Court Enforces Liquidated Damages Clause

On February 27, 2024, the First Department issued a decision in NGM Mgt. Group, LLC v. Bareburger Group, LLC, 2024 NY Slip Op. 00979, enforcing a liquidated damages clause, explaining:

Bareburger is also entitled to summary judgment on its tenth counterclaim for liquidated damages. Plaintiffs do not dispute that the franchise agreements were terminated for cause. Rather, plaintiffs contend that the liquidated damages provision is either an unenforceable penalty or invalid as a nonexclusive remedy for the covered damages.

The party seeking to avoid liquidated damages has the burden to prove that they are an unenforceable penalty. If the amount is grossly disproportionate to the probable loss, the provision is a penalty, and courts will not enforce it. Although the term grossly disproportionate in the liquidated damages context does not lend itself to a precise definition, courts have held that liquidated damages clauses that permit a landlord to recover between two or three times the amount of the existing rent or license fee are not grossly disproportionate to the probable loss and therefore, not a penalty.

Here, the relevant section of the franchise agreements provides for liquidated damages equal to the average value of the Royalty Fees plaintiffs paid (per month) to Bareburger during the twelve (12) months before the termination multiplied by (i) twenty-four (24), being the number of months in two (2) full years, or (ii) the number of months remaining during the term of this Agreement, whichever is higher.

First, the provision’s reliance on an average of monthly royalty fees actually paid in calculating the total amount due provides strong support to the provision’s enforceability, since the provision thus bears a reasonable proportion to the probable loss. Bareburger notes that it only seeks two years of lost royalty fees, and plaintiffs’ flat assertion that the provision is conspicuously disproportionate to foreseeable or probable loss ultimately failed to meet their burden to prove that the provision is a penalty. The provision is thus not unenforceable on this basis.

In addition, plaintiffs’ latter contention—that the liquidated provision is invalid since it is not an exclusive remedy—is unavailing inasmuch as no other provisions of the franchise agreements address lost future royalties paid from franchisees’ operation of the restaurants in the event that the franchise agreements are terminated.

(Internal quotations and citations omitted).

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