The 4-3 split decision of the New York Court of Appeals in The Trustees of Columbia University in the City of New York v. D’Agostino Supermarkets, 36 NY3d 69 (2020) questioned the predictability of the treatment of most courts is considered a rock-solid contractual clause: liquidated damages. See Adam Leitman Bailey and Dov Treiman, “An Unsettling Decision for Liquidated Damages in Settlement Agreements,” New York Law Journal (February 16, 2021). The majority found that the penalty clause in a commercial lease transfer agreement between two well-advised experienced parties was an unenforceable penalty as it resulted in a penalty that was disproportionate to the actual damage (seven times the actual damage). The dissent, centered on the freedom of contract, would have confirmed the provision as not violating public order.
The potential finding that claims for damages are not necessarily exempt from a “disproportionality” challenge is not the only potentially problematic aspect of liability for damages, particularly in the context of construction contracts. As a result, special attention must be paid to the development and design of contractual penalty regulations when operating under New York law.