As we explained in our case summary, the question in this case is whether a liquidated-damages provision in a lease surrender agreement that reflects the amount one party would have paid had the parties not settled is unenforceable. In a 4-3 decision, the Court (Rivera, J.) held that the provision violated New York public policy and so could not be enforced.
The case began when D’Agostino, a supermarket chain, could no longer pay rent to its landlord, Columbia University. The parties soon entered into a surrender agreement. In exchange for Columbia’s decision to forgo its claims to the rent due under the lease agreement, D’Agostino agreed to surrender the premises to Columbia and to pay Columbia about $260,000 in installments. If D’Agostino defaulted, however, it would owe Columbia the full amount due under its original lease: $1.02 million.
D’Agostino soon defaulted under the surrender agreement and failed to cure. At the time, D’Agostino owed $175,00 under the surrender agreement. Columbia sued for its liquidated damages under the surrender agreement—the full $1.02 million. Supreme Court and the Appellate Division both held the liquidated-damages provision was unenforceable because the damages amount was grossly disproportionate to the amount D’Agostino owed under the surrender agreement.
The majority agreed. Under New York law, the majority explained, liquidated damages reflect the parties’ “estimate” of “the extent of the injury that would be sustained as a result of breach of the agreement.” When liquidated damages are “grossly disproportionate to the amount of actual damages,” they can no longer be viewed as an estimate of damages. Instead, they are “a penalty.” And New York public policy forbids such penal provisions. Here, the Court held that the liquidated-damages provision was penal because it far exceeds the $175,000 in actual damages under the surrender agreement. The majority canvassed liquidated-damages decisions from the Appellate Division, noting that other courts had previously declined to enforce similarly disproportionate provisions.
Chief Justice DiFiore dissented, joined by Judges Stein and Wilson. The dissent saw the parties’ “liquidated damages” terminology as “ill-fitting” because the provision didn’t set damages for a hypothetical future breach. Rather, it operated as a contingent settlement agreement, awarding Columbia damages for a past breach if D’Agostino failed to comply with the terms of the surrender agreement. In other words, Columbia already had a right to the $1.02 million. It agreed to forgo that right and accept $260,000 plus surrender instead, but only if D’Agostino made all its payments under the surrender agreement. But because D’Agostino breached the surrender agreement, Columbia retained its right to recover the full $1.02 million. By ruling to the contrary, the dissent feared, the majority’s decision would be a “chill” on settlement agreements—“judicially favored” contracts that encourage parties to resolve their disputes without litigating.