Chapter 16 ACCELERATION CLAUSES, CONFIDENTIALITY AGREEMENTS, CONSEQUENTIAL DAMAGES,LOST PROFITS, AND CONTRACTUAL INTEREST RATES

• Jurisdiction: New York

Chapter Sixteen

Acceleration Clauses, Confidentiality Agreements, Consequential Damages,Lost Profits, and Contractual Interest Rates

I. Acceleration Clauses

Acceleration clauses are common and generally enforced according to their terms.²⁹⁶⁶ Such clauses are no less enforceable merely because they arise in the context of matrimonial actions or familial disputes,²⁹⁶⁷ nor are they unconscionable when they become due upon a default in support payments.²⁹⁶⁸ Parties may also bargain for and agree upon an "escape valve," which lessens the payor's obligation of support when his or her income has diminished.²⁹⁶⁹ An acceleration is not self-executing; the entire balance does not become due unless the acceleration option is exercised by the creditor.²⁹⁷⁰ As a general rule, in the absence of an acceleration clause providing for the entire amount of a note to be due upon the default of any one installment, the respondents were only entitled to recover past due installments and they could not unilaterally declare the notes accelerated. Rather, each default on each installment gives rise to a separate cause of action.²⁹⁷¹

Where the breach asserted as the basis for the acceleration is trivial or inconsequential, the forfeiture may be viewed as an unconscionable penalty and equitable principles come into play;²⁹⁷² the Court of Appeals stated that "[t]o permit literal enforcement of an instrument in such [inconsequential] circumstances is to elevate the nonperformance of some collateral act into the cornerstone for the exaction of a penalty."²⁹⁷³

In Stasiak v. Forlenza,²⁹⁷⁴ the wife commenced an action for nonpayment of contractual spousal support. Thereafter she moved for, in effect, summary judgment on the complaint. Prior to the resolution of her motion, the Supreme Court relieved the husband's attorney as counsel and simultaneously stayed all other proceedings for 30 days. The stay notwithstanding, the court conducted an inquest. The wife testified that she was owed $169,868, which constituted all of the amounts the husband was required to pay over the 10-year period from the date of the agreement, less amounts paid, plus $8,000 as an attorney fee. Notwithstanding that her complaint had requested only $3,160.28, plus additional arrears up to the date of judgment, the Supreme Court awarded her $169,868 less amounts paid.²⁹⁷⁵ The Appellate Division reversed, inter alia, because of the absence of an acceleration clause in the separation agreement, which precluded her entitlement to the additional sums.

II. Confidentiality Clauses

A confidentiality clause knowingly accepted in a matrimonial agreement is not unenforceable as against public policy, and a party may not be relieved of its consequences after having been represented by experienced counsel during the negotiations.²⁹⁷⁶ Goldsmith v. Goldsmith²⁹⁷⁷ affirmed the denial of the husband's motion to compel his wife to sign a confidentiality agreement regarding disclosure.

In Rice v. Rice,²⁹⁷⁸ the Supreme Court denied the wife's application to vacate, modify, or limit the so-ordered confidentiality agreement under which she had agreed that financial information provided by the husband would be used only for purposes of the matrimonial action. Affirming with costs, the Appellate Division ruled that the grounds for modification, as set forth in Daniels v. City of New York,²⁹⁷⁹ had not been met. Significantly, the wife conceded that there had been good cause for the order's issuance and had stipulated thereto. The First Department ruled that her intent to pursue an action against a third party, the Bear Stearns Companies, Inc., with the information protected by the so-ordered agreement, was an insufficient basis for a modification, particularly since the action against Bear Stearns could have been proved without resort to shielded information. Critically, the court noted that the defendant had complied with discovery in reliance on the confidentiality order. The wife did not show that the purpose of the confidentiality order had expired. The husband was held to have been entitled to the benefit of his bargain.

In Hauzinger v. Hauzinger,²⁹⁸⁰ the appellant non-party mediator in the divorce action appealed from an order denying his motion to quash the subpoena for his appearance at a deposition and for his records in connection with the mediation process that he conducted with the parties who were unrepresented by counsel which led to the execution of a separation agreement. The denial of his motion to quash was affirmed because the defendant sought to establish the circumstances surrounding the execution of the separation agreement; and, pursuant to N.Y. Domestic Relations Law § 236B(3) (DRL), courts are required to determine whether the terms of the separation agreement "were fair and reasonable at the time of the making of the agreement." The Appellate Division specifically rejected the mediator's public policy argument as well as his attempt to have the Appellate Division adopt the Uniform Mediation Act, which New York State has not adopted.

The Court of Appeals's terse ruling was limited to the facts of the case and did not address either of the policy issues raised by the mediator.²⁹⁸¹

In Rosenthal v. Rosenthal,²⁹⁸² both parties joined to compel the mediator's testimony. The mediator moved to quash the subpoena. The "Mediation Agreement" stated:

To preserve the integrity of the mediation process [ ] neither Mediator, nor Mediator's records or notes shall be subject to subpoena by either Participant or anyone acting on either Participant's behalf in the event that this matter proceeds to litigation. Each Participant makes this covenant with the other as a condition of your agreement with each other to attempt mediation. Each of you also makes this covenant to Mediator to induce Mediator to serve as the facilitator of your negotiations.

The mediator argued public policy and Administrative Law rationale. In fact, while it was not argued, the mediator was a third-party beneficiary notwithstanding the fact that the benefit conferred upon him was amorphous and intangible. The New York State Manual for Administrative Law Judges and Hearing Officers states that legal protection of confidentiality in mediation is important in order to facilitate discussion. The manual cites former Chief Judge Judith S. Kaye's ADR Task Force report:

(g)(1) Except as otherwise expressly provided by law or court rule, all materials of the mediator are confidential and not subject to disclosure in any judicial or administrative proceeding. Any communication relating to the subject matter of the mediation made during the mediation session by any participant, mediator, or any other person present at the mediation session shall be a confidential communication.

The report continued: "The mediator shall not be called as a witness at trial":

In order to promote mediation as a resolution tool, the parties must be assured of the absolute confidentiality of the process. Such confidentiality will promote candor and a free exchange of ideas. Supreme Court granted the motion based on the joint covenants with the mediator, notwithstanding that the parties for whom the confidentiality protections are in place did not want the protection.

Plainly, mediators, as a class, do not hold an independent legislative privilege; it is exclusively within the legislative domain to confer an independent privilege upon mediators. Moreover, in all areas of privilege it is the communicator who holds the privilege, not the party to whom the confidential information was related. However, while the Court of Appeals in Hauzinger declined to "address what, if any, mediation confidentiality privilege exists under CPLR 3101(b)," it emphasized the language in the mediation agreement that "the mediation agreement provided that if both parties consent, the mediator may communicate with an attorney for either party and release documents to third parties."

Furthermore, as parties may waive any right, even constitutional rights, they may agree to be bound by unique rules of evidence;²⁹⁸³ there is no bar to the waiver of the right to summon a mediator to court. Confidentiality agreements between parties barring either from revealing details of their divorce have been upheld and are not violative of any constitutional right or public policy.

Nevertheless, mediators would not be permitted to hide...