## Facts

- Developers built a luxury cooperative apartment project in the City of Rye, completing six buildings while six additional “peripheral” buildings remained to be built under an approved plan.
- To obtain certificates of occupancy for the completed buildings, the city required the developers to post a surety bond guaranteeing completion of the remaining buildings.
- By a 1967 agreement, the developers posted a $100,000 surety bond and agreed to pay $200 per day after April 1, 1971 for each day the six remaining buildings were not completed, capped at $100,000.
- Adverse financing and market conditions prevented timely completion; more than 500 days elapsed after April 1, 1971 without completion.
- The city sought to recover the full $100,000 face amount of the bond.
- It was undisputed that no statute authorized the city to impose a penalty or forfeiture on the developers.

## Issues

1. Whether the $100,000 bond and $200-per-day provision constituted enforceable liquidated damages or an unenforceable penalty where the amount lacked a reasonable relationship to anticipated municipal damages.
2. Whether a municipality, without specific statutory authorization, may require and enforce a penal bond to secure completion of development obligations tied to zoning and planning approvals.

## Decision

- The Court of Appeals affirmed the order denying the city’s motion for summary judgment on the bond.
- The court held the $100,000 amount was a penalty, not a reasonable pre-estimate of probable monetary harm to the city.
- Because no statute authorized the city to exact a penalty or forfeiture, the city could not enforce the bond on a penal theory.

## Legal Principles

- A stipulated-damages term is enforceable as liquidated damages when (1) actual damages are difficult to estimate at contracting and (2) the fixed amount is a reasonable estimate of probable harm at that time.
- A clause is an unenforceable penalty when the sum is grossly disproportionate to anticipated damages, arbitrary, or designed primarily to coerce performance rather than compensate for expected loss.
- Absent statutory authority, a municipality cannot enforce a contractual penalty or forfeiture even when acting in a governmental capacity.
- Conditions attached to land-use approvals may include security for performance, but recovery of a fixed sum requires a demonstrable, reasonable connection to anticipated pecuniary loss.

## Conclusion

The court treated the city’s completion bond as an invalid penalty because the record showed no reasonable relationship between the $100,000 figure and the city’s probable monetary damages from delay, and no statute authorized the city to impose a penal forfeiture by contract.


City of Rye v. Pub. Serv. Mut. Ins. Co., 34 N.Y.2d 470, 315 N.E.2d 458 (N.Y. 1974)