When NY businesses contract with others, and those contracts include a clause for liquidated damages, be careful that your New York liquidated damage clause is enforceable in New York and not a mere penalty, or you may have negotiated your way into a New York 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, which is damage calculation, typically, used when:
- damages are difficult or impossible to calculate; and
- where the amount agreed upon bears a reasonable relationship to the probable loss.
Our New York law office drafts, has enforced and has challenged liquidated damage clauses in numerous industries including real estate, service agreements, supply agreements and vendor agreements.
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, typically, enforced because the Court will consider it a mere 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 is a mere 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.
Please avoid simply clipping a clause off the internet and having someone experienced in New York law discuss with you your business needs and draft an appropriate agreement that includes, if necessary, a New York-focused liquidated damages clause.