City of Rye v. Public Service Mutual Insurance Co.
358 N.Y.S.2d 391, 315 N.E.2d 458 (N.Y. 1974)
A developer was building some
buildings in Rye, New York. In order to obtain their occupancy permits, they
posted a surety bond of $100k to
ensure timely completion of 6 buildings.
Rye really wanted the
buildings completed quickly because they had a housing shortage.
The developer failed to make
the deadline specified in the contract. City of Rye sued to take the
entire $100k as a penalty.
No State statute authorized
a city to exact a penalty or forfeiture from developers.
Rye argued that the $100k
was for liquidated damages.
The developer's insurer
(Public Service) argued that the $100k Rye wanted was a penalty.
Penalty clauses are unenforceable without statutory
authority.
The Trial Court found for
Public Service. Rye appealed.
The Trial Court found that
damages resulting from the breach were difficult to determine and likely
speculative and minimal.
There was nothing to show
that the damages would amount to $100k.
Despite the fact that the
damages were specified in the contract, the Court found that it was not
enforceable. They felt that this was the equivalent of a penal bond, and constituted an abuse.
The Court noted that Rye
could have potentially drafted a reasonable liquidated damages clause.
If the amount was a reasonable measure of the anticipated harm, then the clause would have been upheld.
In this case though, there
was no connection between the $100k and the damages Rye might have
suffered. It was an arbitrary amount.
