Liquidated Damages Clause Found to be Unenforceable Penalty

On January 29, 2019, the First Department issued a decision in Trustees of Columbia Univ. in the City of N.Y. v. D'Agostino Supermarkets, Inc., 2019 NY Slip Op. 00551, holding a liquidated damages clause to be an unenforceable penalty, explaining:

We find that the damages at the time of the Surrender Agreement were ascertainable. Columbia's attempt to enforce the liquidated damages provision sought to secure performance by threat of a large payment rather than to provide a reasonable assessment of probable damages.

We also find that the liquidated damages provision is unenforceable as unreasonable and confiscatory, since it would result in an award 7½ times the amount that Columbia would have received if the Surrender Agreement had been fully performed.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, agreeing beforehand on the damages that will result from a breach of contract does not always result in an enforceable agreement. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.