On November 30, 2021, Justice Borrok of the New York County Commercial Division issued a decision in W Mgt. Servs. LTD v. Fanning, 2021 NY Slip Op. 32519(U), holding that a liquidated damages provision was an unenforceable penalty, explaining:
For a liquidated damages provision to be enforceable, the provision must (a) be reasonably proportional to the probable loss caused by the breach and (b) the amount of damages is incapable or difficult to estimate. Showing that the liquidated damages amount is grossly disproportionate to the actual suffered losses makes the provision an unenforceable penalty. Loss of future profits may be recovered only when the damages can be determined with reasonable certainty and are not merely speculative. It is well established law that the appropriate measure of damages is the loss sustained or gains prevented at the time of the breach, even when the breach is the non-delivery of stock, the value of which subsequently changes.
W Management’s argument that the liquidated damages provision is valid because the stipulated that they are sophisticated and that they agreed the provision was not a penalty fails. This is a determination to be made by the court as a matter of law. The formula of the Make Whole Payment provision is fatally flawed because it calculates a loss to W Management where they have advanced no money whatsoever as if they have advanced the entire amount of the potential loan for the entire loan term. This is not reasonably proportional to any ascertainable loss. It is of no moment that W Management may have been able to make money on the Collateral had it been delivered. It may have lost money too. The loss, if any, where no loan was advanced and no risk was taken by W Management, was any due diligence and transaction costs it may have incurred in underwriting and putting together the deal. Therefore, the motion must be granted and cause of action for damages for liquidated damages must be dismissed.
(Internal quotations and citations omitted).