The New York Court of Appeals’ 4-3 split decision in The Trustees of Columbia University in the City of New York v. D’Agostino Supermarkets, 36 N.Y.3d 69 (2020) called into doubt the predictability of the courts’ treatment of what most considered a rock-solid contractual term: liquidated damages. See Adam Leitman Bailey and Dov Treiman, “An Unsettling Decision for Liquidated Damages in Settlement Agreements,” New York Law Journal (Feb. 16, 2021). The majority found that the liquidated damages clause in a surrender agreement for a commercial lease between two well-counseled sophisticated parties constituted an unenforceable penalty because it resulted in liquidated damages grossly disproportionate to the amount of actual damage (seven times the actual damage). The dissent, focusing on freedom of contract, would have upheld the provision as not violating public policy.
The potential determination that liquidated damages are not necessarily exempt from a “disproportionality” challenge is not the only aspect of liquidated damages that is potentially problematic, especially in the context of construction contracts. As a result, careful attention must be paid to the development and drafting of liquidated damages provisions in operating under New York law.