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 was building some buildings in Rye, New York. In order to obtain their occupancy permits, they posted a surety bond of $100k to ensure timely completion of 6 buildings.
    • Rye really wanted the buildings completed quickly because they had a housing shortage.
  • The developer failed to make the deadline specified in the contract. City of Rye sued to take the entire $100k as a penalty.
    • No State statute authorized a city to exact a penalty or forfeiture from developers.
    • Rye argued that the $100k was for liquidated damages.
    • The developer’s insurer (Public Service) argued that the $100k Rye wanted was a penalty.
      • Penalty clauses are unenforceable without statutory authority.
  • The Trial Court found for Public Service. Rye appealed.
    • The Trial Court found that damages resulting from the breach were difficult to determine and likely speculative and minimal.
      • There was nothing to show that the damages would amount to $100k.
    • Despite the fact that the damages were specified in the contract, the Court found that it was not enforceable. They felt that this was the equivalent of a penal bond, and constituted an abuse.
    • The Court noted that Rye 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.
      • In this case though, there was no connection between the $100k and the damages Rye might have suffered. It was an arbitrary amount.
  • The Appellate Court affirmed.