When NY businesses contract with others, and those contracts include a clause for liquidated damages, be careful that it is enforceable and proper, and not a penalty, or you are negotiating your way into Court!
In New York, parties generally are free to set the terms of their own contracts and may agree on the damages for breach in certain circumstances.
Specifically, parties are free to agree to liquidated damages clauses, which is an agreement in advance of any breach as to what amount of damages are due where (1) they are difficult or impossible to calculate and (2) where the amount agreed upon bears a reasonable relationship to the probable loss.
Our law office sees these a lot in contracts for services, like alarm services, and also in installment agreements where timely performance is necessary to maintain value.
On the other hand, when damages resulting from a breach are readily calculable or where the agreed upon amount is grossly disproportionate to the probable loss, a liquidated damages clause agreed upon in advance is not enforced because the Court will consider it a penalty.
Penalties are unenforceable on public policy grounds in New York – even if you asked for the penalty! Courts do not want businesses fearing economic hardship in order to grant a windfall over and above a harm that can be actually measured.
Courts will also consider a number of other factors that may tip the balance in Court to determine whether a liquidated damages clause is enforceable or a penalty, such as:
- whether both parties were sophisticated in nature;
- whether both sides were represented by counsel; and
- whether the clause was bargained for at arms-length.
*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.
Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.
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