SUPREME COURT SHOULD NOT HAVE, SUA SPONTE, DETERMINED THE PROVISION OF AN “AGREEMENT OF PURCHASE AND SALE OF STOCK” WHICH CALLED FOR RECOVERY OF DOUBLE ATTORNEYS FEES BY THE PREVAILING PARTY IN LITIGATION WAS AN UNENFORCEABLE PENALTY (SECOND DEPT).

The Second Department determined Supreme Court should not have, sua sponte, held that the provision of the “Agreement of Purchase and Sale of Stock” (PSA) which awarded double attorney’s fees if litigation resulted from a breach was an unenforceable penalty. The decision, which includes legal analysis well worth reading, is a complex discussion of the covenant not to compete and the nonsolicitation agreement which is too detailed and fact-specific to summarize here. There is an extensive dissent. With respect to the “double attorney’s fees” provision, the court wrote:

We disagree with the Supreme Court’s sua sponte determination that the provision of the PSA, which, in the event of litigation, allows for a recovery of double the amount of attorneys’ fees expended by the substantially prevailing party, is an unenforceable penalty. When parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms … . Paragraph 10.11 of the PSA clearly sets forth the intent of the parties, two sophisticated businesspeople with the benefit of counsel, that, should litigation arise out of the PSA, the “substantially prevailing party” is entitled to two times reasonable attorneys’ fees. Where, as here, “there is no deception or overreaching” in the making of such agreement, the agreement should be enforced as written … . Moreover, while each party asserted in the Supreme Court, and asserts on appeal, that he should prevail and be treated as the prevailing party for the purpose of paragraph 10.11, neither party contended in the Supreme Court that the double attorneys’ fees provision of paragraph 10.11 should not be enforced. Loughlin v Meghji, 2020 NY Slip Op 05196, Second Dept 9-30-20