City of Rye v. Public Service Mutual Insurance Co.

358 N.Y.S.2d 391, 315 N.E.2d 458 (N.Y. 1974)

• A developer posted a surety bond of $100k to ensure timely completion of 6 buildings in Rye, NY.  This was done in order to obtain occupancy permits.  They failed to make the deadline specified in the contract.  City of Rye sued.
• No State statute authorized a city to exact a penalty or forfeiture from developers.
• Is the $100k agreement exacted from the developers and the conditional bond supplied by the insurance company a penalty or for liquidated damages?  Penalty clauses are unenforceable without statutory authority.
• Court found (and Appellate Court agreed) that damages resulting from the breach were difficult to determine and likely speculative and minimal.  There is nothing to show that the damages would amount to $100k.
• Despite the fact that the damages were specified in the contract, both the Trial Court and the Appellate Court found that it was not enforceable.  They felt that this was the equivalent of a penal bond, and constituted an abuse.
• The Court did mention that the City could have potentially drafted a reasonable liquidated damages clause.  If the amount was a reasonable measure of the anticipated harm, then the clause would have been upheld.