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Liquidated Damages in A Breach of Contract

Liquidated Damages in A Breach of Contract

The Supreme Court, Appellate Term, Second Department recently heard the case of Photography by Brett Matthews v. Solomon – a very interesting case, that although for a small dollar amount, sheds a great deal of light on the contract principles of modification, cancellation, and liquidated damages. Please note generally that the Appellate Term of the Supreme Court of New York is a lower level appeals court than the Appellate Division, but still empowered to hear appeals from the trial level court – here the District Court of Nassau County.

Background of the Case

In 2010 the plaintiff, Ms. Solomon, contracted with the defendant photography company for the performance of wedding photography services at her daughter’s wedding. The price was about $4900, of which $1000 was paid at signing as a down payment. The contract provided that the company would make its best efforts to use the specific photographer requested by the defendant, but that if this proved impossible, the company would inform defendant, who agreed to accept a different photographer employed by the company.

Paragraph 3 additional provided language about cancellation and refunds. It stated that due to the nature of the business (weddings are scheduled very far in advance and last-minute cancellations are a nightmare for everyone concerned) that no refunds would be given for cancellations made less than 12 months before the wedding. Additionally if the customer sought to cancel the contract for any reason less than 6 months prior to the wedding the entire balance of the $4900 payment would become due immediately.

Plaintiff and defendant agreed on a photographer. The photographer was subsequently fired, and plaintiff and defendant had a meeting in May 2011. According to the plaintiff, defendant approved a new photographer and wrote a check for $3500, the second deposit due under the contract. However, a few days later, defendant stopped payment on the check and said plaintiff’s services were no longer needed.

Defendant claims that she never approved a second photographer, a contention which plaintiff disputes. The district court awarded plaintiff $3000, and the defendant appealed.

Analysis

The court found that the established fact that the defendant wrote the second check for $3500 supported the trial court’s finding that she had in fact approved the substitute photographer – and thus was NOT entitled to cancel the contract.

However the court took note of defendant’s argument about liquidated damages. This provision in a contract is an estimate of a party’s damages in the event of a breach. A court will generally honor this provision as long as, (by the New York State standard articulated here) it bears a reasonable relationship to the actual damages suffered. It is NOT enforceable if it is found to be a penalty, a penalty being more of an arbitrary amount that bears no relation to actual damages.

Here, the contract provided that the FULL amount would be due if the contract were cancelled within 6 months of performance. According to the court, this does not bear any reasonable relation to actual damages, which would be the contract price less plaintiff’s expenses. Thus, the court ruled that paragraph 3 was actually a penalty, and thus unenforceable. The court ordered a new trial to determine the plaintiff’s actual damages.

Crafting cancellation and liquidated damages clauses in a contract is a tricky business. It is thus important to hire experienced counsel to address these matters. Please do not hesitate to contact our office for a consultation.

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