Was $2.3M Liquidated Damages Provision Enforceable Upon Ventures’ Breach?
RDF Agent LLC and Electric Red Ventures, LLC and others entered into a preliminary term sheet, dated July 23, 2021, in contemplation of RDF potentially lending Ventures up to $230 million to finance a real estate development project in Arizona. The term sheet provided that it was not binding except for certain paragraphs, including the paragraph entitled “Exclusivity.”
Under the exclusivity provision of the term sheet, RDF had the “exclusive right” to provide the loan for the project “for a period of sixty . . . days following the later of (i) execution date hereof, and (ii) receipt of the expense deposit [to be made by Ventures].” The 60-day exclusivity period would be “extended to the extent of any delays” attributable to Ventures, or if Ventures was “not prepared to close on the terms set forth herein,” which terms included Ventures’ obligation to provide a specified amount of equity financing for the project. During the exclusivity period, Ventures agreed “not to, directly or indirectly, solicit, make, accept, negotiate, entertain, or otherwise pursue or contact any other persons in respect of financing or any other transaction that may be an alternative to, or may interfere with, the transactions contemplated herein.” The exclusivity provision specified, as RDF’s remedy for a breach by Ventures, liquidated damages in the amount of $2.3 million, or one percent of the maximum amount of the contemplated loan, plus all costs of collection, including attorney’s fees and court costs.
It was undisputed that the exclusivity period went into effect on July 28, 2021, and that Ventures was unable to secure the required amount of equity financing within the 60 days following that date, which ended on September 26, 2021. Although discussions between the parties continued after that date, Ventures ultimately obtained financing from other lenders.
RDF sued, contending that Ventures breached the exclusivity provision by discussing potential financing with other lenders both before and after September 26, 2021, and sought to recover the liquidated damages of $2.3 million set forth by the exclusivity provision as the remedy for that breach. Supreme Court granted RDF’s motion for summary judgment on that claim and, after further submissions, entered an award of attorney’s fees and costs. Ventures appealed,
Ventures contended that the exclusivity provision was unenforceable because, under RDF’s interpretation of that provision, the obligation survived indefinitely. That argument was unavailing. The term sheet set forth the duration of the exclusivity period. The extent of the period beyond September 26, 2021 was in Ventures’ control: if Ventures was prepared to close on the terms set forth in the term sheet, or if the other parties, caused no delays, the exclusivity period would end.
Contracts which are vague as to their duration generally will not be construed to provide for perpetual performance. And a contract will not be construed to require perpetual performance where another construction is available,
Ventures also argued that the exclusivity provision lacked consideration and mutuality of obligation. That argument also was unavailing. Absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny. Here, the exclusivity provision required RDF to proceed in good faith towards consummating the loan and to pursue in good faith the transaction contemplated by the term sheet. That was not a promise that was so insubstantial as to impose no obligation. Thus, RDF provided consideration in exchange for Ventures’ promise not to solicit financing from anyone other than RDF during the exclusivity period. Further, mutuality of obligation does not mean equality of obligation. And, in any event, an interpretation that renders a contract illusory and therefore unenforceable is disfavored and enforcement of a bargain is preferred, particularly where the parties have expressed their intent to be contractually bound in a writing.
Contrary to Ventures’ contention, the exclusivity provision was not ambiguous. A contract is ambiguous if the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings. The term sheet simply did not say what Ventures wanted it to say. A contract is not rendered ambiguous just because one of the parties attaches a different, subjective meaning to one of its terms..
In view of the foregoing determinations, the motion court correctly determined that the record established, as a matter of law, that the period of Ventures’ obligation to deal exclusively with RDF under the exclusivity provision continued after September 26, 2021 (the date on which the initial 60-day period expired), because Ventures, having been unable to raise the required amount of equity financing, was not prepared to close on the terms set forth therein on that date. Given that it was undisputed that Ventures discussed possible financing with lenders other than RDF during the extended term of their obligations under the exclusivity provision, Supreme Court correctly granted RDF’s summary judgment on its claim for breach of the exclusivity provision.
The term sheet’s liquidated damages provision was enforceable. Ventures did not satisfy the burden of showing that the stated liquidated damages were, in fact, a penalty. The amount of liquidated damages was 1% of the maximum loan amount.