Tag: contracts

A clause that addresses damages in a lease agreement between an automobile dealership and the owner of a lot on which the dealer stored cars cannot be enforced because it operates as a penalty, a New York State appeals court in Brooklyn has ruled.

The dispute began in 2008, when the parties agreed that Westbury Jeep Chrysler Dodge (Westbury) would store vehicles on a month-to-month basis on an undeveloped lot owned by the plaintiff. Three years later, they amended the agreement to move the vehicles to a different part of the lot after the owner of the property agreed to lease to a third party the portion previously occupied by Westbury.

The amended agreement, which required Westbury to vacate the original portion of the lot by April 15, 2012, obligated the dealer to pay damages in the amount of $5,000 per day for every day after that deadline that it remained in possession of the original portion. Westbury did not vacate until May 11, allegedly forcing a delay in the start of the owner’s lease with the third party.

The owner accused Westbury of breach of contract and sued to recover $130,000 in damages ($5,000 per day for 26 days). Westbury asked the court to dismiss the damages claim, noting that the delay in starting the lease cost the property owner $57,415. The difference, Westbury charged, constituted a penalty that was disproportionate to the injury suffered by the property owner and therefore unenforceable.

The Appellate Division, Second Department agreed. “Here, [Westbury] demonstrated… that the amended agreement imposed an unenforceable penalty…,” Justice Mark Dillon wrote on behalf of three of his colleagues in a decision on April 12.

The ruling turned on the treatment of so-called liquidated damages (the provision calling on Westbury to pay $5,000 for each day of delay), which represent an estimate by parties to a contract of the extent of injury that a party would suffer in the event of a breach.

Liquidated damages will be upheld when the parties to a contract would otherwise have had difficulty ascertaining damages when they formed the contract and the damages themselves represent a reasonable forecast of the cost of compensating the non-breaching party.

Courts generally will not enforce liquidated damages that impose a penalty or forfeiture. As the Court of Appeals wrote 40 years ago in a ruling that explains the limits of liquidated damages:

A liquidated damage provision has its basis in the principle of just compensation for loss. A clause which provides for an amount plainly disproportionate to real damage is not intended to provide fair compensation but to secure performance by the compulsion of the very disproportion.

In the lawsuit against Westbury, the trial judge concluded that consideration of the claims concerning liquidated damages was premature because questions of fact remained as to who breached the amended agreement.

The Appellate Division disagreed. “The issue of whether the liquidated damages clause is enforceable is readily determinable as a matter of law, without consideration of the unresolved factual issues in this case,” Dillon wrote.

A battle between siblings over their mother’s estate shows that you can hold someone to their promise if you rely in good faith on that person’s word to your disadvantage, a state appeals court in Manhattan has ruled.

The ruling reinstates a lawsuit by Peter Castellotti to force his sister Lisa to give him half of John’s Pizza in Midtown and other assets she inherited from their mother Madeline.

After Madeline’s death in 2005, Peter and Lisa orally agreed that Peter would pay the taxes on Madeline’s estate with his share of the proceeds from a life insurance policy held by Madeline. In exchange, Lisa promised to give Peter half the inheritance after his divorce from his then-wife Rea and half the income and proceeds generated from the estate before the divorce was final.

After she became ill, Madeline disinherited Peter to prevent Rea from obtaining any of her assets, which besides the pizzeria included a 51% stake in a real estate partnership, a house on Staten Island and funds held in various bank accounts.

Lisa allegedly also agreed to obtain a $5 million life insurance policy that named Peter as beneficiary and to maintain that policy until she transferred the assets to Peter.

After Lisa let the insurance policy lapse in May 2012, Peter sued for breach of contract, charging her with failing to transfer half of Madeline’s assets to him after his divorce became final in November 2008. Lisa countered that Peter’s claim was barred by New York’s statute of frauds, which requires that an agreement to name a beneficiary of a life insurance policy be in writing.

The trial court sided with Lisa and dismissed the case after ruling that because part of the contract was invalidated by the statute of frauds, the entire contract was void. The appeals court disagreed. Associate Justice Rosalyn Richter, writing for the panel, explained:

Here, the allegations of the complaint show an unambiguous promise by Lisa to provide Peter with half of the income generated by the assets during the pendency of Peter’s divorce, to transfer half of the assets upon the finality of the divorce, and to name Peter as sole beneficiary of a life insurance policy of at least $5 million. The complaint’s allegations also show that Peter detrimentally relied on those promises by paying a substantial amount in taxes for Madeline’s estate, and suffered resulting monetary damages.

According to Richter, the trial court properly rejected an assertion by Peter that his paying the taxes on the estate meant that the statute of frauds did not apply.

Still, fairness compelled the court to reinstate the court case. “The theory of unjust enrichment is not precluded by the statute of frauds because it is not an attempt to enforce the oral contract but instead seeks to recover the amount by which Lisa was enriched by Peter’s expense,” Richter explained.