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HERE THE LIQUIDATED DAMAGES CLAUSE WAS DEEMED AN UNENFORCEABLE PENALTY BECAUSE THERE WAS NO RELATONSHIP BETWEEN THE AMOUNT OF THE LIQUIDATED DAMAGES AND THE ACTUAL DAMAGES (SECOND DEPT). ​

The Second Department noted that a liquidated damages clause in a contract will constitute an unenforceable penalty if the amount bears no relation to the actual damage. Here, pursuant to the real estate purchase agreement,  $35,000 was put in escrow pending the resolution of three open building permits. The purchaser demanded the escrow funds because two of the three building permits remained open. The Second Department found there was no relationship between the $35,000 liquidated damages and the actual damage:

… [T]he record demonstrates that the sum deposited into the escrow account had no relationship to the estimated cost of “closing out” the open building permits in relation to the subject improvements to the property. Furthermore, the record demonstrates that at the time that the escrow agreement was entered into, the estimated actual damages were readily ascertainable. Under these circumstances, the purported liquidated damages clause constituted an unenforceable penalty … . Schmuelian v Bichoupan, 2024 NY Slip Op 01738, Second Dept 3-27-24

Practice Point: A liquidated damages clause will not be enforced if the amount has no relationship with the actual damages. In that circumstance the liquidate damages constitute an unenforceable penalty.

 

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