Commercial Division Blog
Contract's Liquidated Damages Clause Held to be an Unenforceable Penalty
On November 30, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Perseus Telecorn, LTD. v. Indy Research Labs, LLC, 2018 NY Slip Op. 33083(U), holding that a contract's liquidated damages clause was an unenforceable penalty, explaining:
Moreover, even if, as Perseus alleges, Indy had agreed to the terms of the Master Services Agreement, the damages clause of the Master Services Agreement is unenforceable. Liquidated damages are 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. In Truck Rent-A-Center, the Court of Appeals stated that:
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.
Here, the liquidated damages clause of the Master Services Agreement is unenforceable because it is a penalty. Since the cost of the collocation services to be provided by Perseus is readily ascertainable from the foe schedule attached to the Service Order Form, Perseus cannot claim that its damages were impossible to determine at the time it and Indy executed the Service Order Form. actuality the plain language of the "Approval" section resolves any disputes between the terms of the Service Order Form and the Master Services Agreement in favor of the terms expressed in the Service Order Form. See Comp.
Further, the liquidated damages amount is $1,250,650, when Perseus's actual damages are approximately $170,000. Notably, the liquidated damages amount is more than seven times that of Perseus's actual damages.
(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 email@example.com if you or a client have questions regarding proving damages.