City of Rye v. Public Service Mut. Ins. Co.

• Decision Date: 23 July 1973
• Citation: 346 N.Y.S.2d 163,42 A.D.2d 749
• Parties: CITY OF RYE, Appellant, v. PUBLIC SERVICE MUTUAL INSURANCE COMPANY et al., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 163

346 N.Y.S.2d 163

42 A.D.2d 749

CITY OF RYE, Appellant, v. PUBLIC SERVICE MUTUAL INSURANCE COMPANY et al., Respondents.

Supreme Court, Appellate Division, Second Department.

July 23, 1973.

Before RABIN, P.J., and MARTUSCELLO, SHAPIRO, HOPKINS and MUNDER, JJ.

MEMORANDUM BY THE COURT.

Order affirmed, with $20 costs and disbursements. No opinion.

RABIN, P.J., and MARTUSCELLO, J., concur.

SHAPIRO, J., concurs with an opinion.

HOPKINS, J., dissents and votes to reverse and to grant plaintiff's motion, with an opinion, in which MUNDER, J., concurs.

SHAPIRO, Justice (concurring).

In this action to recover damages in the sum of $100,000 from defendant Public Service Mutual Insurance Company on its surety bond and against the other defendants on an agreement to pay a stipulated charge of $200 per day for each day of delay in the construction and completion of certain buildings, the plaintiff, the City of Rye, appeals from an order which denied its motion for summary judgment. I agree that the order should be affirmed, but, in addition, I would dismiss the complaint.

The nonsurety defendants, Marcel Weiss, Warwick Village, Inc., Milton Harbor Company and 720 Milton Road, Inc., were engaged in the construction of a group of 12 luxury cooperative apartment houses on a 12-acre tract in Rye based on building permit from the City of Rye received on January 31, 1966. In 1964 the developers applied to the Planning Commission of the City of Rye for approval of a variable height apartment development of three two-story shoreline buildings, three four-story buildings and underground garage and six two-story peripheral buildings. Such a development was permitted in an RA-4 zone, limited to a maximum height of 45 feet for all apartment buildings and an average height of 30 feet for all the buildings. The nonsurety defendants' development was approved by a Planning Commission resolution on September 8, 1964 on condition that all work should be completed 'in conformity with plans approved by the Planning Commission and in conformity with all applicable state, county and city regulations prior to the issuance of a certificate of occupancy.' DP On September 14, 1965 the Planning Commission modified its yearold resolution of approval to provide:

'No certificate of occupancy shall be issued for any building until all buildings are completed or until a bond sufficient to guarantee completion of the remainder of the buildings has been filed with the City.'

Earlier, on June 18, 1965, the developers had applied for a building permit for nine two-story buildings and three four-story apartment buildigns and underground garage. As above stated, a building permit was granted on January 31, 1966. Temporary certificates of occupancy were issued for three buildings, K,L and M, on April 14, 1967 and reissued on July 14, 1967 and October 14, 1967. Temporary certificates of occupancy were issued for the four-story buildings on December 29, 1967. Final certificates of occupancy were issued for all of these seven buildings on October 29, 1968.

On the day before the issuance of the temporary certificates of occupancy on the four-story buildings, defendant Weiss signed a letter agreement which is the basis of the city's action, in which, 'in order to induce' the city 'to deliver a temporary Certificate of Compliance with respect to' the completed four-story buildings (collectively, the 'Island and Garage Buildings'), he covenanted that he would deposit a surety bond of $100,000, to be held by the city as security for the commencement of construction of the remaining buildigns, called the peripheral buildings; no later than April 1, 1970 or their completion witnin one year after that date. The agreement provided for the imposition of a charge on Weiss 'for the benefit of the City of Rye of $200 per day until construction of the Peripheral Buildings is commenced or completed, as the case may be,' with the aggregate of such daily charges 'limited to the amount of the bond ($100,000).' The surety bond used on was issued in conformity with that agreement.

At the time of the initiation of this action (in November of 1971), more than 500 days had elapsed since April 1, 1970. The city therefore sued for the full amount of the bond. The answer of the nonsurety defendants consisted only of two defenses. The first was that the agreement embodied in the letter of December 28, 1967 was 'exacted' without statutory or other legal sanction, was without any lawful consideration and constituted a penalty not related to actual damage and was therefore void. The second defense, that of economic duress, is not being urged and is therefore not being considered.

It appears from the brief of the developer defendants, though it is not in the record, that construction on the peripheral buildings was begun after 'an acknowledged delay of about three years.'

The surety defendant's answer admitted execution and delivery of the bond and that this defendant had been informed by the plaintiff, on March 24, 1970, that by a letter dated March 13, 1970 Weiss had informed it that he would not start construction of the peripheral buildigns until the Fall of 1970. This defendant then pleaded the same two defenses raised by the nonsurety defendants. It also pleaded two additional affirmative defenses and cross claims against its codefendants to indemnify it against any loss it might sustain on the bond.

The principal issue in this case is whether the agreement for the giving of the bond was a valid agreement to guarantee the completion of the peripheral buildings, based on a lawful consideration, or, in any case, a valid bond, or whether it was, in the alternative, a valid agreement to pay liquidated damages of $200 per day for each day of delay. A subsidiary issue is the claim made by the nonsurety defendants (in their brief) that they are entitled to summary judgment dismissing the complaint, under subdivision (b) of CPLR 3212, because, as a matter of law, they have conclusively shown that the bond is invalid, as a penalty bond.

It has long been the law in this State that if the damage presumed to result from nonperformance is uncertain and incapable of exact ascertainment, the sum fixed by the parties is deemed to be liquidated damages and is recoverable as such, unless the sum stipulated to be paid by the defaulting party is grossly disproportionate to the presumable or probable damage, or to the readily ascertainable loss. If the latter be the case, the courts 'will treat it as a penalty and will relieve, on the principle that the precise sum was not of the essence of the agreement, but was in the nature of a security for performance' (Ward v. Hudson Riv. Bldg. Co., 125 N.Y. 230, 235, 26 N.E. 256, 257). In Priebe & Sons v. United States, 332 U.S. 407, 68 S.Ct. 123, 92 L.Ed. 32, Mr. Justice Douglas, rejecting as invalid a claim for liquidated damages under a federal contract on the ground that the contract provision for liquidated damages could not possibly be a reasonable forecast of just compensation for the damages caused by a breach of contract, said (p. 413, 68 S.Ct. p. 126):

'It might, as respondent suggests, have an In terrorem effect of encouraging prompt preparation for delivery. But the argument is a tacit admission that the provision was included not to make a fair estimate of damages to be suffered but to serve only as an added spur to performance. It is well-settled contract law that courts do not give their imprimatur to such arrangements. See Kothe v. Taylor Trust, (280 U.S. 224, 50 S.Ct. 142, 74 L.Ed. 382) Supra; Restatement, Contracts § 339. All provisions for damages are, of course, deterrents of default. But an exaction of punishment for a breach which could produce no possible damage has long been deemed oppressive and unjust. See Salmond & Williams on Contracts (2d ed. 1945) § 202.'

The appellant in its brief concedes that one basis for its seeking the bond sued on was to establish 'some penalty * * * to secure compliance within the time specified.' ^*

In an effort to establish that the agreement and the supporting bond on which it is suing is in fact a provision for liquidated damages rather than a penalty, the appellant argues that the failure of the nonsurety respondents to complete the project within the specified time would impose added costs on it (1) by requiring extra time and effort by city officials, employees and agencies to review, inspect and check the progress of the construction of the remaining buildings; (2) by causing inconvenience and annoyance to the public with resultant complaints by neighbors; (3) by extending the period during which the existing violation of the 30-foot maximum average height limitation for the project applicable under the zoning ordinance would exist; and (4) by diminishing the taxes received by the city, which would be based on the value of the completed buildings.

Since the city officials, employees and agencies reviewing, inspecting and checking the progress of the construction of the remaining buildings are full-time employees whose number and salaries would not vary with the construction or nonconstruction of the nonsurety respondents' buildings, the claim of increased expense to the city from this source lacks merit and, in any event, such expenses bear no reasonable relationship to the penal sum of the bond. As for the annoyance to the public, this, too, is hardly a basis for any claim of damage by the city, for the processing of neighbors' complaints by city employees is, like the carrying on of inspections of buildings under construction, an ordinary every-day duty of full-time salaried city employees charged with that responsibility which can result in no compensable damage. The violation (temporary, presumably, even though somewhat prolonged) of the average height maximum not only resulted in no damage to the city, but, at most, gave rise to a cause of action to compel...