Commercial Division Blog

Posted: February 24, 2016 / Categories Commercial, Contracts

Party’s Agreement to "Guarantee" Its Own Performance of Contractual Obligation Enforceable as Liquidated Damages Provision

On February 23, 2016, the First Department issued a decision in 70 W. 45th St. Holding LLC v. Waterscape Resort, LLC, 2016 NY Slip Op. 01269, enforcing a written "guarantee" executed by a party to a real estate contract, which provided that the party would forfeit funds deposited in an escrow account if it failed to obtain a Temporary Certificate of Occupancy ("TCO") for a restaurant located in the property purchased under the contract. The court rejected the defendant’s argument that "a party may not 'guaranty' its own performance," explaining:

[T]he label the parties chose to put on the document is irrelevant. It is clear that the agreement was more in the nature of liquidated damages which Waterscape agreed to pay, by way of forfeiture of the Escrow Deposit in the event of its breach. It is uncontested that Waterscape failed to obtain the TCO in the requisite time. Moreover, at the time of the making of the agreement, plaintiff's actual damages could not be calculated, not in the least because the parties could not know in advance how long past the deadline it would be before the TCO would be obtained, or the lost revenue in the interim. Plaintiff has failed to demonstrate that, at the time of the making of the agreement, the damages were reasonably calculable, or that the liquidated amount was grossly disproportionate to the foreseeable actual damages.

(Citations omitted).