Rye, City of v. Public Services Mut. Ins. Co.

Brief Fact Summary.

The City of Rye (Plaintiff) sought to recover a bond of $100,000 posted by developers (Defendants) to ensure timely completion of six city buildings. 

Synopsis of Rule of Law.

Agreements providing for a penalty or forfeiture without statutory authority are unenforceable.  However, where damages flowing from a breach are difficult to ascertain, a liquidated damages clause will be upheld if the amount is a reasonable measure of the anticipated probable harm.

Facts.

 The developers had already finished six luxury co-operative apartment buildings, and were to construct six more.  However, the City would not issue certificates of occupancy for the completed buildings without a bond from the developers for timely completion of the new buildings.  The developers agreed to pay $200 per day for each day after 4/1/71 that the buildings were not completed, and, in fact were over 500 days late finishing the projects.  The City sought to recover its entire $100,000 bond.  The Special Term denied the City’s motion for summary judgment, and the Appellate Division affirmed

Issue.

Was the agreement exacted from the developers and the conditional bond supplied to provide a penalty, or for liquidated damages?

Held.

Affirmed. 

The bond of $100,000 posted by the developers did not represent a reasonable estimate of probable monetary harm to the city from finishing late, but a penalty in the absence statutory authority.  The penal bond could not be recovered by the City. 
There was no evidence to show that the sum of $200 per day or the aggregate amount of the bond had a reasonable relationship to the pecuniary harm likely to be suffered by the City. 

Dissent.

None.

Concurrence.

None.

Discussion.

The court noted that developers are rarely in the position to bargain on an equal basis with local officials, and the City took advantage of its upper-hand in this case by imposing a penalty for late completion of their project.