Exclusivity Fee in LOI/Term Sheet qualified as Liquidated Damages.

In Parkmerced Invs. v. WeWork Cos. LLC, Index No. 652094/2020, the Court held that Exclusivity Fee was also liquidated damages clause that prevented the other party from seeking other monetary damages based on alleged breach of contract, breach of the covenant and good faith and fair dealing, based on promissory estoppel.

The Court interpreted a Term Sheet/Letter of Intent that contained primarily non-binding provisions but also contained a hand-full of binding provisions, one of which was a $20 million Exclusivity Fee. The Exclusivity Fee was non-refundable and payable: (i) as a deposit (credit) against the investor’s intended future investment, (ii) to compensate the other party for agreed to not negotiate with other potential investors, and (iii) if the investor failed to invest the full amount of the intended funds ($450 million) for the project by the deadline date.

After the investor (WeWork) failed to invest the full amount, the other party sued for damages that exceeded the amount of the Exclusivity Fee. The Court held that the Exclusivity Fee was intended as liquidated damages. The Exclusivity Fee clause stated: “if the Preferred Investment fails to close by the [deadline date] for any reason, or no reason, if WeWork fails to timely pay the second installment of the Exclusivity Fee, then Maximus shall be deemed to have earned an amount equal to the entire Exclusivity Fee as liquidated damages, and not as a penalty, the parties agreeing that the damage to be incurred by Maximus for the failure of the transaction to proceed or to be consummated by [the] Outside Date would be difficult to compute.”

The Court found that parties to a lawsuit may be awarded either (1) actual damages or (2) liquidated damages, but not both when the factual basis or allegations for the damages is the same. In this case the language is clear that (A) the Exclusivity Fee is intended to compensate the party if the investor fails to “proceed” or “consummate” the investment and (B) both parties agreed that the Exclusivity Fee was agreed to because of the difficulty of calculating damages if the investor subsequently breached its investment obligation.

The concept of inserting in a contract an amount to be paid if a party breaches the contract in the future because of “difficulty of calculating future damages based on breach of that contract” (along with the ancillary requirement that the payable amount is not a penalty) is the basic premise for a liquidated damages clause to be effective. In this case, the parties acknowledged both requirements.