Are liquidated damages clauses enforceable in New York?

The rule is now well established. A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. (City of Rye v. Public Serv. Mut. Ins. Co., 34 N.Y.2d 470, 473, 358 N.Y.S.2d 391, 393, 315 N.E.2d 458, 459, Supra; Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 223, 192 N.E. 297, 301, Supra; Curtis v. Van Bergh, 161 N.Y. 47, 55 N.E. 397; Ward v. Hudson Riv. Bldg. Co., 125 N.Y. 230, 26 N.E. 256, Supra; Restatement, Contracts, § 339.) If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced. (Equitable Lbr. Co. v. IPA Land Dev. Corp., 38 N.Y.2d 516, 521--522, 381 N.Y.S.2d 459, 461--462, 344 N.E.2d 391, 394--395, Supra; Seidlitz v. Auerbach, 230 N.Y. 167, 172--173, 129 N.E. 461, 462--463; 14 N.Y.Jur., Damages, § 155.) In interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for 'liquidated damages', as in this case, or have styled it as a penalty. (E.g., Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 225, 192 N.E. 297, 302, Supra; Ward v. Hudson Riv. Bldg. Co., 125 N.Y. 230, 234, 26 N.E. 256, Supra.) Such an approach would put too much faith in form and too little in substance. Similarly, the agreement should be interpreted as of the date of its making and not as of the date of its breach. (E.g., Seidlitz v. Auerbach, 230 N.Y. 167, 172, 129 N.E. 461, 462, Supra.)

In applying these principles to the case before us, we conclude that the amount stipulated by the parties as damages bears a reasonable relation to the amount of probable actual harm and is not a penalty. Hence, the provision is enforceable and the order of the Appellate Division should be affirmed.

Looking forward from the date of the lease, the parties could reasonably conclude, as they did, that there might not be an actual market for the sale or re-rental of these specialized vehicles in the event of the lessee's breach. To be sure, plaintiff's lost profit could readily be measured by the amount of the weekly rental fee. However, it was permissible for the parties, in advance, to agree that the re-rental or sale value of the vehicles would be 50% Of the weekly rental. Since there was uncertainty as to whether the trucks could be re-rented or sold, the parties could reasonably set, as they did, the value of such mitigation at 50% Of the amount the lessee was obligated to pay for rental of the trucks. This would take into consideration the fact that, after being used by the lessee, the vehicles would no longer be 'shiny, new trucks', but would be used, possibly battered, trucks, whose value would have declined appreciably. The parties also considered the fact that, although plaintiff, in the event of Puritan's breach, might be spared repair and maintenance costs necessitated by Puritan's use of the trucks, plaintiff would have to assume the cost of storing and maintaining trucks idled by Puritan's refusal to use them. Further, it was by no means certain, at the time of the contract, that lessee would peacefully return the trucks to the lessor after lessee had breached the contract.

With particular reference to the dissent at the Appellate Division, it is true that the lessee might have exercised an option to purchase the trucks. However, lessee would not be purchasing 25 'shiny, new trucks' for a mere $2,500. Rather, lessee, after the passage of one year from the commencement of the term, could have purchased trucks that had been used for at least one year for the amount outstanding on the bank loan, in addition to the $2,500. Of course, the purchase price would be greater if the option were exercised early in the term rather than towards the end of the term since plaintiff would be making payments to the bank all the while. ² More fundamental, the existence of the option clause has absolutely no bearing on the validity of the discrete, liquidated damages provision. The lessee could have elected to purchase the trucks but elected not to do so. In fact, the lessee's letter of termination made a point of the fact that the lessee did not want to purchase the trucks. The reality is that the lessee sought, by its wrongful termination of the lease, to evade all obligations to the plaintiff, whether for rent or for the agreed upon purchase price. Its effort to do so failed. That lessee could have made a better bargain for itself by purchasing the trucks for $48,134.17 ³ pursuant to the option, instead of paying $92,341.79 in damages for wrongful breach of the lease is not availing to it now. Although the lessee might now wish, with the benefit of hindsight, that it had purchased the trucks rather than default on its lease obligations, the simple fact is that it did not do so.

We attach no significance to the fact that the liquidated damages clause appears on the preprinted form portion of the agreement. The agreement was fully negotiated and the provisions of the form, in many other respects, were amended. There is no indication of any disparity of bargaining power or of unconscionability. The provision for liquidated damages related reasonably to potential harm that was difficult to estimate and did not constitute a disguised

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penalty. We also find no merit in the claim of trial error advanced by Puritan.

It is well settled that parties to an agreement may provide for the payment of liquidated damages upon its breach, and such damages will be upheld if (1) the amount fixed is a reasonable measure of the probable actual loss in the event of breach, and (2) the actual loss suffered is difficult to determine precisely (see, Truck Rent-A Center v. Puritan Farms, 41 N.Y.2d 420, 393 N.Y.S.2d 365, 361 N.E.2d 1015; City of Rye v. Public Serv. Mut. Ins. Co., 34 N.Y.2d 470, 473, 358 N.Y.S.2d 391, 315 N.E.2d 458; see also, Lavington v. Edgell, 127 A.D.2d 155, 512 N.Y.S.2d 817). However, if the liquidated damages do not bear a reasonable proportion to the loss actually sustained by a breach, they will constitute an unenforceable penalty (Consolidated Rail Corp. v. MASP Equip. Corp., 67 N.Y.2d 35, 499 N.Y.S.2d 647, 490 N.E.2d 514; Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 192 N.E. 297; National Telecanvass Assoc. v. Smith, 98 A.D.2d 796, 470 N.Y.S.2d 22). The rule was clearly stated in X.L.O. Concrete Corp. v. Brady & Co., 104 A.D.2d 181,

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183-184, 482 N.Y.S.2d 476, affd. 66 NY2d 970, 498 N.Y.S.2d 799, 489 N.E.2d 768), as follows:

"If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to 'provide fair compensation but to secure performance by the compulsion of the very disproportion' * * * Thus, the rule has evolved that when the damages flowing from the breach of a contract are easily ascertainable, or the damages fixed are plainly disproportionate to the injury, the stipulated sum will be treated as a penalty * * * but, where they are uncertain, or difficult, if not incapable, of ascertainment, then a provision liquidating them in advance of loss will be enforced, if the amount liquidated bears a reasonable proportion to the probable loss * * * Whether the sum stipulated represents a liquidation of the anticipated damages or a penalty is a question of law, with due consideration for the nature of the contract and the attendant circumstances * * * Moreover, the agreement should be interpreted as of the date of its execution, not the date of its breach" (citations omitted).

Liquidated damages clauses are suited to factual situations where there is uncertainty concerning the measure of damages (see, Morgan Servs. v. Lavan Corp., 59 N.Y.2d 796, 797, 464 N.Y.S.2d 733, 451 N.E.2d 480 [the liquidated damages clause in a contract for the rental of uniforms held valid in an action for loss of future profits in that it "bore a reasonable relation to the amount of probable actual harm for breach of that contract, there being uncertainty concerning the re-rental or sale value of the uniforms"] ).

However, where there is doubt as to whether a provision constitutes an unenforceable penalty or a proper liquidated damage clause, it should be resolved in favor of a construction which holds the provision to be a penalty (City of New York v. Brooklyn & Manhattan Ferry Co., 238 N.Y. 52, 56, 143 N.E. 788; Vernitron Corp. v. CF 48 Associates, 104 A.D.2d 409, 478 N.Y.S.2d 933; National Telecanvass Assoc. Ltd. v. Smith, 98 A.D.2d 796, 470 N.Y.S.2d 22, supra; see also, Schiffman v. Deluxe Caterers of Shelter Rock., 100 A.D.2d 846, 474 N.Y.S.2d 87).

Applying the principles of "liquidated damages" law to the facts of this case, it is clear that the stipulated loss which would occur as a result of a single default by the husband in any payment, such as a short delay in the payment of child support, would be clearly disproportionate to the amount of the actual damages. Moreover, the actual loss attributable to these late payments of support is readily ascertainable and is, therefore, an inappropriate area for the application of liquidated damages.

For the purpose of determining the validity of the liquidated damages clause, the weekly support payments in this case are analogous to monthly rental payments under a lease. In Gilad Realty Corp. v. Ripley Pitkin Ave., 48 A.D.2d 683, 368 N.Y.S.2d 228, the parties entered into an agreement to extend a long-term lease and reduce the monthly payments. Upon the tenant's default, under a "liquidated damages" clause in the extension agreement, the landlord sought to recover the difference between the original and the reduced rent for the entire term of the extension, a period of 225 months at $375 per month. This court invalidated the clause as a penalty, holding:

"We cannot agree with plaintiff. To do so would give it the benefit of a penal forfeiture. As was stated in Manhattan Syndicate v Ryan (14 AD2d 323, 327 ), 'it is a relevant general rule that a failure to pay a sum of money due will rarely, if ever, justify a further sum, in excess of interest, to be paid by way of liquidated damages. On the contrary, such a requirement is likely to be condemned as a penal forfeiture which the law will not recognize'. Here, the damages claimed by plaintiff and awarded by Special Term (in excess of $91,000) are clearly disproportionate to the actual loss resulting from the nonpayment of several months' rent. The amount of that loss is readily ascertainable and, despite the finding by Special

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Term that there was no ambiguity as to the intent of the parties, that is all that should be awarded" (Gilad Realty Corp. v. Ripley Pitkin Ave., supra, at 683-684, 368 N.Y.S.2d 228).

Similarly, in Vernitron Corp. v. CF 48 Associates, supra, the "liquidated damages" clause in the lease provided for additional damages in a sum equivalent to one year's rent in the event of a default under the terms of the lease, including nonpayment of rent. This court struck down the patent attempt to penalize a defaulting tenant, as follows:

"In the case at bar, it is clear that the loss which might occur as a result of certain minor defaults under the lease (i.e., for a two-day delay in payment of rent) would be clearly disproportionate to the amount of liquidated damages. Moreover, the loss attributable to certain defaults such as late payment of rent is clearly readily ascertainable and is inappropriate for application of liquidated damages. In conclusion, we find that on its face the clause in question was a penalty rather than a legitimate liquidated damages clause and unenforceable as a matter of law" (Vernitron Corp. v. CF 48 Assocs., supra 104 A.D.2d at 410, 478 N.Y.S.2d 933).

III

In the instant case, the purported liquidated damages would require the husband to pay "maintenance" to the wife in the amount of $5,720 per year in addition to the child support agreed upon, retroactive to March 2, 1984, and continuing into the future until either the wife or husband dies or, if the wife remarries, until the youngest child reaches majority. As noted above, by the express terms of this clause, the additional "maintenance" payments of $5,720 per year would be continued even if the wife remarries, albeit nominally disguised in the form of child support. As the youngest child will reach the age of majority on August 28, 1993, a single untimely payment of child support would trigger a "liquidated damages" payment of nearly $54,750. Such "liquidated damages" are clearly out of all proportion to the actual damages which could be caused by the husband's breach, namely, the accrual of arrears which are readily ascertainable and can be precisely fixed. The wife has demonstrated no damage as a result of a breach caused by late payments which would render the enforcement of this penalty anything less than an unconscionable windfall.

Without enforcement of the provision, the parties are left in relatively equal positions: the husband has paid and must continue to pay the required support and, if not, as is the case with other litigants in her position, the wife may obtain a judgment for any arrears together with interest and costs. On the other hand, enforcing the provision would improperly punish the husband and award the wife an undeserved gain. Without having demonstrated injury and having received virtually all the money to which she is entitled, she would receive back payments of alimony, which the parties had determined in February 1984 were not actually necessary for her support, and would continue to receive them despite the fact that her remarriage would have made her ineligible for them according to the terms of the judgment of divorce. Such a result is inherently inequitable and will not be sanctioned.

In sum, we find that the clause at issue in the stipulation of February 29, 1984, is a penalty rather than a liquidated damage clause and is unenforceable as a matter of law.

This appeal principally involves a liquidated damages clause — the Agreement's provision for an early termination fee — considered by the courts below to be a penalty and therefore unenforceable. Whether the early termination fee represents an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances (Mosler Safe Co. v Maiden Lane Safe Deposit Co., 199 NY 479, 485

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[1910]; Leasing Serv. Corp. v Justice, 673 F2d 70, 74 [2d Cir 1982]). The burden is on the party seeking to avoid liquidated damages — here, JMD — to show that the stated liquidated damages are, in fact, a penalty (P.J. Carlin Constr. Co. v City of New York, 59 AD2d 847 [1st Dept 1977]; Wechsler v Hunt Health Sys., 330 F Supp 2d 383, 413 [SD NY 2004]). Further, "[w]here the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven" (Brecher v Laikin, 430 F Supp 103, 106 [SD NY 1977] [citations omitted]; see also 3 Farnsworth, Contracts § 12.18, at 304 [3d ed] [where a liquidated damages provision is an unenforceable penalty, "the rest of the agreement stands, and the injured party is remitted to the conventional damage remedy for breach of that agreement, just as if the provision had not been included"]).

In Truck Rent-A-Center, we characterized liquidated damages as "[i]n effect, . . . an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement" (41 NY2d at 424). We called the distinction between liquidated damages and a penalty "well established":

"A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced" (id. at 425 [citations omitted]).

Thus, JMD must demonstrate either that damages flowing from a prospective early termination were readily ascertainable at the time Congress and JMD entered into their revolving loan agreement, or that the early termination fee is conspicuously disproportionate to these foreseeable losses. Relatedly, we have cautioned generally against interfering with parties' agreements (see Fifty States Mgt. Corp. v Pioneer Auto Parks, 46 NY2d 573, 577 [1979] ["Absent some element of fraud, exploitive overreaching or unconscionable conduct . . . to exploit a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties"]; cf. 3 Farnsworth, Contracts § 12.18, at 303-304 [3d ed] ["(I)t has

[4 N.Y.3d 381]

become increasingly difficult to justify the peculiar historical distinction between liquidated damages and penalties. Today the trend favors freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation"]; see also XCO Intl. Inc. v Pacific Scientific Co., 369 F3d 998, 1002-1003 [7th Cir 2004] ["The rule (against penalty clauses) hangs on, but is chastened by an emerging presumption against interpreting liquidated damages clauses as penalty clauses"]).

The conclusory affidavit of JMD's president, which relied entirely on the memorandum of law prepared by JMD's attorney, provides no factual basis to support any conclusion that the early termination fee was an unenforceable penalty (see e.g. Bush v St. Clare's Hosp., 82 NY2d 738 [1993]). JMD presented no proof to show that Congress's prospective damages upon early termination were capable of precise estimation at the time the parties executed the Agreement, or that the early termination fee was grossly disproportionate to this probable loss.

Congress, which did not cross-move for summary judgment, has asked us nonetheless to grant it this relief or, in the alternative, to determine that material triable issues of fact remain. While Supreme Court and the Appellate Division may search the record and grant summary judgment to a nonmoving party (see CPLR 3212 [b]), we may not (Merritt Hill Vineyards v Windy Hgts. Vineyard, 61 NY2d 106, 110-111 [1984]). Upon remittal of this matter to Supreme Court, however, Congress may seek summary judgment if it is so advised.

The court also improperly dismissed so much of plaintiff's first cause of action as claimed nearly $19,000 from a liquidated damages clause in an agreement signed by defendant, by which she agreed to provide plaintiff with timely financial statements as a result of her default on some $500,000 of apparent debt, and to pay "at least an additional $50" for each day that such statements were late. The statement in the agreement that this

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$50 per day "shall not be indicative of the actual damage" is not an admission that it bears no reasonable relationship to the actual damages, but appears to be no more than a recognition of the fact that such liquidated damages may only be enforced when the actual damages are difficult or impossible to ascertain (see Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420, 425 [1977]). Defendant correctly notes that there is no evidence that this liquidated damages amount bears a reasonable relationship to the actual damages plaintiff suffered. However, there is also no evidence that it does not. "The burden is on the party seeking to avoid liquidated damages ... to show that the stated liquidated damages are, in fact, a penalty," and to "demonstrate either that damages flowing from [the breach] were readily ascertainable at the time [the parties] entered into their ... agreement, or that the [liquidated damages] fee is conspicuously disproportionate to these foreseeable losses" (JMD Holding Corp. v Congress Fin. Corp., 4 NY3d 373, 380 [2005]). It is defendant, not plaintiff, who has failed to carry her burden.

A liquidated damages clause based upon gross revenue is unenforceable. See McRoberts Protective Agency v. Lansdell Protective, 61 A.D.2d 655, 403 N.Y.S.2d 511 (1st Dept 1978), holding that it is error to base damages upon estimated gross profits rather than estimated net profits.

In the case at bar, Plaintiff seeks to recover 30% of full time (2080) hours at the annualized cost for services or $13,728. The record shows that Ms. Parker worked two hours a day for five days a week. Plaintiff billed Defendants $22 per hour, paid Ms. Parker $12 per hour, and received a net profit of $10 per hour. On an annual basis, Plaintiff's damages would equal $5,200 based upon Ms. Parker working 520 hours a year ($10 net profit per hour which Plaintiff earned times the yearly total of 520 hours). At most, Plaintiff would be entitled to its net profit, if it could provide a basis for recovery. See Weinrauch v. Kashkin, 64 A.D.2d 897, 407 N.Y.S.2d 885 (2d Dept 1978); Scientific Mgt. Inst. v. Mirrer, 29 A.D.2d 962, 289 N.Y.S.2d 338 (2d Dept 1968); and Epstein Engineering P.C. v. Cataldo, 2012 WL 4835533 (Sup Ct, N.Y. County 2012).

The court finds that Paragraph 5.0 of the Contract is unenforceable for two reasons: (1) the damages fixed are disproportionate to Plaintiff's injury, and (2) Plaintiff's actual loss is able to be calculated based upon the hours worked by Ms. Parker.

In Construction by Singletree, Inc. v. Lowe, 55 A.D.3d 861, 864, 866 N.Y.S.2d 702 (2d Dept 2008), the Court voided the liquidated damage clause because:

J.C. also established its prima facie entitlement to judgment as a matter of law in connection with Lowe's liquidated damages claim. Although the parties to an agreement may provide for the payment of liquidated damages upon breach of the agreement, such a provision will only be upheld if the amount fixed is a reasonable measure of the probable actual loss in the event of a breach, and the actual loss suffered is difficult to determine precisely (see Truck Rent–A–Ctr. v. Puritan Farms 2nd, 41 N.Y.2d 420, 423–424 [1977]; Willner v. Willner, 145 A.D.2d 236, 239–240 [1989]). Here the liquidated damages clause is unenforceable under any circumstances since the damages fixed are disproportionate to the injury, actual loss is susceptible of calculation and, as admitted by Lowe in his deposition, the sole purpose of the subject provision was to improperly secure J.C.'s performance of the agreement by compulsion (see Truck Rent–A–Ctr. v. Puritan Farms 2nd, 41 N.Y.2d at 425, 393 N.Y.S.2d 365, 361 N.E.2d 1015; Evangelista v. Ward, 308 A.D.2d 504, 505 [2003]; Irving Tire Co. v. Stage II Apparel Corp., 230 A.D.2d 772, 773–774 [1996]; Willner v. Willner, 230 A.D.2d at 241, 656 N.Y.S.2d 283).

The above law supports this court's ruling that Paragraph 5.0 is unenforceable.