Court Holds Party Fails to Make Prima Facie Entitlement to Liquidated Damages Despite Breach of AgreementPrint Article
- Posted on: Jan 15 2020
Commercial contracts typically include a liquidated damages provision that allows for the payment of a predetermined amount of damages in the event of a breach by one of the parties. Courts will sustain such a provision if the liquidated amount is reasonably proportionate to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is grossly disproportionate to the probable loss, then the provision amounts to nothing more than a penalty and will not be enforced. Given the consequences of a liquidated damages clause, it is important to understand when and how such a clause will be enforced.
A Primer on Liquidated Damages
What are Liquidated Damages?
A liquidated damages clause specifies a predetermined amount of damages owed by a party in breach of a contract. The amount is determined by the parties at the time they execute the agreement and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement. Truck Rent-A-Ctr. v. Puritan Farms 2nd, 41 N.Y.2d 420, 424 (1977) (Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”).
Are Liquidated Damages Clauses Enforceable?
If the predetermined amount of damages “is manifestly disproportionate to the actual” harm suffered, courts will not enforce the provision on the grounds that it is a penalty instead of an estimate of actual damages. J.R. Stevenson Corp. v. Westchester Cty., 113 A.D.2d 918, 920 (2d Dept. 1985) (“If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to ‘provide fair compensation but to secure performance by the compulsion of the very disproportion,’” and the clause is unenforceable) (quoting Truck Rent-A-Ctr., 41 N.Y.2d at 424). Whether a contractual provision is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances.” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc., 24 N.Y.3d 528, 536 (2014). Although the party challenging the liquidated damages provision has the burden to prove that the liquidated damages are, in fact, an unenforceable penalty (see JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373, 380 (2005); Parker v. Parker, 163 A.D.3d 405, 406 (1st Dept. 2018)), the party seeking to enforce the provision must have been damaged in order for the provision to apply (see, e.g., J. Weinstein & Sons, Inc. v. City of New York, 264 App. Div. 398, 400 (1st Dept.) (“The proof establishes that no claims were made against defendant and that defendant suffered no financial damage whatsoever.”), aff’d, 289 N.Y. 741 (1942)). The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact, a penalty.
A liquidated damages clause is unenforceable in two circumstances: (1) if the damages flowing from a breach of the contract were easily ascertainable at the time of execution; or (2) if the damages fixed were “conspicuously disproportionate” to the probable losses. Truck Rent-A-Center, 41 N.Y.2d at 425 (explaining that the “actual loss [must be] incapable or difficult of precise estimation” and the amount liquidated must bear “a reasonable proportion to the probable loss.”); JMD Holding, 4 N.Y.3d at 380. New York courts often strike liquidated damage clauses when they fail to meet the foregoing. See, e.g., Sina Drug Corp. v. Mohyuddin, 122 A.D.3d 444, 445 (1st Dept. 2014) (holding that liquidated damages clause providing that defendants would pay $1 million if they refused to indemnify plaintiffs was an unenforceable penalty); Motichka v. Cody, 5 A.D.3d 185, 187 (1st Dept. 2004) (holding that a provision requiring payment of $1,000 per day if defendant failed to pay within 60 days was an unenforceable penalty, since damages were easily ascertainable by calculating interest accrued from the time of the breach); LeRoy v. Sayers, 217 A.D.2d 63, 69-70 (1st Dept. 1995) (invalidating lease term in which the tenant forfeited $63,500 in deposits regardless of whether the tenant terminated agreement with several months’ notice).
“Where the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven.” Brecher v. Laikin, 430 F. Supp. 103, 106 (S.D.N.Y. 1977) (citations omitted).
Rubin v. Napoli Bern Ripka Shkolnik, LLP
On January 14, 2020, the Appellate Division, First Department addressed the enforceability of a liquidated damages clause in an employment agreement, holding that the defendants did not make a prima facie showing of entitlement to those damages. Rubin v. Napoli Bern Ripka Shkolnik, LLP, 2020 N.Y. Slip. Op. 00250 (1st Dept. Jan. 14, 2020) (here).
[Ed. Note: the background discussion below is taken from the motion court’s decision.]
Rubin involved claims brought by plaintiff, Denise A. Rubin (“Rubin”), for, among other things, employment discrimination and breach of contract against her former employers, defendants Napoli Bern Ripka Shkolnik, LLP, Worby Groner Edelman & Napoli Bern, LLP, and Napoli Bern & Associates, LLP (collectively, the “Law Firm Defendants” or the, “Law Firms”), and one of the Law Firms’ partners, defendant Paul J. Napoli (“Napoli”).
Rubin was employed by one or more of the Law Firm Defendants, as an associate attorney and general counsel, from 2003 until September 2014. Rubin entered into a written employment agreement with the Law Firm Defendants in 2004 and again in 2007 (the “Employment Agreement”). The Employment Agreement remained in effect until her employment was terminated in September 2014.
Rubin alleged that during her tenure at the Law Firms, she was paid less in base salary and bonuses than several less experienced and less skilled male attorneys, was denied a promotion to partner when less experienced and less skilled male attorneys were promoted, and was fired without cause when male attorneys with performance issues remained employed. Rubin also claimed that defendants agreed to but did not pay her a guaranteed bonus for matters on which she performed work. She further alleged that after Napoli fired her, she continued to work on the Law Firms’ matters, at the direction of another partner at the Law Firms, but was not paid for the work she performed from October 14, 2014 until early December 2014.
Rubin commenced the action on April 24, 2015 (the “First Action”). The original complaint alleged four causes of action against all defendants: sex-based employment discrimination in violation of the New York City Human Rights Law (“NYCHRL”) (first); breach of contract for failure to pay a promised bonus (second); breach of contract for failure to pay salary or benefits from October 14, 2014 until early November 2014 (third); and quantum meruit, for work performed from October 14, 2014 until early December 2014 (fourth). The Law Firm Defendants answered the complaint in August 2015. Napoli filed a pre-answer motion to dismiss as against him in June 2015, and Rubin cross-moved for sanctions. Napoli’s motion was granted, and Rubin’s cross motion was denied on September 2, 2015.
In October 2015, plaintiff commenced a new action against Napoli (“Second Action”), asserting one cause of action under the NYCHRL for employment discrimination. Napoli moved to dismiss the complaint on res judicata grounds. The court denied Napoli’s motion in February 2016 and consolidated the Second Action with the First Action.
Between March 2016 and July 2016, the parties engaged in motion practice related to, among other things, Napoli’s filing of counterclaims. On September 29, 2016, the court permitted Napoli to amend his answer solely to the extent of permitting him to assert a counterclaim for tortious interference with contractual relations. Napoli appealed the denial of his motion to amend his answer with respect to his other counterclaims. The First Department affirmed the motion court’s decision on June 20, 2017.
In May 2016, Napoli moved to seal documents submitted by Rubin with her papers in support of her motion to dismiss Napoli’s counterclaims. The motion was resolved by stipulation of the parties dated May 17, 2016. One week later, the Law Firm Defendants moved to compel Rubin to return all documents in her possession to which she had access during her employment with the Law Firms, including documents containing confidential, privileged, proprietary or sensitive information related to the Law Firms’ matters and clients. The parties resolved the motion pursuant to a stipulation on June 14, 2016.
On August 18, 2016, the Law Firm Defendants moved for leave to amend their answer to include a counterclaim for breach of contract, alleging that Rubin breached the Employment Agreement by disclosing privileged and confidential information related to the Law Firms’ business and clients, in documents submitted to the court in support of her motion to dismiss Napoli’s counterclaims, and claiming they were entitled to liquidated damages under the contract. The motion court granted the motion on December 5, 2016.
Rubin sought to amend her complaint to add a cause of action for retaliation against all defendants, based on their conduct during the litigations, and to add an additional cause of action for breach of contract against the Law Firm Defendants for failing to provide “tail” insurance. The Law Firm Defendants moved for summary judgment dismissing the second cause of action for breach of contract based on allegations that they failed to pay a non-discretionary bonus to Rubin; and granting judgment in their favor on their breach of contract counterclaim in the amount of $100,000 as liquidated damages.
The motion court denied the Law Firm Defendants’ motion for summary judgment on their counterclaim for liquidated damages.
Defendants claimed that Rubin violated the confidentiality provision of the Employment Agreement by filing four documents with the court during earlier motion practice in the case, and contended that they were entitled to $100,000 in liquidated damages, or $25,000 for each violation, under the agreement. Rubin claimed that she did not believe she was breaching the confidentiality provision of the Employment Agreement when she submitted the documents in question to the court. “Assuming, without deciding, that the four documents at issue, or any one of them, contained confidential ‘business information, trade secrets and other proprietary information and data’ subject to … the Employment Agreement,” the motion court held that it could not determine on the record before it that the disclosure of the information was done “knowingly, intentionally or willfully.” Moreover, the motion court held that defendants failed to demonstrate what, if any, injury or loss they sustained as a result of the disclosure of the four documents at issue.
The First Department’s Decision
The First Department affirmed the denial of the Law Firm’s Defendants’ motion for liquidated damages.
The Court held that although defendants demonstrated that Rubin triggered the liquidated damages provision of the Employment Agreement when she “knowingly, intentionally or willfully” filed the four documents in question, they “did not make a prima facie showing of entitlement to those damages.”
The law firm defendants established as a matter of law that plaintiff violated the confidentiality provision of her employment agreement when she filed four confidential documents – three email chains discussing client and law firm business issues and a written audit report of the firms’ policies and procedures prepared by another law firm – on NYSCEF (New York State Courts Electronic Filing), making them publicly available. At the time of the filing, plaintiff was an attorney licensed in New York and was represented by counsel. Accordingly, under the circumstances, her actions qualified as “knowing, intentional or willful” and triggered the liquidated damages provision of her employment agreement. However, on this record, defendants did not make a prima facie showing of entitlement to those damages.
Slip Op. at *1.
The Court explained that “defendants did not identify … any damages that they sustained as a result of plaintiff’s breach of the agreement.” Id. at **1-2.
Liquidated damages clauses can be found in a wide array of commercial contracts, such as contracts for the sale of real property, commercial leases, employment contracts, and construction contracts. While such provisions are generally enforceable under New York law, Rubin shows that a necessary element of the claim for such damages is injury or damages. Without such proof, the claim for liquidated damages will be denied.