Liquidated Damages and Oral Amendments to Written Contracts

By Michael D. Brofman, Esq.
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Many 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.

For 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.

Indeed, 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.

Weiss 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.