The question in this case is whether a liquidated-damages provision in a settlement agreement between two sophisticated parties, which reflects the amount one party would have had to pay had the parties not settled, constitutes an unenforceable penalty.
In 2004, Columbia University leased retail space to D’Agostino Supermarkets, Inc. Two years before the lease was set to expire, D’Agostino stopped paying rent under the lease. Soon after, the parties resolved any claim Columbia would have for D’Agostino’s default by entering into a surrender agreement. That agreement required D’Agostino to pay Columbia $86,000 in two lump sums, and an additional $175,000 in eleven monthly installments. The parties agreed that if D’Agostino defaulted under the surrender agreement and failed to cure its default, it would have to pay Columbia liquidated damages totaling the unpaid amount of rent left on the original lease—totaling more than $1 million—plus interest.
D’Agostino made the two lump-sum payments but failed to make any monthly payments under the surrender agreement, and Columbia sued for liquidated damages. Supreme Court held the liquidated-damages provision to be an unenforceable penalty because it was disproportionate to the amount that D’Agostino would have paid had it complied with the surrender agreement. The court also held that liquidated damages were unavailable because the amount D’Agostino owed under the settlement agreement was readily ascertainable. The First Department unanimously affirmed in a short decision.
The Court of Appeals granted Columbia leave to appeal.
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