On February 3, 2022, Justice Schecter of the New York County Commercial Division issued a decision in Atlantis Mgt. Group II LLC v. Nabe, 2022 NY Slip Op. 30399(U), refusing to enforce a contractual penalty for non-performance, explaining:
A penalty provision will not be enforced if it is against public policy to do so and public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority based on the principle of just compensation for loss.
Where, as here, a clause is intended to secure performance by the compulsion of the very disproportion it is plainly unenforceable.
In fact, disproportionate penalty provisions are practically no different from unenforceable liquidated damages clauses. In interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for liquidated damages or have styled it as a penalty. A contractual provision fixing damages in the event of breach, will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.
Here, it is clear that the buy-back clauses–forfeiture for a dollar–are grossly disproportionate, unreasonable, unenforceable penalty provisions. By their terms, any breach of any provision however trivial triggers the draconian $1-buy-out consequence without regard to the magnitude of the breach or actual value of the interest surrendered. Section 6.3 is conspicuously disproportionate to foreseeable losses because the same drastic remedy applies to an immaterial technical breach as it does a material one. By punishing any breach, however minor, with forfeiture of valuable interests in exchange for a mere dollar, the intent of the provision is purely punitive. In no way was it intended to remotely correspond with the magnitude of any loss or injury. Recovery must ultimately be limited to actual damages proven and there is no reason it cannot be. After searching the record, the OAs’ buy-back provisions (§ 6.3) are unenforceable penalty clauses as a matter of law. Plaintiffs motion for summary judgment for specific performance (fourth cause of action) is denied, the claim for entitlement to that relief is rejected, the cause of action is dismissed and a declaration against entitlement to that relief (fifth cause of action) is issued and summary judgment is awarded to defendants on the second counterclaim.
(Internal quotations and citations omitted).