Plaintiffs Cannot Avoid Application of Liquidated Damages Clause

On February 8, 2021, Justice Sherwood of the New York County Commercial Division issued a decision in Raven Capital Mgt. LLC v. Georgia Film Fund 72, LLC, 2021 NY Slip Op. 30393(U), rejecting plaintiffs' attempt to avoid the application of a liquidated damages clause, explaining:

Defendant successfully argues that plaintiffs cannot recover more than the $250,000 Break-Up Fee as damages for breach of the Term Sheet. A break-up fee provision is a liquidated damages clause, providing an estimate the parties made regarding damage if one party breached. Determining whether a liquidated damages provision is enforceable is a question of law which requires the court to look to whether: (i) actual damages would be difficult to determine; and (ii) the sum stipulated is plainly disproportionate to the possible loss. Courts should invalidate a liquidated damages clause only in rare cases. Here, as the Term Sheet was merely a contract setting out terms for the parties to negotiate a subsequent Distribution Agreement, a calculation of actual damages may not be permitted as courts have held that plaintiffs may not recover consequential damages for breach of an exclusive negotiating contract. Plaintiffs fail to rebut this presumption, first arguing that the Break Up Fee does not necessarily apply as the complaint alleges only GFF's breach of the Exclusivity Period, but not triggering of the Break-Up Fee which required GFF to either enter into any Competing Transaction which may be an alternative to the Term Sheet or agree in writing to accept an alternative distribution. This argument, however, fails as plaintiffs' complaint specifically alleges that GFF breached the Exclusivity Provision of the Term Sheet by entering into a Competing Transaction with another third-party distributor. Plaintiffs' argument, that even if the Break-Up fee applies, plaintiffs may still recover for other actual damages, is similarly unavailing because, as stated above, consequential damages are not available for breach of exclusive negotiating contracts. Plaintiffs, however, may avoid dismissal of their claim for equitable relief as the Term Sheet does not explicitly bar such remedies. Consequently, defendant's argument limiting plaintiffs' monetary recovery must be sustained.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. Parties can agree beforehand on the damages that will result from a breach of contract, but there still might be a dispute over whether such an agreement is enforceable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforcement of a liquidated damages provision.