The Appellate Division, Second Department held in Loughlin v. Meghji, 186 A.D.3d 1633, on Sept. 30, 2020, that a provision of a commercial contract requiring the payment of double the amount of attorney fees expended by the “substantially prevailing party” in a litigation between the contracting parties is not an unenforceable penalty. While some may believe that this particular provision is, in fact, a penalty, the court’s mode of analysis in reaching that result is the more important takeaway for commercial lawyers.

Instead of focusing on the more traditional factual inquiries in determining the enforceability of such provisions, the court in Loughlin invoked the simpler rule that sophisticated commercial parties should be held to the terms of the contract that they signed onto. It remains to be seen whether Loughlin signals a growing shift in how New York courts treat such provisions in commercial contracts, and whether this new approach knows any boundaries.