Whether Liquidated Damages Clause is Properly Invoked Depends on Whether Actual Damages Can be Determined

Zeer v. Azulay, 2008 WL 1134239 (N.Y. App. Div. Apr. 8, 2008)

In this case, defendant contractors agreed to construct a home on property owned by plaintiffs pursuant to a written contract executed by the parties in September 2003.  The parties agreed that if the contractor did not complete the project by February 29, 2004 and obtain a certificate of occupancy, it would be liable for liquidated damages of $250 per day until the work was completed.

After defendants failed to obtain the certificate of occupancy, the parties entered into a stipulation of settlement in December 2004, agreeing that defendants would obtain the certificate of occupancy within 25 days or be subject to the liquidated damages provision set forth in the original contract.  The stipulation also provided that if any party filed liens or encumbrances on any other party’s properties, the filing party would be liable for liquidated damages equal to double the amount of the lien or encumbrance.  By July 2005, the contractor had still not obtained the certificate of occupancy and the plaintiffs moved for liquidated damages of $250 per day from February 29, 2004.

In August 2005, the plaintiff sold the premises to a third party for $580,000.  The same day, defendants moved for summary judgment to restrain plaintiffs from selling the premises and were granted a TRO.  On September 2, defendants obtained the certificate of occupancy.

On September 16, 2005, the court entered judgment against defendants and ordered them to pay liquidated damages of $250 per day for the period February 29, 2004 through September 2, 2005.  Plaintiffs moved to amend the judgment, seeking additional damages because the TRO denied them access to their corporate bank account.  The judgment was amended in February 2006 to include damages equal to half the balance of the bank account.  Both sides appealed.

The Appellate Division reversed the judgment, holding that the record was insufficient to show whether the liquidated damages clause was properly triggered.  The court noted that a defendant seeking to invalidate a liquidated damages clause must prove that the damages are not a reasonable measure of the plaintiff’s actual loss and that the actual loss was readily ascertainable at the time the agreement was entered into.  These determinations, according to the court, required a plenary hearing.  The court further noted that the lower court’s decision regarding whether the TRO imposed a lien or encumbrance on plaintiffs’ bank account was premature and should be addressed at the plenary hearing.