New York Law Review

Tag: Penalty Clause

  • Matter of Associated General Contractors, N.Y. Chapter, Inc. v. Savin Bros., Inc., 36 N.Y.2d 957 (1975): Enforceability of Arbitrator’s Decisions on Penalties

    Matter of Associated General Contractors, N.Y. Chapter, Inc. v. Savin Bros., Inc., 36 N.Y.2d 957 (1975)

    When parties agree to arbitrate disputes, the arbitrator’s determination, including questions of law like whether a damages clause is an unenforceable penalty, are generally binding and not subject to judicial review unless a strong public policy is violated.

    Summary

    Associated General Contractors sought arbitration against Savin Bros. for breach of their membership agreement, specifically regarding a liquidated damages clause. The arbitrators found Savin Bros. in violation and upheld the damages clause. Savin Bros. argued the clause was an unenforceable penalty. The New York Court of Appeals held that because Savin Bros. agreed to arbitration, the arbitrator’s decision on the penalty issue was binding, absent a significant violation of public policy. The court emphasized the public policy favoring arbitration in collective bargaining disputes.

    Facts

    Savin Bros. was a member of Associated General Contractors, a multi-employer collective bargaining association.

    The membership agreement stipulated that disputes over breaches would be submitted to arbitration.

    If a breach was found, damages would be awarded to the association, calculated as no less than three times the daily liquidated damage amount in Savin Bros.’ construction contracts for each day of violation.

    A dispute arose, and the association demanded arbitration, alleging Savin Bros. breached the agreement.

    Procedural History

    The arbitrators ruled that Savin Bros. violated the agreement for 58 days and awarded $104,400 in damages, finding the liquidated damages clause reasonable and not a penalty.

    The association moved to confirm the arbitration award.

    Savin Bros. cross-moved to vacate the award, arguing the damages clause was an unenforceable penalty.

    Special Term granted the motion to confirm and denied the cross-motion.

    The Appellate Division affirmed, although a majority agreed the damages clause imposed a penalty.

    The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether an arbitrator’s decision regarding the enforceability of a liquidated damages clause as a penalty is subject to judicial review when the parties have agreed to arbitration.

    Holding

    No, because having chosen arbitration, Savin Bros. was bound by the arbitrator’s determination that the damages clause was not a penalty, and judicial intervention is unwarranted absent a strong showing of public policy violation.

    Court’s Reasoning

    The court emphasized that by agreeing to arbitration, the parties submitted questions of law to the arbitrator’s judgment. As stated, “Once the issue is before the arbitrators, questions of law are for determination by them and are not open to resolution by judicial intervention”.

    The court acknowledged a public policy favoring peaceful dispute resolution through arbitration, especially in collective bargaining contexts. It noted the absence of third-party interests that would necessitate judicial intervention.

    The court distinguished the case from those involving a violation of a strong public policy, such as in *Matter of Aimcee Wholesale Corp. [Tomar Prods.]* and *Matter of Allied Van Lines [Hollander Express & Van Co.]*.

    The court effectively deferred to the arbitrator’s expertise and the parties’ agreement to resolve disputes through arbitration, reinforcing the limited scope of judicial review in such cases.

  • City of Rye v. Public Serv. Mut. Ins. Co., 34 N.Y.2d 470 (1974): Enforceability of Penalty Bonds

    34 N.Y.2d 470 (1974)

    A bond posted to ensure completion of a project is unenforceable as a penalty if it does not reflect a reasonable estimate of probable harm and there is no statutory authority for the penal bond.

    Summary

    The City of Rye sought to recover $100,000 on a surety bond from developers who failed to complete six apartment buildings by a set deadline. The bond was required for the developers to obtain certificates of occupancy for six already-completed buildings. The court held that the bond was an unenforceable penalty because it didn’t represent a reasonable estimate of the city’s potential damages from the delay, and there was no statutory authorization for such a penalty. The court emphasized the potential for abuse if municipalities could arbitrarily demand large penalty bonds without legislative oversight.

    Facts

    Developers planned to construct twelve luxury co-operative apartment buildings. To get certificates of occupancy for the first six completed buildings, the City of Rye required the developers to post a $100,000 bond. The agreement also stipulated a payment of $200 per day for each day after April 1, 1971, that the remaining six buildings were not completed, capped at the bond amount. The developers failed to complete the buildings by the deadline. The city then sought to recover the full $100,000 bond amount.

    Procedural History

    The City of Rye moved for summary judgment, which was denied by Special Term. The Appellate Division affirmed the denial. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the bond of $100,000 posted by the developers with the City of Rye to ensure completion of construction constituted an enforceable liquidated damages provision or an unenforceable penalty.

    Holding

    No, because the bond did not represent a reasonable estimate of the probable harm to the city, and there was no statutory authority permitting the city to exact such a penalty.

    Court’s Reasoning

    The court reasoned that, without specific statutory authorization, general contract law principles regarding liquidated damages apply. A liquidated damages provision is enforceable if the damages are difficult to ascertain and the amount fixed is a reasonable measure of the anticipated probable harm. However, if the amount is grossly disproportionate to the anticipated harm, it constitutes an unenforceable penalty. The court found the city’s claimed harms—increased inspector time, lost tax revenues, and zoning violations—were minimal, speculative, or not properly developed in the record. The court stated, “The most serious disappointments in expectation suffered by the city are not pecuniary in nature and therefore not measurable in monetary damages.” It emphasized the lack of statutory authority for municipalities to exact such bonds, stating, “For municipalities, without statutory authorization or restriction, to condition perhaps arbitrarily the grant of building permits or certificates of occupancy on large penalty bonds raises potential for grave abuse.” The court concluded that the bond was an unenforceable penalty because it bore no reasonable relationship to the pecuniary harm suffered by the city and highlighted the absence of evidence suggesting the developers’ delay was purposeful.