A homeowner wanted to develop his West Greenwich Village townhouse and entered into a License Agreement with his neighbor so that the development might permissibly proceed. The neighbor agreed to move out during the construction. The License Agreement, negotiated between attorneys, provided that the developer would pay $1000 a day in liquidated damages if he did not obtain a temporary certificate of occupancy for his work within 18 months. The developer was 318 days late.
When the neighbor sought to enforce the liquidated damage clause of the License Agreement, the developer claimed the $1000 a day charge was a penalty and, therefore, not enforceable. The New York Appellate Division held that since the charge was not grossly disproportionate to the neighbor’s estimated damages, the daily liquidated damage rate could properly be assessed.
Whether a liquidated damage amount is an unenforceable penalty under New York law is not determined by proportion alone. Among sophisticated parties in an arms-length transaction, the amount must be so unreasonable in light of the estimated loss that a reasonable man would say that it shocks the conscience.
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