by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)
In the past, I have written about engagements gone wrong, including a case involving a failed (alleged) engagement and the return of a (purported) engagement ring that the recipient initially claimed to have lost, but later (apparently) found, and marriages gone wrong, including a case asking whether a marriage can be annulled because of a former wife's equitable fraud, but never a marriage reception gone wrong. With the Appellate Division's recent decision in Corona v. Stryker Golf, LLC, I am finally able to fill this gap in my failed relationship scholarship. On a more routine note, Corona also provides a helpful primer on the enforceability of liquidated damages clauses in contracts.
In Corona, plaintiff entered into a contract with defendant to hold her wedding reception at defendant's catering hall. Defendant agreed to provide the venue, food, and beverages for a contract price of approximately $12,012.80. The contract required an initial, non-refundable deposit of $2,500. Plaintiff made this payment and two subsequent payments of $5,166.35 and $1,725.35, for a total of $9,391.70. The contract contained the following provision regarding cancellation:
Cancellation under any circumstances is not acceptable and, in addition to forfeiting all deposits, the Patron will remain responsible for paying the entire balance of the contract price (excluding service charge) for the Event even if the Event does not occur.
Unfortunately, six months before the reception was to be held, plaintiff notified defendant that she was cancelling the wedding. Relying on the cancellation provision in the contract, defendant refused to return any of the money Plaintiff had paid under the contract. Plaintiff sued. Both parties moved for summary judgment. After trying to settle the case, the trial court granted defendant's motion and dismissed the complaint. The trial court held that plaintiff "twice breached the contract," although the decision does not explain how. On the issue of damages, defendant argued that the liquidated damages clause was "grossly disproportionate to [any] actual damages sustained by defendant and thus unenforceable as a penalty." The trial court rejected this argument, holding that the terms of the contract were "clear and unambiguous," therefore the court was required to enforce those terms as written.
Plaintiff appealed and the Appellate Division reversed.
The Appellate Division began by noting that, 53 years ago, it provided a "clear definition" to distinguish between an enforceable liquidated damages clause and an unenforceable penalty:
Liquidated damages is the sum a party to a contract agrees to pay if he breaks some promise, and which, having been arrived at by a good faith effort to estimate in advance the actual damage that will probably ensue from the breach, is legally recoverable as agreed damages if the breach occurs. A penalty is the sum a party agrees to pay in the event of a breach, but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach.
In other words, a liquidated damages clause must be a "reasonable forecast" of the actual damages flowing from a breach to be enforceable. If it is not, then the clause is unenforceable and the non-breaching party must use conventional measures to prove its damages.
In Corona, the Appellate Division held that the cancellation provision was an unenforceable penalty. It ruled that the clause was "untethered to any reasonable basis for determining the actual economic loss defendant may have sustained as a result of plaintiff's decision to cancel the contract six months before the scheduled performance date." Further it held that the $9,391.70 that plaintiff already paid to defendant was nearly equal to the $9,680 cost of the food and beverages under the contract. The Appellate Division held that defendant was "obviously spared incurring this cost," therefore allowing it to "retain[ ] the full $9,391.70 plaintiff paid constitutes the kind of unwarranted windfall we condemn[ ] . . . as an unenforceable penalty." The Appellate Division reversed the trial court and ordered that it enter judgment in favor of plaintiff for $6,891.70 (the amount paid by plaintiff to defendant less the initial deposit, which both parties agreed was non-refundable).
Pete's Take 