City of Rye v. Public Serv. Mut. Ins. Co

Brief Fact Summary.

Plaintiff and Defendant entered into an agreement to construct six apartment buildings. Pursuant to the agreement, Defendant was to post $100,000 bond and to pay $200 per day for each day after April 1, 1971 six apartment buildings were incomplete. Defendant was not able to obtain sufficient funds for the development project. Defendant brought suit seeking the full value of the bond. The trial court and the appellate court found for Defendant. Plaintiff appeals.

Synopsis of Rule of Law.

Provision in a contact that fixes damages to a particular, reasonable amount in anticipation of harm will be upheld.

Facts.

Plaintiff, the City of Rye, hired Defendant, Public Service Mutual Insurance Company, to build six luxurious apartment buildings. Under the contact between the parties, Defendant was required to post $100,000 bond and to pay $200 per day for each day after April 1, 1971 six apartment buildings were incomplete. Plaintiff did not have any statutory authority to impose such a bond. Defendant was not able to obtain enough money to complete the buildings on time, due to the changes in the market. When the development of the buildings was 500 days late, Defendant brought initiated this action against Plaintiff to obtain the full value of the bond. The trial court found for Defendant and denied Plaintiff’s motion for summary judgment. The Plaintiff appealed, and the appellate court held that the bond was unenforceable because it was penal in nature. Plaintiff appealed.

Issue.

When damages to a breach of contact suit are difficult to ascertain, will provision in the agreement that fix damages to a particular, reasonable amount in anticipation of harm will be upheld.

Held.

Yes, damages to a breach of contact suit are difficult to ascertain, will provision in the agreement that fix damages to a particular, reasonable amount in anticipation of harm will be upheld.

Discussion.

Provision in a contact that fixes damages to a particular, reasonable amount in anticipation of harm will be upheld. The legal term for the fixed damages in a contract is known as “liquidated damages.” The liquidated damages must not be grossly disproportionate to the anticipated harm. If the liquidated damages are grossly disproportionate, the provision will not be upheld because it is unreasonable. In this case, the contact between the parties states that Defendant is required to post $100,000 bond and to pay $200 per day for each day after April 1, 1971 six apartment buildings were incomplete. This provision is a liquidated damage provision. Further, the damages caused by a delay are not pecuniary in nature, but rather, penal. The record does not indicate that the actual harm, the delay, bore any reasonable relationship with the $100,000 bond imposed on Defendant. Because this form of harm is not pecuniary, making the harm difficult to quantify and reasonably anticipate at the time of contracting, it would be unreasonable to impose this provision on Defendant. Therefore, the bond is penal and unenforceable, and the trial court’s and appellate court’s holding is affirmed.