Rubinstein v. Rubinstein, 23 N.Y.2d 293 (1968)

A liquidated damages clause in a contract does not automatically bar the remedy of specific performance unless the contract explicitly states that the liquidated damages provision is the sole and exclusive remedy.

Summary

Two cousins, Henry and Leo Rubinstein, decided to dissolve their joint business ventures. They signed an agreement stipulating that one would choose between two businesses, with a $5,000 deposit held in escrow, to be forfeited as liquidated damages if either party defaulted. Henry chose a property, but Leo later refused to proceed. Henry sued for specific performance, while Leo argued the liquidated damages clause limited Henry’s remedy. The New York Court of Appeals held that the liquidated damages clause did not preclude specific performance, reversing the lower court’s decision. The Court emphasized that specific performance is presumed unless the contract clearly indicates otherwise and that the primary purpose of the agreement was to sever the business relationship, which could not be achieved through monetary damages alone.

Facts

Henry and Leo Rubinstein, distant relatives, jointly operated several businesses, including a grocery store and a delicatessen. Differences arose, leading them to agree to a separation of their business interests. On July 20, 1965, they signed an agreement stipulating that Henry would choose between the two businesses, with Leo taking the other. The agreement included a provision for a $5,000 deposit from each party, held in escrow, to be forfeited as liquidated damages in case of default. Henry elected to take the Kips Bay property. Disputes arose regarding the details of the transaction, and the deal was not finalized.

Procedural History

Henry sued Leo for specific performance in the Supreme Court, New York County. Leo counterclaimed for specific performance initially, then moved to strike the complaint, arguing that the liquidated damages clause limited Henry to a $5,000 remedy. Special Term granted summary judgment to Henry but held that the liquidated damages clause was the sole remedy available. The Appellate Division affirmed the Special Term’s decision, with a divided court. The New York Court of Appeals granted leave to appeal and reversed the Appellate Division’s order.

Issue(s)

1. Whether a liquidated damages clause in a contract automatically bars the remedy of specific performance.

2. Whether the plaintiff has an adequate remedy at law.

Holding

1. No, because a liquidated damages provision does not, in and of itself, bar the remedy of specific performance; there must be explicit language in the contract stating that the liquidated damages provision was to be the sole remedy.

2. No, because the principal aim of the agreement was to sever the parties’ relationship and enable each party to own one half of the joint business completely and separately, a result that cannot be achieved by a damage award.

Court’s Reasoning

The Court of Appeals reasoned that the law presumes the primary purpose of a contract is performance, not nonperformance. A liquidated damages clause is generally intended to secure performance and avoid litigation over the amount of damages. The Court emphasized that nothing in the contract explicitly stated that the liquidated damages provision was to be Henry’s sole remedy. The court cited Phoenix Ins. Co. v. Continental Ins. Co., 87 N.Y. 400; Diamond Match Co. v. Roeber, 106 N.Y. 473 and Restatement, Contracts, § 378 to support the view that the presence of a liquidated damages clause is not a decisive circumstance to bar the equitable remedy of specific performance. As Judge Lehman stated in Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214: “It is a question of intention, to be deduced from the whole instrument and the circumstances; and if it appear that the performance of the covenant was intended, and not merely the payment of damages in case of a breach, the covenant will be enforced.” The court also noted the original intent of the $5,000 deposit was to be used in connection with the “closing,” suggesting it was intended to facilitate performance, not to serve as an alternative to it. The court found Leo’s interpretation of the agreement would be preposterous, giving Henry the “right” to continue as Leo’s partner if Leo didn’t like the division. Furthermore, the Court highlighted that Leo’s initial counterclaim for specific performance indicated his understanding that the agreement was enforceable in equity. The Court stated that equitable relief should be granted because the agreement’s provisions are fully capable of being carried out, and a court of equity has the power to demand that the party seeking equitable relief must do equity.