Shareholder Agreement Provision Requiring Shareholders and Corporation to Agree on Shareholder's Compensation Unenforceably Vague

On September 11, 2019, the Second Department issued a decision in Osborne v. Williamson Law Book Co., 2019 NY Slip Op. 06503, holding that a shareholder agreement provision requiring shareholders and the corporation to agree on the shareholder's compensation for working for the corporation was unenforceably vague, explaining:

A contract is to be construed in accordance with the parties' intent, which is generally discerned from the four corners of the document itself. Consequently, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.

Here, the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the causes of action alleging breach of contract and tortious interference with contract, and the plaintiff failed to raise a triable issue of fact in opposition. Contrary to the plaintiff's contention, the agreement cannot reasonably be interpreted as prohibiting reduction of his salary, or augmentation of Chwiecko's salary, without the plaintiff's consent. Regardless of what the parties' practices may have been, there are simply no words to that effect contained in the agreement. To the extent that the plaintiff asserts that his consent was required because the agreement provided that the shareholders and the corporation would agree to each shareholder's compensation, such an indefinite provision, absent some specified methodology for reaching an agreement, is not enforceable.

(Internal quotations and citations omitted).

Part of the reason parties to commercial contracts choose to have those contracts governed by New York law is that New York courts typically enforce contracts as written. However, this decision shows that where a contract term is vague, a court might not enforce it. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the interpretation of a contract under New York law.