In many long-term contracts, such as in the services industry, it has become rather commonplace for the service provider to insert a liquidated damages clause, which essentially sets forth the specific damages they will be entitled to if the recipient terminates the contract prematurely.

As I’m sure you know, not all liquidated damages clauses are enforceable under New York law; on the other hand, not all of them are unenforceable either.

To the contrary, New York’s courts have long held (as far back as 1977) that  “a liquidated damages provision is enforceable where the fixed amount bears a ‘reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation’ (JMD Holding Corp., supra, 4 N.Y.3d at 380, 795 N.Y.S.2d at 507 (quoting Truck Rent-A-Center v. Puritan Farms 2nd,Inc., 41 N.Y.2d 420, 425, 393 N.Y.S.2d 365, 369 (1977)).”

New York’s courts have shown an increasing tendency to honor these provisions when they are mutually negotiated between two sophisticated businesses that are on equal, or roughly equal footing; conversely, the courts have refused to honor liquidated damage provisions where they are a penalty that is out of scale with foreseeable losses, or where the provisions are being unilaterally imposed by one side on a far weaker second half to a deal, which is also known as “unconscionability.” JMD Holding Corp., supra, 4 N.Y.3d at 378-85, 795 N.Y.S.2d at 506-10; Stenda Realty, LLC v. Kornman, 67 A.D.3d 996, 889 N.Y.S.2d 639 (2d Dep’t 2009).

As a strictly practical matter, the following bears emphasis: a court’s determination as to the validity – or invalidity – of a particular liquidated damages clause will often have to await the end of a case. And the reason for this should be fairly evident: the relationship – or the lack thereof – between the liquidated damages clause and foreseeable losses is a fact-specific one, and requires a full and detailed analysis of the facts of the case. Consequently, as part of your initial contract negotiations, you should consider whether this provision will have enough bite to make it worthwhile to litigate down the line, if this deal ultimately falls apart.

Stated differently (and to quote many of my gurus, including a 15th century mystic): begin with the end in mind.

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In today’s edition of the New York Law Journal, there was an interesting decision from a New York County trial court in a breach of contract case, Garber v. Inter Capital Resources LLC. In this case, the plaintiff was a commission salesman who sought to recover the commissions that he purportedly earned – but was never paid – for the second and third quarters of calendar year 2008.

The underlying, earlier decision from which this more recent decision stems is even more important, because it serves an important reminder to attorneys litigating breach of contract and breach of employment agreement cases: make sure that your causes of action are not only supported with specific factual allegations, but that they are also separately and distinctly pled.

In short, since the Court found that the plaintiff had not particularized any specific violations of the Labor Law, but had only set forth enough facts to sustain a common law (as opposed to statutory) breach of contract claim, the plaintiff was not entitled to recover statutory damages under the Labor Law, and therefore, the Court dismissed the plaintiff’s claims seeking to recover liquidated damages and attorney’s fees based upon the defendants’ alleged violations of Labor Law § 198 (1-a), stating: “Breach of contract claims do not give rise to the relief afforded under Labor Law §198 (1-a). See Gottlieb v. Kenneth D. Laub & Co., Inc., 82 NY2d 457, 464 (1993); Pachter v. Bernard Hodes Group, 10 NY3d 609 (2008).”

One final note: since the plaintiff failed to allege enough factual particulars, his attempt to pierce the defendants’ corporate veil failed as well.

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Although, as the title of this article suggests, some things should be fairly obvious, when enough money is at stake, people will still try to throw stuff at the wall to see if any of it will stick.

In a case that they brought in Federal Court in Upstate New York, Opto Generic Devices Inc. (“OGD”) sued Air Products & Chemicals Inc. (“ACC”) for breach of contract and for consequential damages, asserting that it lost profits when the defendant did not buy its products. In this case, the defendant admitted that the parties had entered into a series of agreements that delineated the scope of work to develop certain products for plaintiff, and included a $400,000 agreement for license rights to these products. In light of the ongoing working relationship between the parties, and the exchange of nearly $1,000,000 between them with regard to the development of this product, the plaintiff was caught off guard when the defendant never actually bought the finished product.

But the plaintiff had one “small” problem with their case – while the contract set forth the parties’ responsibilities as to patent prosecution and maintenance, commercial rights and licenses (i.e., it was a development contract), there was absolutely no provision requiring ACC to buy any OGD products. Consequently, I can’t say I’m surprised that the Court dismissed this aspect of their breach of contract action.

You know the old saying about what happens when you assume something …

It’s just another example of the costs of failing to reduce your agreements to writing.

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