author: Chief Judge Kaye.

text:
    [663 NE2d 283, 639 NYS2d 971]
    Monica Chainani, an Infant, by Her Father and Natural Guardian, Suresh Chainani, et al., Appellants-Respondents, v Board of Education of the City of New York, Respondent, and Amboy Bus Co., Inc., et al., Respondents-Appellants. Gloria Bruce, Individually and as Parent and Natural Guardian of Jennifer Bruce, an Infant, et al., Appellants, v Roslyn R. Hasbrouck et al., Defendants, and Ellenville Central School District No. 2, Respondent.
    Argued September 14, 1995;
    decided November 1, 1995

      POINTS OF COUNSEL

      Sullivan & Liapakis, P. C., New York City (Cheryl Eisherg Moin of counsel), for appellants-respondents in the first above-entitled action.
    I. Defendant Board of Education should be held vicariously responsible for the school bus operator’s violation of Vehicle and Traffic Law § 1174 (b). (Van Gaasbeck v Webatuck Cent. School Dist. No. 1, 21 NY2d 239; Dean v Baumann, 39 AD2d 138, 32 NY2d 756; Dashinsky v Santjer, 32 AD2d 382; Ross v Ching, 146 AD2d 55; Pierce v International Harvester Co., 61 AD2d 255; Koenig v Patrick Constr. Corp., 298 NY 313; Sewar v Gagliardi Bros. Serv., 69 AD2d 281, 51 NY2d 752; Kleeman v Rheingold, 81 NY2d 270; Williams v Board of Trustees, 204 App Div 566; Haimes v New York Tel. Co., 46 NY2d 132.) II. The common-law negligence of defendant Board, based upon inadequate crossing instructions, should have been submitted for jury resolution. (Bohm v Holzberg, 47 AD2d 764;
      Coughlin v Festin, 53 AD2d 800; Van Gaasbeck v Webatuck Cent School Dist No. 1, 21 NY2d 239; Rothstein v City Univ. of N. Y., 194 AD2d 533; Murray v City of New York, 43 NY2d 400.)

      L. Kevin Sheridan, Smithtown, and Silverman Collura & Chernis, P. C, New York City, for respondents-appellants in the first above-entitled action.
    I. It was error for the courts below to construe section 1174 (b) as imposing strict liability. (Van Gaasbeck v Webatuck Cent. School Dist. No. 1, 21 NY2d 239; People v Coe, 71 NY2d 852; Arbegast v Board of Educ., 65 NY2d 161; Sherman v Robinson, 80 NY2d 483; D'Amico v Christie, 71 NY2d 76; Lusenkas v Axelrod, 183 AD2d 244; Sewar v Gagliardi Bros. Serv., 51 NY2d 752; Sega v State of New York, 60 NY2d 183; Valicenti v Valenze, 68 NY2d 826.) II. It was error for the courts below to hold that the jury’s determination that Acuti’s alleged violation of section 1174 (b) was not a proximate cause of plaintiffs injury had to be unreasonable. (Derdiarian v Felix Contr. Corp,, 51 NY2d 308; Mirand v City of New York, 84 NY2d 44; Pagan v Goldherger, 51 AD2d 508.)

      Paul A. Crotty, Corporation Counsel, of New York City (Alan G. Krams and Kristin M. Helmers of counsel), for respondent in the first above-entitled action.
    I. The court below correctly ruled that the Board was not vicariously liable for injuries caused by Acuti’s breach of his duties under section 1174 (b) of the Vehicle and Traffic Law since Acuti was the employee of an independent contractor and the statute does not even place any duty on the Board, much less evince an intent to make school districts liable for all violations of the statute. (Pratt v Robinson, 39 NY2d 554; Koenig v Patrick Constr. Corp., 298 NY 313; Haimes v New York Tel. Co., 46 NY2d 132; Mendes v Caristo Constr. Corp., 5 AD2d 268, 6 AD2d 673, 6 NY2d 729; Van Gaasbeck v Webatuck Cent School Dist. No. 1, 21 NY2d 239; Matter of Hofbauer, 47 NY2d 648; Park W. Mgt. Corp. v Mitchell, 47 NY2d 316, 444 US 992; Leach v Newport Yellow Cab, 628 F Supp 293, 815 F2d 704; Ek v Herrington, 939 F2d 839; Sewar v Gagliardi Bros. Serv., 69 AD2d 281, 51 NY2d 752.) II. The court below should not have directed plaintiffs’ verdict on the question of whether Acuti’s violation of section 1174 (b) proximately caused Monica’s injuries. There was a rational basis for the jury’s determination that the violation did not proximately cause the accident. (Dolitsky v Bay Isle Oil Co., 111 AD2d 366; Quadrozzi v Norcem, Inc., 125 AD2d 559;
      Holmberg v Donohue, 24 AD2d 569.) III. The trial court and the court below did not abuse their discretion as a matter of law when they refused to allow the jury to consider whether the Board was negligent for allegedly having violated regulation concerning the content of bus safety instructions. The regulation was not mentioned until the trial was over, and it introduced a new theory of liability that was not based on the details of the bus accident, so that the Board would have been unfairly prejudiced if the issue were submitted to the jury. (Ebert v New York City Health & Hosps. Corp., 82 NY2d 863; DiMauro v Metropolitan Suburban Bus Auth., 105 AD2d 236; Sharkey v Locust Val. Mar., 96 AD2d 1093; Hird v General Motors Corp., 61 AD2d 832; Fultonville Frozen Foods v Niagara Mohawk Power Corp., 91 AD2d 732; Forman v Davidson, 74 AD2d 505; Murray v City of New York, 43 NY2d 400; Rothstein v City Univ. of N. Y., 194 AD2d 533.)

      Jay Worona, Albany, and Katherine Gaffney for New York State School Boards Association, Inc., amicus curiae, in the first above-entitled action.
    I. The lower court properly ruled that defendant school board is not vicariously liable for the negligence of its independent contractor because school districts may delegate the transportation of students to and from school and, therefore, no exception should be made to the general rule that a party is not liable for the negligent acts of independent contractors. (McDonald v Shell Oil Co., 20 NY2d 160; Miles v R & M Appliance Sales, 26 NY2d 451; Allen v Cloutier Constr. Corp., 44 NY2d 290; People v Ryan, 82 NY2d 497; People v Smith, 79 NY2d 309; Haimes v New York Tel. Co., 46 NY2d 132; Williams v Board of Trustees, 204 App Div 566; Pratt v Robinson, 39 NY2d 554; Williams v Board of Trustee, 210 App Div 161.) II. The lower court properly ruled that defendant school board is not vicariously liable for the negligence of its independent contractors because plaintiffs are not without a legal remedy and, therefore, no exception should be made to the general rule that a party is not liable for the negligent acts of independent contractors. (Feliberty v Damon, 72 NY2d 112; Bryant v Presbyterian Hosp., 304 NY 538; Hesch v Seavey, 188 AD2d 808.)

      Sichol & Hicks, P. C, Suffern (William R. Sichol Jr., of counsel), for appellants in the second above-entitled action.
    I. The school district had a duty to exercise reasonable care for plaintiffs safety. (Williams v Board of Trustees, 204 App Div 566; Pratt v Robinson, 39 NY2d 554; Gleich v Volpe, 32 NY2d 517; Fornaro v Kerry, 139 AD2d 561; Sewar v Gagliardi Bros. Serv., 69 AD2d 281, 51 NY2d 752; Armlin v Spickerman, 250 App Div 810; McDonald v Central School Dist. No. 3, 289 NY 800; Berner v Board of Educ., 286 NY 174; Barth v Central School Dist. No. 1, 278 App Div 585; Germond v Board of Educ., 10 AD2d 139.) II. The district had a nondelegable duty to enforce rules known to be necessary for the safety of pupils using its bus transportation system. (Williams v Board of Trustees, 204 App Div 566; Settles v Incorporated Vil. of Freeport, 132 Misc 2d 240; Rosenberg v Equitable Life Assur. Socy., 79 NY2d 663; Colon v Board of Educ., 11 NY2d 446; Rohlfs v Weil, 271 NY 444; Kojic v City of New York, 76 AD2d 828; Annutto v Village of Herkimer, 56 Misc 2d 186, 31 AD2d 733, 24 NY2d 820.) III. As a matter of law, there was a triable issue as to whether the bus company was an independent contractor or the district was derivatively liable for its negligence. (Matter of Wheeler v Kayfetz Prods., 38 AD2d 667; Kojic v City of New York, 76 AD2d 828.) IV. As a matter of law, there is a triable issue as to whether the district had actual or constructive notice of the alternate bus stop. (Rhabb v New York City Hous. Auth., 41 NY2d 200.) V. The district was not performing a governmental function and was not immune from liability for negligently failing to adopt no-cross rules. (Gleich v Volpe, 32 NY2d 517; Pratt v Robinson, 39 NY2d 554; Moshier v Phoenix Cent. School Dist., 199 AD2d 1019, 83 NY2d 947; Sewar v Gagliardi Bros. Serv., 69 AD2d 281, 51 NY2d 752; Miller v State of New York, 62 NY2d 506; Weiner v Metropolitan Transp. Auth., 55 NY2d 175; Florence v Goldberg, 44 NY2d 189; Motyka v City of Amsterdam, 15 NY2d 134; Perry v Board of Educ., 189 AD2d 939; Poysa v State of New York, 102 Misc 2d 269.)

      Cook, Tucker, Netter & Cloonan, P. G, Kingston (Robert D. Cook, of counsel), for respondent in the second above-entitled action.
    I. There can be no liability imposed upon a school district for an automobile accident involving a student who is not under the supervision or control of the school district at the time of the accident. (Pratt v Robinson, 39 NY2d 554; Di Cerbo v Raab, 132 AD2d 763; Van Gaasbeck v Webatuck Cent. School Dist. No. 1, 21 NY2d 239.) II.Defendant school district is not responsible for the acts of the independent bus contractor. (Rosenberg v Equitable Life Assur. Socy., 79 NY2d 663; Gravelle v Norman, 75 NY2d 779.) III. Where there is no genuine issue of fact, the court should determine a motion for summary judgment as a matter of law. (Andre v Pomeroy, 35 NY2d 361.)
   OPINION OF THE COURT

Chief Judge Kaye.

The common issues in these combined appeals center on whether public schools that have contracted for transportation services with independent bus companies should be liable for injuries to students which occur between a child’s home and the bus stop. In each case, we resolve these issues in favor of the school defendant, as did the Appellate Division.

Chainani v Board of Educ. Eight-year-old Monica Chainani rode home from her New York City school on February 3,1987, and left the school bus at her designated stop, the last stop on the route. Monica had to cross the street to reach her house, which her regular bus driver knew. On that day, however, the bus was driven by defendant Edward Acuti, an employee of defendant Amboy Bus Company, who had driven that route only once previously. Acuti did not know that Monica had to cross the street and, after she stepped in front of the bus to cross, he pulled away from the curb and ran over her.

Monica’s father, on her behalf and his own, brought suit against the Board of Education, Amboy and Acuti. A jury found both that Acuti was negligent and that his negligence was the proximate cause of the accident. The jury also found Monica negligent and apportioned responsibility 75% to Acuti and 25% to Monica. Additionally, the jury found that Acuti had violated Vehicle and Traffic Law § 1174 (b), but that the violation was not the proximate cause of the accident. The Trial Judge nonetheless directed a verdict for the plaintiffs against all three defendants. The Appellate Division affirmed as to Amboy and Acuti, but reversed as to the Board of Education, holding that the Board was not vicariously liable for Acuti’s violation of the statute. Plaintiffs appeal the reversal as to the Board; Amboy and Acuti appeal the affirmance as to them. We now affirm.

Bruce v Hasbrouck. Nine-year-old Jennifer Bruce was seriously injured when she was struck by a car while trying to cross a highway to catch her bus at an undesignated stop. Jennifer’s designated stop — Tom’s Taxidermy — was on the same side of the highway as her home, the east side, and was unquestionably safe. The school bus was routed to travel north on the highway, Route 209, picking up students on the east side, and then turn around and travel south on Route 209 to pick up students on the west side. The Ellenville School District set up the loop route, with authorized stops on both sides, so that students would avoid having to cross Route 209. According to plaintiffs, however, when students on the east side were late they often crossed Route 209 to catch the bus at undesignated stops on the west side, a practice that had occurred as much as two or three times per week over a two-year period. The district denied knowledge of such a practice.

On the morning of June 15, 1990, Jennifer missed the bus at her designated stop on the east side of Route 209 and crossed the highway to catch the bus on its return trip along the west side of the highway. The bus driver, defendant Lisa Mulford, an employee of defendant Shawanga Bus Company, was travel-ling south on the highway when she noticed that traffic was backed up due to an accident. A car driven by Roslyn Hasbrouck had struck Jennifer as she crossed the road.

Jennifer’s parents, on her behalf and their own, brought suit against the Ellenville Central School District, Shawanga Bus Company, Mulford and Hasbrouck. The Trial Judge granted summary judgment to the school district, holding that it was not directly liable for the accident in that the child’s designated bus stop was safe, there was no evidence that the school district knew that children boarded the bus at undesignated stops on Route 209, and the district had no obligation to establish rules prohibiting students from crossing the highway. The Appellate Division affirmed as to the school district, holding that the district did not owe a duty to the child because she was not in its custody or control and that the district’s decision to impose "no-cross” rules was a governmental function immune from tort liability. Additionally, the court concluded that the district was not vicariously liable for the acts of the independent contractor Shawanga. As to Shawanga and Mulford, the Appellate Division reversed, holding that there was a question of fact regarding whether the act of picking up students who had crossed the highway was reasonable in light of the risk to the students. Plaintiffs appeal the order as to the school district, which we now affirm.

Direct Liability of the Schools

Advancing various theories of direct liability, plaintiffs argue first that the schools should be held responsible because the students were in their custody at the time of injury while on their way to and from the bus stop. Plainly, a school has a duty of care while children are in its physical custody or orbit of authority, or if a specific statutory duty has been imposed, and if the school chooses to provide transportation services it must do so in a careful and prudent manner including establishing safe bus stops (Pratt v Robinson, 39 NY2d 554, 560; see also, Education Law § 3635 [1] [d] [relieving schools of responsibility of providing transportation to children directly to or from their homes]). Whatever the precise boundaries of the duty, however, here the schools had contracted-out responsibility for transportation, and therefore cannot be held liable on a theory that the children were in their physical custody at the time of injury.

Alternatively plaintiffs argue that the Legislature has imposed a specific statutory duty on the schools by virtue of Vehicle and Traffic Law § 1174 (b), which reads:

"The driver of such school bus, when receiving or discharging passengers who must cross a public highway, street or private road, shall instruct such passengers to cross in front of the bus and the driver thereof shall keep such school bus halted with red signal lights flashing until such passengers have reached the opposite side of such highway, street or private road.”

The words of the subdivision, however, clearly place the affirmative obligation on bus drivers, not schools. That no specific statutory duty was imposed on the schools is made evident by the web of detailed statutes and regulations concerning independent contractors engaged to provide student transportation services (see, Education Law § 305 [14]; § 3623 [1]; § 3627 [10]; § 3635; 8 NYCRR part 156). The statutes, for example, require contracts for transportation to be in writing and approved by each school superintendent, who is charged with conducting an investigation into the drivers, routes, time schedules and other matters involving student safety (Education Law § 3635 [3]; § 3625; 8 NYCRR 156.2,156.3). Transportation contracts must be awarded pursuant to competitive bidding and are subject to approval by the Commissioner of Education (Education Law § 305; 8 NYCRR 156.1). The Legislature obviously contemplated that schools would contract out transportation services yet nowhere specified the sort of direct responsibility it imposed on drivers under Vehicle and Traffic Law § 1174 (b) (compare, Labor Law §§ 240, 241 [placing liability for injury to workers upon owners who employ independent contractors]).

The Bruce plaintiffs, as yet another basis for the school’s direct liability, suggest that the school was itself negligent in the operation of its transportation system when it set up a loop bus route and failed to establish "no-cross” rules, specifically instructing students not to cross the highway and bus drivers not to pick up students who had crossed the highway. Plaintiffs argue that, although it delegated the task of transporting students, the school retained control over safety issues and was thus responsible for promulgating no-cross rules (Restatement [Second] of Torts § 414 [one who employs an independent contractor but retains control over any part of the work remains liable for failing tp exercise its control with reasonable care]; Education Law § 3622; see also, 8 NYCRR 156.2, 156.3 [d] [2]).

Although the school was active in some areas involving safety — including conducting safety training sessions for bus drivers — it did not retain control over every safety aspect of the manner in which the independent contractor picked up and discharged students along Route 209. As both Supreme Court and Appellate Division noted, there was no evidence that the school had knowledge of a student practice of crossing Route 209 to catch the bus at undesignated stops on the opposite side. So far as this record is concerned, the school acted properly in instructing the bus company to pick up students at designated stops on both sides of Route 209 and was not further obligated to tell the bus company where it was not supposed to pick up students, relying reasonably on the company to act responsibly in protecting the safety of the children it was charged to transport and to comply with Vehicle and Traffic Law § 1174.

Vicarious Liability of the Schools

Having concluded that defendant schools are not themselves directly liable to plaintiffs, we turn to the question whether they are vicariously liable for the acts of the bus driver and company contracted to provide transportation services. Plaintiffs contend that the schools are vicariously liable based on the bus driver’s violation of Vehicle and Traffic Law § 1174 and because the task delegated was inherently dangerous. In both cases we decline plaintiffs’ invitation to extend liability to the schools.

Ordinarily, a principal is not liable for the acts of independent contractors in that, unlike the master-servant relationship, principals cannot control the manner in which the independent contractors’ work is performed. Of numerous exceptions to this general rule, the one plaintiffs advance is the nondelegable duty — that the defendants were not free to delegate to a contractor the responsibility for transporting schoolchildren (Feliberty v Damon, 72 NY2d 112, 118-119; see also, Prosser and Keeton, Torts § 71, at 512 [5th ed]). The "nondelegable duty” exception may be invoked where a particular responsibility is imposed upon a principal by statute or regulation (see, e.g., Kleeman v Rheingold, 81 NY2d 270, 274-275) or where the task at issue is inherently dangerous (see, Rosenberg v Equitable Life Assur. Socy., 79 NY2d 663, 668).

Plaintiffs point to Vehicle and Traffic Law § 1174 as imposing a statutory responsibility on the school. As previously discussed, this statute does not place any duty, let alone a nondelegable duty, on the schools.

Nor can we agree with plaintiffs that vicarious liability should be imposed because the duty delegated is inherently dangerous (see, Feliberty v Damon, 72 NY2d 112, 119, supra,). This State has long recognized an exception from the general rule where, genetically, the activity involved is "dangerous in spite of all reasonable care” (Prosser and Keeton, Torts § 71, at 513 [5th ed]; see, Whitaker v Norman, 75 NY2d 779; Restatement [Second] of Torts § 427). This exception applies when it appears both that "the work involves a risk of harm inherent in the nature of the work itself [and] that the employer recognizes, or should recognize, that risk in advance of the contract” (Rosenberg v Equitable Life Assur. Socy., 79 NY2d 663, 669, supra; McDonald v Shell Oil Co., 20 NY2d 160, 165). Familiar examples of inherently dangerous activities are blasting, certain types of construction and working with high tension electric wires (Prosser and Keeton, Torts § 71, at 513 [5th ed]).

Demanding though it may be, the activity of transporting children by bus to and from school — successfully accomplished countless times daily — does not involve that sort of inherent risk for the nonnegligent driver and is simply not an inherently dangerous activity so as to trigger vicarious liability.

Plaintiffs contend that a particularized version of this same exception applies where the employer knows or has special reason to know that the work for which the independent contractor was hired creates a "peculiar unreasonable risk” in the absence of special precautions and the employer takes no steps to minimize the risk (Restatement [Second] of Torts § 413; see, Wilson v Good Humor Corp., 757 F2d 1293, 1303-1306 [DC Cir]; see also, Prosser and Keeton, Torts § 71, at 512 [neither "inherently dangerous” nor "peculiar unreasonable risk” has been well defined and have been used by courts interchangeably]). The school’s failure to inform students that they were prohibited from crossing Route 209 and to instruct bus drivers not to pick up students who crossed the highway, according to plaintiffs, resulted in a "peculiar unreasonable risk” for which the school should be vicariously liable because it did not take adequate precautions. We have not previously adopted or rejected this Restatement exception and find it unnecessary to do so here.

As Wilson illustrates, section 413 rests on both the principal’s knowledge of a peculiar unreasonable risk created by the work of the independent contractor and the principal’s failure to take any steps to minimize that risk, though in the best position to do so (see, Wilson v Good Humor Corp., 757 F2d, at 1305). Here, there was no evidence that the school knew of the students’ unsafe practice of crossing the highway to undesignated stops; the school took measures to minimize any risk by designating stops on both sides of the road; and the bus company, which did know of the students’ practice, was itself in a position to reduce the risk by refusing to receive passengers except at their designated stops.

There is, in short, no basis for direct or vicarious liability of defendant schools.

Liability of Amboy and Acuti under Vehicle and Traffic Law §1174

Vehicle and Traffic Law § 1174 imposes on the bus driver, when receiving or discharging schoolchildren who must cross a road, a duty both to instruct such passengers to cross in front of the bus and to keep the bus halted, with red lights flashing, until the students have reached the other side. Failure to fulfill this duty, which proximately causes injury, results in the imposition of absolute liability on the driver (Van Gaasbeck v Webatuck Cent. School Dist., 21 NY2d 239). Defendants Amboy and Acuti urge that liability was erroneously assessed against them on two grounds, neither meritorious: that absolute liability can be imposed only when the proof shows the driver knew the schoolchild had to cross, and that the Appellate Division erred in affirming the trial court’s directed verdict on the issue of proximate cause.

Defendants correctly point out that, unlike the present case, in Van Gaasbeck, as in Sewar v Gagliardi Bros. Serv., (51 NY2d 752) — raising the same subdivision — the evidence established that the driver knew plaintiff students had to cross the roadway. We disagree with defendants, however, as to the legal significance to be drawn from that factual distinction. As the Court read the statute in Van Gaasbeck, and as we read the statute today, the "explicit purpose of this statute was to see to it that children would cross the highway under the careful supervision of the driver who would not only watch them cross the street in front of him but would flash his red lights to warn oncoming traffic to stop” (21 NY2d, at 245). Allowing the driver to avoid liability simply by failing to ascertain whether students must cross — in other words, allowing the new driver to escape responsibility because he failed to learn what the regular driver knew, for the children’s safety — is antithetical to the sense of the statute as well as the sense of Van Gaasbeck. Violation of the statute having been properly found, we agree with the trial court and Appellate Division that there was no reasonable view of the evidence that proximate cause was lacking (see, Cohen v Hallmark Cards, 45 NY2d 493, 499).

Appellants’ remaining arguments lack merit.

Accordingly, in Chainani, the order of the Appellate Division should be affirmed, with costs to respondent Board of Education as against appellants-respondents and respondents-appellants. In Bruce, the order of the Appellate Division, insofar as appealed from, should be affirmed, with costs.

Judges Simons, Titone, Bellacosa, Smith, Levine and Ciparick concur.

In Chainani v Board of Educ.: Order affirmed, with costs to respondent Board of Education as against appellants-respondents and respondents-appellants.

In Bruce v Hasbrouck: Order, insofar as appealed from, affirmed, with costs.

      . At the time of Monica Chainani’s accident, Vehicle and Traffic Law § 1174 (b) expressly applied only to a highway and was amended in 1988 to clarify its application to public highways, streets and private roads. No issue is raised in this respect. Additionally, in 1990 the section was amended to require that the bus driver keep the bus halted until the passengers are at least 15 feet from the bus and off the road.

      . Restatement (Second) of Torts § 413 reads in full:
      "One who employs an independent contractor to do work which the employer should recognize as likely to create, during its progress, a peculiar unreasonable risk of physical harm to others unless special precautions are taken, is subject to liability for physical harm caused to them by the absence of such precautions if the employer
      "(a) fails to provide in the contract that the contractor shall take such precautions, or
      "(b) fails to exercise reasonable care to provide in some other manner for the taking of such precautions.”


source: Caselaw Access Project

author: Chief Judge Kaye. Levine, J.

license: Public Domain

text:
    [663 NE2d 289, 639 NYS2d 977]
    Peter Dalton, as Parent and Natural Guardian of Brian M. Dalton, an Infant, Respondent, v Educational Testing Service, Appellant.
    Argued October 19,1995;
    decided December 7, 1995

      POINTS OF COUNSEL

      White & Case, New York City (Philip H. Schaeffer, J. Stepan Wood and William R. Spiegelberger of counsel), and Wilmer, Cutler & Pickering (Bruce Berman and Michael F. Bennet, of the District of Columbia Bar, admitted pro hoc vice, of counsel), for appellant.
    I. Educational Testing Service (ETS) did not breach the duty of good faith and fair dealing. (Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62; Van Valkenburgh, Nooger & Neville v Hayden Publ. Co., 30 NY2d 34, 409 US 875; Gordon v Nationwide Mut. Ins. Co., 30 NY2d 427, 410 US 931; Kirke La Shelle Co. v Armstrong Co., 263 NY 79; Murphy v American Home Prods. Corp., 58 NY2d 293; Wieder v Skala, 80 NY2d 628; Bank of China v Chan, 937 F2d 780; Havel v Kelsey-Hayes Co., 83 AD2d 380; M/ A-Com Sec. Corp. v Galesi, 904 F2d 134; Tuttle v Grant Co., 5 AD2d 370, 6 NY2d 754.) II. Notwithstanding their de nova review of the evidence, the lower courts did not find that Dalton’s scores are valid. III. If ETS’ review was inadequate, the matter should have been remanded to ETS for further consideration. (Matter of Olsson v Board of Higher

      Educ., 49 NY2d 408; Matter of Chusid v Albany Med. Coll., 157 AD2d 1019, 75 NY2d 711; Matter of Susan M. v New York Law School, 149 AD2d 69, 76 NY2d 241; Matter of Yaeger v Educational Testing Serv., 158 AD2d 602; De Pina v Educational Testing Serv., 31 AD2d 744; Matter of K. D. v Educational Testing Serv., 87 Misc 2d 657.)

      Nicolosi & Sciacca, Bayside (Vincent F. Nicolosi and Laurie S. Hershey of counsel), for respondent.
    I. The lower courts only held ETS to its express and implied commitments and did not expand the implied covenant of good faith as reasonably understood by the parties. (Wood v Lucy, Lady Duff-Gordon, 222 NY 88; Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62; Kirke La Shelle Co. v Armstrong Co., 263 NY 79; Wieder v Skala, 80 NY2d 628; De Pina v Educational Testing Serv., 31 AD2d 744; Matter of K. D. v Educational Testing Serv., 87 Misc 2d 657; Johnson v Educational Testing Serv., 615 F Supp 633, 754 F2d 20, 472 US 1029; Matter of Seagroatt Floral Co. [Riccardi], 78 NY2d 439; Humphrey v State of New York, 60 NY2d 742; Najjar Indus. v City of New York [Mersereau Pumping Sta.], 57 NY2d 647.) II. The trial court acted correctly in ordering ETS to release the scores without comment or qualification. (Matter of Olsson v Board of Higher Educ., 49 NY2d 408; Matter of Susan M. v New York Law School, 149 AD2d 69, 76 NY2d 241; Lowinger v Touro Coll., 202 AD2d 298; Morales v New York Univ., 83 AD2d 811, 55 NY2d 822; Melvin v Union Coll., 195 AD2d 447; Tedeschi v Wagner Coll., 49 NY2d 652; Muller v Muller, 266 NY 68; Demilo Corp. v E.K. Constr. Co., 207 AD2d 480; Van Wagner Adv. Corp. v S & M Enters., 67 NY2d 186; Matter of Hall v Johnstone, 209 AD2d 982.)
   OPINION OF THE COURT

Chief Judge Kaye.

The primary question before us is whether defendant, Educational Testing Service (ETS), a standardized testing firm, complied with procedures specified in its contract with high school senior Brian Dalton in refusing to release Dalton’s Scholastic Aptitude Test (SAT) score. Because the factual findings underlying the trial court’s determination that ETS failed to act in good faith in following those procedures were affirmed by the Appellate Division, have support in the record and are consequently beyond the scope of our review, we conclude — as did the trial court and Appellate Division — that ETS breached its contract with Dalton. Though we agree, moreover, with the courts below that specific performance is the appropriate remedy, we nevertheless conclude that the promised performance was good-faith compliance with the stated procedures, not release of the questioned scores as ordered by those courts.

I

In May 1991, Brian Dalton took the SAT, which was administered by ETS, at Holy Cross High School in Queens where Dalton was a junior. Six months later, in November, he took the examination a second time, as a senior, this time at John Bowne High School in Queens, and his combined score increased 410 points.

Because Dalton’s score increased by more than 350 points, his test results fell within the ETS category of "Large Score Differences” or "discrepant scores.” In accordance with ETS policy, members of the ETS Test Security Office therefore reviewed his May and November answer sheets. Upon a finding of disparate handwriting, the answer sheets were submitted to a document examiner, who opined that they were completed by separate individuals. Dalton’s case was then forwarded to the Board of Review, which preliminarily decided that substantial evidence supported cancelling Dalton’s November score.

Upon registering for the November SAT, Dalton had signed a statement agreeing to the conditions in the New York State edition of the Registration Bulletin, which reserved to ETS "the right to cancel any test score * * * if ETS believes that there is reason to question the score’s validity.” The Registration Bulletin further provided that, if "the validity of a test score is questioned because it may have been obtained unfairly, ETS [will] notifly] the test taker of the reasons for questioning the score” and offer the test-taker the following five options: (1) the opportunity to provide additional information, (2) confirmation of the score by taking a free retest, (3) authorization for ETS to cancel the score and refund all fees, (4) third-party review by any institution receiving the test score or (5) arbitration.

As specified in the Registration Bulletin, ETS apprised Dalton of its preliminary decision to cancel his November SAT score in a letter from Test Security Specialist Celeste M. Eppinger. Noting the handwriting disparity and the substantial difference between his May and November test results, Eppinger informed Dalton that "[t]he evidence suggests that someone else may have completed your answer sheet and that the questioned scores may be invalid.” She advised him that he could supply "any additional information that will help explain” this or, alternatively, elect one of the other options.

Eppinger enclosed the Procedures for Questioned Scores pamphlet with her letter, which reiterated the test-taker’s right to "submit additional relevant information” to the Board of Review supporting the validity of questioned scores. In cautioning test-takers to provide only information "relevant to the questions being raised,” the Procedures for Questioned Scores explained, "[f]or example, character references or testimonial letters do not explain handwriting differences.” As to the four additional options, the guide further explained, "ETS also offers other options * * * if additional information doesn’t resolve the questions about the validity of the scores. The option to provide additional information to resolve these questions may be used in combination with one or more of the[se] options.”

Dalton opted to present additional information to the Board of Review, including the following: verification that he was suffering from mononucleosis during the May examination; diagnostic test results from a preparatory course he took prior to the November examination (he had taken no similar course prior to the May SAT) that were consistent with his performance on that test; a statement from an ETS proctor who remembered Dalton’s presence during the November examination; and statements from two students — one previously unacquainted with Dalton — that he had been in the classroom during that test. Dalton further provided ETS with a report from a document examiner obtained by his family who concluded that Dalton was the author of both sets of answer sheets.

ETS, after several Board of Review meetings, submitted the various handwriting exemplars to a second document examiner who, like its first, opined that the May and November tests were not completed by the same individual. As a result, ETS continued to question the validity of Dalton’s November score.

At this point plaintiff Peter Dalton, father and natural guardian of Brian Dalton, filed a CPLR article 78 proceeding, later converted to an action at law, to prohibit ETS from cancelling Dalton’s November SAT score and to compel immediate release of the score. Following a 12-day nonjury trial, the trial court found that ETS failed "to make even rudimentary efforts to evaluate or investigate the information” furnished by Dalton and thus concluded that ETS failed to act in good faith in determining the legitimacy of Dalton’s score, thereby breaching its contract (155 Mise 2d 214, 225). The trial court premised this conclusion on its determination that the ETS Board of Review members failed to evaluate the information submitted because they believed Dalton’s presence at the November SAT to be wholly irrelevant to the handwriting issue and that he could controvert the Board’s preliminary finding that the score was invalid solely by taking a retest. As a remedy for the contractual breach, the trial court ordered ETS to release the November SAT score.

The Appellate Division affirmed. It too found that ETS ignored the documentation provided by Dalton and considered only the reports of its own document examiners. Like the trial court, the Appellate Division concluded that this failure to evaluate as well as to investigate Dalton’s information constituted a breach of contract. In light of these factual determinations, we agree that ETS breached its contract with Dalton but differ as to the scope of the relief.

II

By accepting ETS’ standardized form agreement when he registered for the November SAT, Dalton entered into a contract with ETS (see, AEB & Assocs. Design Group v Tonka Corp., 853 F Supp 724, 732). Implicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance (see, Van Valkenburgh, Nooger & Neville v Hayden Publ. Co., 30 NY2d 34, 45, cert denied 409 US 875).

Encompassed within the implied obligation of each promisor to exercise good faith are " 'any promises which a reasonable person in the position of the promisee would be justified in understanding were included’ ” (Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62, 69, quoting 5 Williston, Contracts § 1293, at 3682 [rev ed 1937]). This embraces a pledge that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract” (Kirke La Shelle Co. v Armstrong Co., 263 NY 79, 87). Where the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion (see, Tedeschi v Wagner Coll., 49 NY2d 652, 659). The duty of good faith and fair dealing, however, is not without limits, and no obligation can be implied that "would be inconsistent with other terms of the contractual relationship” (Murphy v American Home Prods. Corp., 58 NY2d 293, 304).

The parties here agreed to the provisions in the Registration Bulletin, which expressly permit cancellation of a test score so long as ETS found "reason to question” its validity after offering the test-taker the five specified options. Nothing in the contract compelled ETS to prove that the test-taker cheated. Nor did the invitation to the test-taker to furnish ETS with relevant information reasonably and realistically translate into any requirement that ETS conduct a field investigation or gather evidence to verify or counter the test-taker’s documentation. Indeed, such an obligation would be inconsistent with the contractual language placing the burden squarely on the test-taker to overcome the ETS finding of score invalidity. ETS, therefore, was under no duty, express or implied, to initiate an external investigation into a questioned score.

The contract, however, did require that ETS consider any relevant material that Dalton supplied to the Board of Review. The Registration Bulletin explicitly afforded Dalton the option to provide ETS with relevant information upon notification that ETS questioned the legitimacy of his test score. Having elected to offer this option, it was certainly reasonable to expect that ETS would, at the very least, consider any relevant material submitted in reaching its final decision.

Dalton triggered this implied-in-law obligation on the part of ETS by exercising his contractual option to provide ETS with information (compare, Matter of Yaeger v Educational Testing Serv., 158 AD2d 602 [where test-taker declined to invoke any of the proffered options, ETS cancelled score in good faith and in accordance with terms of the contract]). Significantly, Dalton heeded the advice in the Procedures for Questioned Scores and tendered numerous documents that did more than simply deny allegations of wrongdoing or attest to his good character, such as medical evidence regarding his physical condition, statements by fellow test-takers, the statement of a classroom proctor and consistent diagnostic test results (compare, Swencki v Educational Testing Serv., No. C 81-0689 [WD KY] [test-taker sent letter to ETS explaining that he could not have cheated]; Matter of K. D. v Educational Testing Serv., 87 Misc 2d 657 [test-taker submitted sworn statement that he did not cheat]).

Nevertheless, with the exception of the document examiner’s report, ETS disputes the relevancy of this information. Specifically, ETS maintains that the sole issue before the Board of Review was the disparate handwriting and that evidence regarding Dalton’s health (apart from a damaged arm) or presence during both examinations is irrelevant to resolving that issue.

To be sure, the Procedures for Questioned Scores warned Dalton "to provide only additional information that is relevant to the questions being raised.” The Eppinger letter to Dalton, however, informed him that his November score was possibly invalid precisely because ETS believed "that someone else may have completed [his] answer sheet.” Thus, ETS expressly framed the dispositive question as one of suspected impersonation. Because the statements from the classroom proctor and November test-takers corroborated Dalton’s contention that he was present at and in fact took the November examination, they were relevant to this issue.

Likewise, inasmuch as the medical documentation concerning Dalton’s health at the time of the May SAT provided an explanation for his poor performance on that examination, and the consistent diagnostic test results demonstrated his ability to achieve such a dramatic score increase, these items were also germane to the question whether it was Dalton or an imposter who completed the November examination. Indeed, in its manual, Policies and Procedures Concerning Scores of Questionable Validity — which details internal ETS procedure regarding questioned scores — ETS offers several examples of "relevant information” that a test-taker might provide, including "a doctor’s report that the candidate was under the influence of medication at the time the low score was earned.” Regarding "a case of possible impersonation” in particular, the manual suggests that "other test results might demonstrate that the questioned score is not inconsistent with other measures of the candidate’s abilities.” Thus, Dalton’s material fell within ETS’ own definition of relevancy, as expressed in its manual and letter to Dalton.

The critical question then is whether the Board of Review made any effort to consider this relevant information submitted by Dalton. That is a factual inquiry. Both the trial court and the Appellate Division concluded that the Board utterly failed to evaluate the material. Given these affirmed findings, "our scope of review is narrow. This Court is without power to review findings of fact if such findings are supported by evidence in the record” (Humphrey v State of New York, 60 NY2d 742, 743).

Several Board of Review members — each member alone had the power to order release of Dalton’s November score — testified that they believed information establishing Dalton’s presence during the November examination to be irrelevant to their determination and, moreover, that only a successful retest would validate Dalton’s score. Thus, there is support in the record for the factual determinations of the trial court and Appellate Division and they are binding on us. This is so notwithstanding inconsistent testimony by Board members that the Board did review Dalton’s information but found it unpersuasive. In light of the affirmed findings, the Court of Appeals simply does not have authority to weigh conflicting evidence and make its own factual determinations, as the dissent would do.

Consequently, this case is factually distinct from those relied upon by ETS, where the testing service considered but then rejected information provided by the test-taker (see, e.g., Langston v ACT, 890 F2d 380; Denburg v Educational Testing Serv., No. C-1715-83 [NJ Super Ct]; cf., Johnson v Educational Testing Serv., 754 F2d 20, 26, cert denied 472 US 1029 [noting that ETS provided test-taker with opportunity to be heard and to be represented by counsel]). When ETS fulfills its contractual obligation to consider relevant material provided by the test-taker and otherwise acts in good faith, the testing service — not the courts — must be the final arbiter of both the appropriate weight to accord that material and the validity of the test score. This Court will not interfere with that discretionary determination unless it is performed arbitrarily or irrationally.

Where, however, ETS refuses to exercise its discretion in the first instance by declining even to consider relevant material submitted by the test-taker, the legal question is whether this refusal breached an express or implied term of the contract, not whether it was arbitrary or irrational. Here, the courts below agreed that ETS did not consider the relevant informatian furnished by Dalton. By doing so, ETS failed to comply in good faith with its own test security procedures, thereby breaching its contract with Dalton.

The dissent urges that because the trial court and Appellate Division relied in part on ETS’ failure to investigate Dalton’s information, they arguably employed an erroneous legal standard. Overlooked, however, is that both courts also concluded that ETS’ refusal to evaluate the material breached the contract with Dalton and, thus, employed a correct legal standard. Moreover, the crucial factual inquiry under the correct standard — whether ETS considered Dalton’s relevant material — has already been resolved by those courts. Because this factual finding dictates the legal conclusion that ETS breached the contract, remittal is unnecessary.

Ill

We agree with the trial court and Appellate Division that Dalton is entitled to specific performance of the contract. Dalton is not, however, entitled to release of his score as though fully validated. The goal of specific performance is to produce "as nearly as is practicable, the same effect as if the contract had been performed” (Farnsworth, Contracts § 12.5, at 823 [1982]). Had the contract here been performed, ETS would have considered the information provided by Dalton in reaching a final decision. ETS never promised to release a score believed to be invalid, and the validity of Dalton’s November SAT score has yet to be determined. Indeed, the trial court specifically noted that it was not resolving the question whether Dalton in fact took the November test.

In an analogous context, we have refused to compel a university to issue a degree to a student who had not fulfilled the academic requirements (see, Matter of Olsson v Board of Higher Educ., 49 NY2d 408). This reluctance to interfere with the exercise of academic discretion is motivated by sound considerations of public policy. "When an educational institution issues a diploma to one of its students, it is, in effect, certifying to society that the student possesses all of the knowledge and skills that are required by his [or her] chosen discipline” (id., at 413). Likewise, we have held that a college did not act arbitrarily in declining to "round off” a student’s failing grade so that she could graduate (see, Matter of McIntosh v Borough of Manhattan Community Coll., 78 AD2d 839, affd 55 NY2d 913).

The comparison between ETS and academic institutions is surely not exact, inasmuch as judicial restraint in matters of academic achievement is based, in part, on the inherently subjective nature of the evaluation to be made by professional educators (see, Tedeschi v Wagner Coll., 49 NY2d 652, 658, supra). Still, similar policy concerns militate against directing ETS to release a questioned score. When a standardized" testing service reports a score, it certifies to the world that the test-taker possesses the requisite knowledge and skills to achieve the particular score. Like academic credentials, if courts were to require testing services to release questioned scores, "the value of these credentials from the point of view of society would be seriously undermined” (Olsson, supra, at 413). Given the reliance that students, educational institutions, prospective employers and others place on the legitimacy of scores released by ETS, requiring challenged scores to be reported would be contrary to the public interest and exceed the scope of ETS’ promised performance.

While courts as a matter of policy are reluctant to intrude upon academic discretion in educational matters, they stand ready as a matter of law and equity to enforce contract rights. Where a contract is breached, moreover, and the injured party is entitled to specific performance, the remedy must be a real one, not an exercise in futility.

Dalton is entitled to relief that comports with ETS’ contractual promise — good-faith consideration of the material he submitted to ETS. We cannot agree with Dalton’s assumption that ETS will merely rubber-stamp its prior determination without good-faith attention to his documentation and that reconsideration by ETS will be an empty exercise. Our conclusion that the contract affords Dalton a meaningful remedy rests also on the provision in the Procedures for Questioned Scores allowing Dalton to utilize one or more of the remaining four options in combination with renewed consideration by the Board of Review. Those options — including third-party review by any institution receiving the test score as well as arbitration — remain available should ETS determine that the information submitted fails to resolve its concerns about the validity of the November score.

Accordingly, the Appellate Division order should be modified in accordance with this opinion and, as so modified, affirmed, without costs.

Levine, J.

(dissenting). I agree with the majority that the Educational Testing Service (ETS) had no duty, express or implied, to investigate the information submitted by Brian Dalton. However, I do not agree that we are bound by the factual determinations of the lower courts, which are based on an erroneous legal standard, or that the record contains any evidence that ETS arbitrarily failed to consider the materials submitted by Dalton. I, therefore, respectfully dissent.

A primary obligation of ETS as administrator of the SAT and other scholastic aptitude tests heavily relied upon by institutions of higher education is to certify that released scores accurately reflect the performance on the test of the identified test taker. The college admission process is highly dependent on the authenticity of the SAT scores released by ETS, as are other test takers whose scores are valued in relation to those of all others who take the exam and are competing for admission. In order to ensure the reliability of its certification process, ETS has established elaborate procedures that balance the harms to institutions and other candidates of the release of possibly invalid scores against the detriment to students whose scores are challenged as potentially invalid. The procedures established by ETS are unquestionably fair; they give test takers whose scores are questioned opportunity after opportunity to validate their scores. In the end, however, ETS as a practical necessity must be the final arbiter of whether it can honestly certify the validity of a student’s score. Thus, the standard contract between ETS and test takers reserves to ETS the right "to cancel any test score * * * if ETS believes that there is reason to question the score’s validity [emphasis supplied].”

Peter Dalton, Brian Dalton’s father, brought this suit based on the claim that ETS treated Brian Dalton unfairly because it did not conduct a thorough investigation of the material Brian submitted to ETS when his scores were questioned. The trial court accepted Dalton’s argument. Thus, to support its conclusion that ETS failed "to make even rudimentary efforts to evaluate or investigate the information furnished by” Dalton and thus failed to act in good faith in carrying out its obligations to Dalton, the court pointed to ETS’s failure to make contact with or question the proctor, the test administrator, or other students who gave evidence that tended to show that Dalton was present, and to ETS’s refusal to conduct fingerprint or lie detector tests on Dalton (155 Misc 2d 214, 225). Likewise, the Appellate Division clearly considered ETS’s failure to investigate as a factor in its ultimate conclusion that ETS acted without good faith: "The practice of ignoring Dalton’s evidence without even initiating a preliminary investigation clearly demonstrate a lack of good faith by ETS” (206 AD2d 402, 403 [emphasis supplied]).

My colleagues in the majority here, however, correctly conclude that ETS had no express or implied duty to investigate. Thus, it seems indisputable that the ultimate determinations of the courts below — that ETS breached its implied covenant of good faith and fair dealing — were reached at least in significant part by reliance on an erroneous legal standard, that ETS had a duty to investigate. Thus, at a minimum, reversal and remittal for new findings based on the proper legal standard is required here.

However, applying the correct legal standard to the record evidence, it is my conclusion that ETS fulfilled its contractual obligations as a matter of law and, therefore, we should reverse and dismiss the Daltons’ complaint.

As the Chief Judge concludes, ETS was contractually obligated to consider any relevant material that Dalton supplied the Board of Review (majority opn, at 390). After considering that evidence, ETS had the stated right to cancel Dalton’s test score if it possessed "a reason to question” the score’s validity. Thus, it seems self-evident that ETS expressly reserved to itself substantial discretion on whether to refuse to certify a test score.

To be sure, there is a covenant of good faith and fair dealing implicit in the contract between Dalton and ETS (see, Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62, 68; Van Valkenburgh, Nooger & Neville v Hayden Publ. Co., 30 NY2d 34, 45, cert denied 409 US 875). It requires that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract” (Kirke La Shelle Co. v Armstrong Co., 263 NY 79, 87). In this way, the implied covenant "is in aid and furtherance of other terms of the agreement of the parties. No obligation can be implied, however, which would be inconsistent with other terms of the contractual relationship” (Murphy v American Home Prods. Corp., 58 NY2d 293, 304 [rejecting application of implied covenant to at-will employment contracts]). Where good faith is an express condition of a contract that contemplates a wide scope of discretion on the part of one party, there is no breach if the discretionary act performed is "not arbitrary and capricious” (Smith v Robson, 148 NY 252, 255; see also, 3A Corbin, Contracts § 647, at 104-106). The implied covenant does no more; it works only to ensure that a party with whom discretion is vested does not act arbitrarily or irrationally (see, e.g., Tedeschi v Wagner Coll., 49 NY2d 652, 659).

Thus, the issue here is whether there is evidence that ETS performed its discretionary functions arbitrarily or irrationally, or with bad faith in fact (cf., Langston v ACT, 890 F2d 380, 386; Johnson v Educational Testing Serv., 754 F2d 20, cert denied 472 US 1029 [American College Testing Program only contractually required to act in good faith]).

Here, there was no evidence of bad faith in fact. Moreover, ETS had two definitive reports of highly qualified handwriting experts, of proven reliability, that the November 1991 answer sheet was filled out by someone other than the person who filled out the May 1991 exam answer sheet and the documents known to have been signed or produced by Brian Dalton. Surely it was not irrational or arbitrary for ETS to find that the unexplained disparate handwriting on the November 1991 answer sheet gave it reason to question the validity of the second test score. The courts below did not find otherwise. Nor can it be said that, as a matter of law, the evidence submitted by Dalton totally obviated the reasons ETS had to question the test score. It was, therefore, not a breach of the implied covenant of good faith to refuse to certify Dalton’s scores after consideration of the evidence submitted, and the majority does not so hold.

Rather the majority holds that there is evidence that ETS breached its implied covenant of good faith in its deliberative process in failing "to consider” Dalton’s submissions (majority opn, at 391). However, the uncontroverted evidence accepted by the courts below and the majority here is that when ETS received the information submitted by Dalton it did not totally disregard it. Rather, it considered it and judged it weighty enough to merit further evaluation. Thus, it is undeniable that ETS responded to the submissions by retaining another handwriting expert to get a third evaluation of the documents. In addition, ETS submitted Dalton’s additional handwriting samples to its first handwriting expert for a second evaluation.

To overcome this concrete evidence of consideration, the majority points to selectively, narrow portions of the record in which ETS Board of Review members testified that they deemed irrelevant Dalton’s evidence that tended to show he was in the room on the day the test was given as evidence that ETS "failed to consider” Dalton’s submissions, which in turn supported the determination of its breach of the implied covenant of good faith and fair dealing. I disagree.

Again, it is uncontroverted that each member of the ETS Board of Review gave a reason why he or she found Dalton’s submissions irrelevant. Therefore, a breach of the implied covenant of good faith and fair dealing could only be established if the reason the Board members gave to deem irrelevant Dalton’s submissions was arbitrary, capricious or irrational. Each Board member testified that the evidence did not explain their one lingering crucial doubt, the disparate handwriting, which was the exact doubt communicated to Dalton by ETS — "someone else may have completed [the] answer sheet” (Dec. 11, 1991 letter to Brian Dalton). Because the reason to deem irrelevant Dalton’s evidence of presence was not irrational, arbitrary or capricious it cannot, as a matter of law, form the basis of a breach of the implied covenant of good faith. It is only by substituting its judgment for that of ETS as to what should have been deemed relevant evidence that the majority finds evidence of bad faith. However, "[w]hen an [institutional decision maker] * * * acts within its jurisdiction, not arbitrarily but in the exercise of an honest discretion based on facts within its knowledge that justify the exercise of discretion, a court may not review the exercise of its discretion” (Matter of Carr v St. John’s Univ., 17 AD2d 632, 634, affd 12 NY2d 802; see also, Matter of Harris v Trustees of Columbia Univ., 98 AD2d 58, 70 [Kassal, J., dissenting], revd on dissenting opn below 62 NY2d 956).

In sum, ETS acted within its discretion in continuing the security process rather than releasing the score after considering and rejecting Dalton’s evidence. There is no evidence that ETS acted arbitrarily in its discretionary decision-making process. Hence there is no evidence that ETS breached any express or implied covenant in its contract with Dalton. Accordingly, I would reverse the order of the Appellate Division and dismiss the complaint.

Judges Titone, Bellacosa, Smith and Ciparick concur with Chief Judge Kaye; Judge Levine dissents and votes to reverse in a separate opinion in which Judge Simons concurs.

Order modified in accordance with the opinion herein and, as so modified, affirmed, without costs.

       For example, when Shirley Kane-Orr — chairperson of the Board of Review and a member of the three-member panel of the Board that initially reviewed Dalton’s case on December 11,1991, the panel that again considered his case on January 3d, 1992, and the final panel to review Dalton’s case on February 7, 1992 — was asked whether she "or any member of the panel or the test security office ever questioned] [Dalton’s] presence in the classroom,” she answered, "[n]o”; when further asked by Dalton’s counsel, "[s]o am I to assume * * * that since you didn’t question his presence in the classroom, that it was not an issue in this case,” she responded, "[i]t was a non-issue in the sense that [it] was not an issue at all to be considered whether or not he was in the classroom.” Likewise, Sydell Carlton, member of the panel that considered Dalton’s case on January 17, 1992, was also asked whether she ever questioned Dalton’s presence in the classroom, to which she replied, "[t]hat was not an issue for us to decide. The issue for us to decide was, why are those handwritings disparate? His presence in the room was not, for us, in issue.”

       Notably, Dalton’s scores had not been finally cancelled at the inception of this suit. Dalton had been offered, but refused, the opportunity to validate his scores by taking another test at the expense of ETS and scoring within a specified range of his November score, or to submit the matter to arbitration.


author: Ciparick, J.

text:
    [663 NE2d 297, 639 NYS2d 985]
    New York City Health and Hospitals Corporation et al., Appellants, v Mary Jo Bane, as Commissioner of Social Services of the State of New York, Respondent. Medical Society of the State of New York et al., Appellants, v Mary Jo Bane, as Commissioner of Social Services of the State of New York, Respondent.
    Argued November 30,1995;
    decided December 21, 1995

      POINTS OF COUNSEL

      Rosenman & Colin, New York City (Peter F. Nadel and David A. Florman of counsel), and LeBoeuf, Lamb, Greene & Mac-Rae (Jay G. Safer and Beverly G. Steinberg of counsel), for appellants in the two above-entitled actions.
    I. The first cause of action is dispositive: plaintiffs’ claims were timely submitted and there is no Statute of Limitations issue. (Zapata v Town of Huntington, 193 AD2d 674; West Side Fed. Sav. & Loan Assn. v Hirschfeld, 101 AD2d 380, 65 NY2d 605; Matter of Avon Nursing Home v Axelrod, 83 NY2d 977; Matter of Jewish Home & Infirmary v Commissioner of N. Y. State Dept. of Health, 84 NY2d 252; Matter of Beaudoin v Toia, 45 NY2d 343; Bender v New York City Health & Hosps. Corp., 38 NY2d 662.) II. The second cause of action, based on violations of Federal law, is not time-barred. (New York City Health & Hosps. Corp. v Mc-Barnette, 84 NY2d 194; Agency Holding Corp. v Malley-Duff &

      Assocs., 483 US 143; Wilson v Garcia, 471 US 261; Auto Workers v Hoosier Corp., 383 US 696; Cullen v Margiotta, 811 F2d 698, cert denied sub nom. Nassau County Republican Comm. v Cullen, 483 US 1021; Giovannetti v Dormitory Auth., 115 AD2d 851, 69 NY2d 621; Corbett v Reynolds, 151 AD2d 227; Bryant Ave. Tenants’ Assn. v Koch, 71 NY2d 856; Hanover Shoe v United Shoe Mach., 392 US 481; Rehabilitation Assn. v Kozlowski, 838 F Supp 243, 42 F3d 1444.) III. The Federal court action tolls the Statute of Limitations under CPLR 205 where the court is found to lack subject matter jurisdiction. (Edelman v Jordan, 415 US 651; Gaines v City of New York, 215 NY 533; Matter of Morris Investors v Commissioner of Fin. of City of N. Y, 69 NY2d 933; Carrick v Central Gen. Hosp., 51 NY2d 242; George v Mt. Sinai Hosp., 47 NY2d 170; Censor v Mead Reins. Corp., 176 AD2d 600; Matter of Kinsella v Board of Educ., 64 AD2d 738; Buchholz v United States Fire Ins. Co., 269 App Div 49; Utica Sheet Metal Corp. v Myers-Laine Corp., 45 AD2d 116; Matter of Toomey v Blum, 77 AD2d 802, 54 NY2d 669.)

      Dennis C. Vacco, Attorney-General, New York City (Robert A. Forte, Victoria A. Graffeo and Peter H. Schiff of counsel), for respondent in the two above-entitled actions.
    I. Plaintiffs’ declaratory judgment actions to compel the State to pay coinsurance amounts retroactively for services rendered to dual eligibles between January 1, 1987 and June 2, 1992 are barred by the four-month Statute of Limitations for CPLR article 78 proceedings. (New York City Health & Hosps. Corp. v McBarnette, 84 NY2d 194; Matter of Rye Psychiatric Hosp. Ctr. v State of New York, 177 AD2d 834, 80 NY2d 751; Matter of Jewish Home & Infirmary v Commissioner of N. Y. State Dept. of Health, 84 NY2d 252; Matter of Avon Nursing Home v Axelrod, 83 NY2d 977; Will v Michigan Dept. of State Police, 491 US 58; Matter of Thomas v New York Temporary State Commn. on Regulation of Lobbying, 83 AD2d 723, 56 NY2d 656; Casillas v Perales, 154 AD2d 420; Owens v Okure, 488 US 235; Bryant Ave. Tenants’ Assn. v Koch, 71 NY2d 856; 423 S. Salina St. v City of Syracuse, 68 NY2d 474, 481 US 1008.) II. The tolling provisions of CPLR 205 (a) do not save these declaratory judgment actions from the Statute of Limitations bar. (Gaines v City of New York, 215 NY 533.) III. Plaintiffs’ reimbursement claims not submitted within 90 days of the date of service or 30 days of payment by Medicare are untimely under the State’s billing regulations. (Barsh v Town of Union, 126 AD2d 311; Philbrick & Brother v Florio Co-op. Assn., 137 App Div 613, 200 NY 526; Matter of Costello v Geiser, 85 NY2d 103; Advanced Refractory Technologies v Power Auth., 81 NY2d 670.)
   OPINION OF THE COURT

Ciparick, J.

Plaintiffs, Medicare and Medicaid services providers, obtained a Federal court judgment declaring invalid a regulation adopted by defendant Commissioner of the Department of Social Services which limited defendant’s responsibility for coinsurance payments incurred in connection with Medicare Part B services rendered to certain "dually eligible” elderly and poor patients. After the declaration of invalidity, plaintiffs submitted coinsurance claims for services rendered during the period when the invalidated regulation was in effect. Defendant refused to pay these claims. We must decide whether plaintiffs’ first cause of action challenging defendant’s refusal to pay their coinsurance claims is time-barred.

Medicare is a Federally funded and administered medical insurance plan for persons 65 years of age or older and certain disabled individuals (42 USC §§ 1395-1395ccc). Medicare consists of two components, Parts A and B. Part A is an inpatient hospital insurance plan that pays 100% of reasonable inpatient costs (see, 42 USC — 1395Í-4). Part B is a supplementary insurance plan that pays 80% of reasonable costs for other services not covered by Part A, including physician and hospital outpatient services (see, 42 USC §§ 1395j — 1395w-4 [j]). Enrollees in Part B pay an annual deductible and the remaining coinsurance fee of 20% of the reasonable costs or charges for services rendered.

Medicaid is a joint Federal and State funded system which subsidizes medical care for the poor, regardless of age (42 USC § 1396 et seq.). States participating in the Medicaid program establish a schedule of payment rates for various types of medical care. Health care providers who treat Medicaid patients must accept the scheduled rate as payment in full for services provided.

Medicaid and Medicare overlap because State Medicaid programs may pay Medicare Part B premiums, deductibles and coinsurance on behalf of individuals who are "dually eligible,” i.e., both elderly and poor. Congress recognized that poor Medicare-eligible individuals often do not possess the financial resources to enroll in the optional Part B Medicare program, which requires enrollees to pay insurance premiums, annual deductibles, and the 20% coinsurance amount. Consequently, the Medicare Act provides that a State may agree to pay Part B insurance premiums on behalf of poor elderly and disabled individuals — known as "dual eligibles” or "crossovers” — and thus assist them in acquiring Part B coverage. The Federal Government provides funding to subsidize these State "buy-in” arrangements. New York has such a "buy-in” agreement with the Secretary of Health and Human Services.

Prior to January 1, 1987, New York State paid the entire 20% coinsurance amount for buy-in crossovers. Effective January 1, 1987, New York changed that practice by enacting the "crossover” regulation (18 NYCRR 360-7.7, originally codified as 360.10). The regulation provided that with respect to crossovers covered by Part B through a buy-in arrangement, New York would not make any coinsurance payments, except when the 80% of reasonable costs that Medicare pays is less than the Medicaid rate, in which case New York would pay the difference. Because the reasonable Medicare charge for a particular service was almost always more than the corresponding scheduled Medicaid fee for that service, providers were invariably unable to collect more than 80% of their reasonable costs or charges for treatment of crossover patients. The regulation also prohibited health care providers from collecting any money from the crossover patients themselves.

On December 19, 1986, defendant sent a letter informing health care providers of the new regulation and instructing them not to submit claims to Medicaid in the event the Medicare payment exceeded the Medicaid fee.

Perales I

In July 1987, plaintiffs New York City Health and Hospitals Corporation (HHC) and Medical Society of the State of New York (Medical Society) commenced an action in United States District Court, seeking injunctive and declaratory relief. Plaintiffs alleged that the crossover regulation violated the Medicare and Medicaid Acts. The District Court granted defendants’ motion for summary judgment dismissing the complaint. The United States Court of Appeals for the Second Circuit reversed and remanded to the District Court for entry of judgment in plaintiffs’ favor (New York City Health & Hosps. Corp. v Perales, 954 F2d 854, cert denied 506 US 972). The Court of Appeals held that the crossover payment limitations violated the Medicare and Medicaid Acts and that plaintiffs were entitled to recover 100% of their reasonable costs or charges (id., at 860).

On June 3, 1992, the District Court vacated its earlier judgment and entered a final judgment declaring the crossover regulations "unlawful and null and void to the extent the same authorize or permit the State of New York to pay less than the full deductible and coinsurance liability incurred under * * * the Social Security Act for qualified Medicare beneficiaries, including persons dually eligible for benefits.” Defendant was "enjoined from implementing the [crossover] Regulations to the extent set forth above” and directed to "pay the full deductible and coinsurance liability incurred under Title XVIII of the Social Security Act.”

After the declaration of invalidity defendant complied with the judgment, but only for services rendered on or after June 3, 1992. Defendant took the position that the judgment did not require it to pay crossover coinsurance claims for services rendered prior to June 3, 1992, as that would constitute retroactive relief which Federal courts are prohibited from ordering under the Eleventh Amendment.

Perales II

On August 28, 1992, plaintiffs moved in District Court for an order holding defendant in contempt of the judgment. The District Court held defendant in contempt, concluding that the judgment entered on June 3, 1992 encompassed all claims properly submittable on that date, and that defendant’s policy was in violation of the judgment (833 F Supp 353, 362), The District Court later modified its opinion, finding that defendant was not in contempt inasmuch as the legal enforceability of the judgment was unclear under the Eleventh Amendment. However, the court stated that defendant was still obligated to pay all claims properly submitted after June 3, 1992 for services rendered prior to that date.

The United States Court of Appeals reversed the District Court’s order only to the extent the court applied the June 3, 1992 judgment retroactively (New York Health & Hosps. Corp. v Perales, 50 F3d 129). The Court of Appeals held that the Eleventh Amendment prohibited Federal courts from ordering defendant to pay retroactive awards to claimants.

The Instant State Litigation

On August 13, 1992, shortly before commencement of Per-ales II, plaintiffs HHC and certain hospitals commenced the first of these two actions to declare unlawful and enjoin defendant’s refusal to pay coinsurance claims for services rendered prior to June 3,1992. On September 1,1992, plaintiffs Medical Society and certain ambulance services commenced the second action, alleging the same causes of action and seeking the same relief. The two actions were consolidated. Plaintiffs’ first cause of action challenges defendant’s refusal to pay claims submitted after June 3, 1992 for services rendered between January 1, 1987 and June 2, 1992. The second and third causes of action allege, in the alternative, that defendant’s implementation of the crossover regulations prior to June 3, 1992 was violative of Federal and State law respectively.

Supreme Court granted plaintiffs’ motions for summary judgment on the complaints and ordered full payment of claims for services rendered between January 1, 1987 and June 2, 1992. The court concluded that because plaintiffs’ claim for declaratory relief was based on the continuing application of the coinsurance regulation, the cause of action accrued continuously. In addition, the court held that plaintiffs’ State law claims were subject to the six-year Statute of Limitations of CPLR 213 (1). Finally, the court concluded that the billing regulation’s 90-day limitation period could not be used to defeat plaintiffs’ right to reimbursement because the delayed submission of claims fell within the "circumstances outside the control of the provider” exception.

The Appellate Division reversed, on the law, and granted defendant’s motions for summary judgment dismissing the complaints. Relying on this Court’s decision in New York City Health & Hosps. Corp. v McBarnette (84 NY2d 194, 200-201), the Court concluded that even if plaintiffs were correct in their assertion that the crossover regulations were void ab initia, plaintiffs’ challenge to the regulation was governed by the four-month limitations period applicable to CPLR article 78 proceedings. The Appellate Division further held that Supreme Court erred in estopping defendant from relying on 18 NYCRR 540.6’s 90-day filing requirement as a defense.

First Cause of Action

Plaintiffs’ first cause of action alleges:

"The Medicaid Act provides ** * * and the U.S. Court of Appeals has so held (NYCHHC v Perales, 954 F2d 854 [2d Cir. 1992]), that a state Medicaid program must make payment of Medicare cost-sharing amounts in full on behalf of crossovers and other QMBs [Qualified Medicare Beneficiaries]. * * * As a consequence of the foregoing, Defendant’s failure and refusal to pay claims submitted or to be submitted after June 3, 1992 for Medicare cost-sharing amounts for services furnished to crossovers and other QMBs between January 1, 1987 and June 2, 1992 violate [Federal and State law] * * * and accordingly are unlawful and invalid.”

Plaintiffs assert that this cause of action is not time-barred, because defendant’s billing regulation authorized them to make their reimbursement claims within 30 days of the June 3, 1992 judgment, and because the present actions were commenced within four months of defendant’s refusal to pay the claims. The billing regulation provides:

"Claims for payment for medical care, services or supplies furnished by any provider * * * must be initially submitted within 90 days of the date the medical care, services or supplies were furnished to an eligible person to be valid and enforceable against the department * * * unless the provider’s submission of the claims is delayed beyond 90 days due to circumstances outside the control of the provider. * * * All claims submitted after 90 days must be * * * submitted within 30 days from the time submission came within the control of the provider” (18 NYCRR 540.6 [a] [1]).

At the outset, it is undisputed that plaintiffs submitted claims for payment within 30 days of the June 3, 1992 judgment. In dispute is whether the delayed submission of claims for pre-June 3, 1992 services was permissible under the billing regulation as due to circumstances outside plaintiffs’ control. The crossover regulation, by its plain terms, foreclosed the possibility of recoupment of any coinsurance amount when the Medicare payment exceeded the Medicaid fee or rate. Indeed, defendant specifically instructed providers not to submit claims to Medicaid when the Medicare payment exceeded the Medicaid rate. Moreover, disregarding defendant’s "claiming instructions” constitutes an "unacceptable practice” that places providers at risk of being sanctioned (see, 18 NYCRR 515.2, 515.3). As Supreme Court aptly noted, "plaintiffs’ reliance on the new regulation itself and on the official instructions on how it should be followed was not only reasonable, it was the only lawful manner in which to proceed. [Plaintiffs] were explicitly told not to file claims and they did not.”

We agree that, the delayed submission of coinsurance claims was due to circumstances beyond plaintiffs’ control and that the billing regulation thus authorized them to submit their claims within 30 days of the judgment declaring the coinsurance regulation invalid. The present actions were promptly commenced within four months of defendant’s refusal to pay the claims in July 1992, and no Statute of Limitations bar is conceivably applicable.

Defendant does not dispute plaintiffs’ assertion that it acted unlawfully in July 1992 in rejecting plaintiffs’ claims for payment. Instead, defendant takes the position that plaintiffs’ first cause of action accrued on January 1, 1987, when the coinsurance regulation went into effect. Defendant contends that plaintiffs were relegated to commencing an article 78 proceeding within four months of that date pursuant to New York City Health & Hosps. Corp. v McBarnette (84 NY2d 194, supra), because their first cause of action is in substance a challenge to the validity of the coinsurance regulation and such a claim could and should have been raised in an article 78 proceeding (see, id., at 205).

Defendant’s argument rests on a mischaracterization of plaintiffs’ first cause of action. The first cause of action is not, as defendant asserts, a challenge to the validity of the coinsurance regulation, but rather challenges the legality of defendant’s July 1992 refusal to pay retroactive coinsurance claims, rendering defendant’s reliance on McBarnette misplaced. Plaintiffs, within 30 days of entry of the June 3, 1992 judgment, submitted claims for payment for services rendered to crossover patients between January 1, 1987 and June 2, 1992. Defendant’s refusal to pay those claims was unlawful, as it was based on defendant’s continued application of the invalidated coinsurance regulation.

Nor does our recent decision in McBarnette dictate an earlier accrual date. McBarnette involved a disputed change in the method used to reimburse hospitals for services rendered to certain patients. Effective January 1, 1987, the defendants changed their existing per diem method of calculating reimbursement to a less favorable per case approach. On July 3, 1989, the Commissioner of Social Services advised hospitals that for patients whose hospital stays "straddled” the period before and after the January 1, 1988 effective date, reimbursement was to be calculated under the new per case method. This July 3, 1989 rate decision was timely challenged in court by the Hospital Association of the State of New York (HANYS) (see, Matter of Hospital Assn. v Axelrod, 165 AD2d 152, lv denied 78 NY2d 853). HHC was aware of the HANYS litigation but chose not to intervene or commence a separate suit. The July 3, 1989 rate decision was ultimately found arbitrary and capricious and the defendants were ordered to repay to HANYS and its members any funds withheld or recouped pursuant to the invalidated rate decision (see, id.). HHC demanded a refund as well, but was refused. HHC commenced the Mc-Barnette declaratory judgment action within four months of that refusal.

This Court held that the declaratory judgment action, for which no specific Statute of Limitations is prescribed, was time-barred because it could have been brought in the form of an article 78 proceeding (McBarnette, supra, at 205). Indeed, HHC’s claim that the rate decision was unlawful and arbitrary and capricious, in that it had no foundation in the governing statutes, was the type of claim plainly encompassed by CPLR 7803 (id.). Furthermore, HHC "lost the right to challenge the validity of the underlying rate decision through its own inaction,” and "had no legal basis for its October 1991 post-HANYS demand for a refund of the moneys that had been recouped pursuant to the recently invalidated 'straddle patient’ policy” (id., at 206). Importantly, however, we noted that HHC’s complaint actually did assert a timely cause of action based on the defendants’ refusal of its demand for a refund, but that cause of action was without independent legal significance because the underlying claim upon which it was based was time-barred (id.).

In contrast with McBarnette, the instant plaintiffs not only asserted a timely cause of action based on defendant’s refusal of their demand for coinsurance payments, they also possessed a sound legal basis for that demand, grounded in their prompt and successful Federal court challenge to the validity of the underlying coinsurance regulation. Unlike HHC’s lack of diligence in McBarnette, these plaintiffs did not "sit on their existing rights pending the outcome of an early challenge brought by others” (id.). Rather, they diligently preserved a sound legal basis for their post -Perales I demand for retroactive coinsurance payments. Accordingly, the first cause of action is not time-barred under McBarnette.

In view of our conclusions, it is unnecessary to address the remaining causes of action in plaintiffs’ complaints.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the order and judgment of Supreme Court, New York County, reinstated.

Chief Judge Kaye and Judges Simons, Bellacosa, Smith and Levine concur; Judge Titone taking no part.

Order reversed, etc.