptible to multiple meanings. What is missing from that agreement is a provision that would have safeguarded the plaintiffs’ interests in the event one of the named directors departed. I do not regard the omission in the agreement as an ambiguity and I cannot agree with Justice Gibbons that extrinsic evidence may be received to determine whether an ambiguity exists. In this State it is not permissible to introduce extrinsic evidence to show that an ambiguity exists; such a conclusion must derive from the face of the agreement itself (see Sutton v East Riv. Sav. Bank, 55 NY2d 550 ; Breed v Insurance Co. of North Amer., 46 NY2d 351 ; Fiore v Fiore, 46 NY2d 971 ).

I also disagree with Justice Gibbons’ conclusion that the plaintiffs’ authority to select a replacement director may be implied from the agreement. A term may be implied only where it may be assumed that it would have been included if attention had been drawn to it (Long Is. R. R. Co. v Northville Inds. Corp., 41 NY2d 455 , 461) and where *165 it is reasonably inferable from the language of the contract (Sutton v East Riv. Sav. Bank, supra, p 555). Embraced in the interpretive result should be “ ‘any promises which a reasonable person in the position of the promisee would be justified in understanding were included’ ” (Rowe v Great Atlantic & Pacific Tea Co., 46 NY2d 62, 69 ). In other words, an implied promise is one that is made by the promisor but was not put into contractual language with sufficient clarity to be called an express promise (see Wood v Duff-Gordon, 222 NY 88 ; 3 Corbin, Contracts, § 562). By finding a basis for implication, Justice Gibbons is declaring that it is plain from the face of the agreement that the missing replacement power is really not missing but has actually been imperfectly expressed somewhere in the agreement. While the replacement power was a safeguard the plaintiffs obviously should have sought, what the agreement reflects is that plaintiffs obtained only partial protection. There is no indication in either the acquisition agreement or the shareholders’ agreement that full protection was intended.

My difficulty with the majority position is that it seems to propound the proposition that the purpose of the shareholders’ agreement was not to provide protection for the plaintiffs at all but simply to create a proxy system for the convenience of the parties. The majority thus attributes to the instant proxy system an independent purpose apart from the imposition of restrictions on the voting rights of an otherwise controlling block of stock, a commonplace use for such a mechanism (see 3 White, New York Corporations [13th ed], par 620.02). I find it difficult to accept such a narrow view of the purpose of the agreement. Its purpose was not merely to create a proxy system but to restrict the plaintiffs’ substantial voting rights while also providing them with a voice in the control of the company. As the agreement currently reads, the proxy holders must vote in favor of the three named persons for directors but in the absence of a provision requiring the proxy holders to vote for any particular replacement for these directors they are free to vote as they see fit when a vacancy occurs. Therefore, upon the resignation of North the board of directors may fill the vacancy until the next shareholders’ meeting *166 (see Business Corporation Law, § 705; Matter of Captan v Lionel Corp., 20 AD2d 301 , affd 14 NY2d 679 ) and when that time arrives the shareholders can pick whomever they desire, subject, of course, to the proviso that the proxy holders must vote for the two plaintiffs.

Although the plaintiffs have not relied on section 204 of the Restatement, Contracts, Second, I have considered that section in connection with these appeals. Section 204 provides that when the parties to a contract “have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court”. While the section can be utilized to save contracts that might otherwise be void for indefiniteness (see Speidel, Restatement Second: Omitted Terms and Contract Method, 67 Cornell L Rev 785, 803), I conclude that it has no application to this case. Use of section 204 as an instrument to repair the consequences of unilateral mistake under circumstances such as those here might undermine established principles of the law of reformation. Those principles require that before an instrument is reformed on the ground of mutual mistake it must be demonstrated that the mistake was mutual (see Backer Mgt. Corp. v Acme Quilting Co., 46 NY2d 211 ). Plaintiffs’ remedy is to establish mutual mistake.