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Liquidated Damages and Oral Amendments to Written Contracts

On Behalf of | Feb 18, 2020 | Articles, Publications

By Michael D. Brofman, Esq.Email the Author

business people and professionals, including physicians, have seen
liquidated damages provisions in both business and employment
agreements.  Effectively, the liquidated damages provisions in such
agreements may provide that in the event one party to the agreement
breaches the contract, that breaching party agrees that the other party
will have suffered damages in a fixed (liquidated) amount.

example, if in a business contract, one party is required to manufacture
products for delivery to the other party by a certain date, but fails
to do so, the contract can provide for liquidated damages in a fixed
amount per day for each day of the delay.  As another example, which may
arise in an employment agreement of a physician, the contract may
contain a restrictive covenant upon termination, preventing the employee
physician from contacting patients of the medical practice whom the
physician has never treated.  The agreement may have a provision
allowing a court to prevent the prohibited conduct, or a liquidated
damages provision fixing an amount due the employer for such a breach,
or both.

Normally, such liquidated damages provisions, if
reasonably related to the damages the non-breaching party would actually
suffer, are enforceable by a court.  However, in a recent case, Rubin
v. Napole Bern Ripka Shkolnick, LLP, the New York Appellate Division,
First Department, reminded us that a liquidated damages clause alone is
not enough to allow a judgment to be entered against a party, even if
the breaching party admits the breach!

Rubin, an attorney, had
left the defendant’s law firm’s law practice and violated the
confidentiality provision of her employment agreement, which contained a
liquidated damages clause.  The Appellate Division, after analyzing the
state of the law on liquidated damages as determined by New York’s
highest court, the Court of Appeals, found that even though Rubin had
breached the confidentiality covenant, the law firm had not proven it
had been damaged by the breach.  Therefore, it reversed the lower court
and dismissed the law firm’s counterclaim for damages against Rubin.

the Appellate Division, in its decision, went a bit further, given the
facts of the case.  Rubin alleged that she was entitled to and had been
receiving 5% of all of the law firm’s net attorney fees on work she was
assigned to or was materially involved in, based on an oral agreement
and was owed money by the firm.  Even though her employment agreement
did not reference a 5% non-discretionary bonus and contained a clause
which precluded verbal modifications of the employment agreement, the
Appellate Division, again reversing the lower court, allowed Rubin’s
breach of contract and accounting claim to go forward.  The Appellate
Division determined that since Rubin alleged she relied on the oral
agreement with the law firm in continuing her employment, and since
there was evidence that the law firm paid the 5% bonus on at least some
cases, there was an issue of fact as to whether the parties intended the
contract to be amended to add the mandatory bonus provision.  Although
we do not yet know how the litigation will turn out, the fact that her
claim was allowed to continue is a victory for Rubin.

The moral of
Rubin is twofold:  (i) liquidated damages clauses are ineffectual
unless a party can prove it was actually damaged by the breach and (ii)
written contracts that preclude oral amendments can be amended orally if
evidence supports that the parties intended such an amendment and acted
consistently with that intention.

Michael D. Brofman, Esq.,
who joined the Firm in 2004, leads the Firm’s creditor rights and
workout practice. He is a graduate of Fordham Law School (J.D. 1978).
Mr. Brofman possesses over 41 years of experience, including the
representation of physicians and other healthcare professionals as
litigants in bankruptcy and commercial cases, as well as representing
clients in debt restructuring and workouts, asset based financing,
secured transactions and commercial real estate transactions. He has
been involved in numerous bankruptcy cases throughout the United States,
primarily representing the interests of creditors. Since 1998, he has
represented physicians in most of the hospital Chapter 11 cases filed in
the New York metropolitan area. Mr. Brofman is a frequent lecturer in
the areas of bankruptcy, workouts and secured and unsecured creditor
rights and Article 9 of the Uniform Commercial Code.

Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm
providing a wide array of legal services to the members of the health
care industry, including corporate and transactional matters, civil and
administrative litigation, healthcare regulatory issues, bankruptcy and
creditors’ rights, and commercial real estate transactions.