Liquidated Damages - Not An Opportunity To Overreach

LIQUIDATED DAMAGES:
NOT AN OPPORTUNITY FOR OVERREACHING

By: Robert S. Tanner, Esq.

Your Construction Law FirmTM

Does your contract contain a liquidated damages provision that is enforceable?

A liquidated damages provision fixes and makes certain the damages the parties agree to in the event of a breach. Such provisions provide certainty as to the damages to be paid where calculating damages is difficult and not readily ascertainable.

In Design Time, Inc. v. Monco of Orlando, Inc., 518 So. 2d 454 (Fla. 5th DCA 1988), Design Time, Inc. ("Buyer") entered into an agreement to buy a machine from Monco of Orlando, Inc. ("Seller") for $66,950.00. Buyer paid a 10% deposit. When Seller attempted delivery, Buyer refused.

Seller kept Buyer's deposit and sold the machine to someone else at the same price Buyer had agreed to. Seller also sued Buyer and was awarded $21,255 in damages. The trial court also awarded Seller its attorney's fees.

Buyer appealed.

The contract between Buyer and Seller contained a liquidated damages provision:

Default in payment when due shall, at the option of Seller, render the total purchase price at once due and payable and/or in the alternative, shall entitle the Seller to immediate possession and title of the goods specified herein without legal process and any money theretofore paid herein shall be retained by Seller as liquidated damages.

Apparently, the trial court invalidated that provision and instead applied provisions from the Uniform Commercial Code, applicable in the sales of goods, which allowed recovery of lost profits.

The general rule is that, "Where the parties to a contract have agreed to the consequences of a breach, their agreement will control provided that the remedy is 'mutual, unequivocal and reasonable.'" Additionally, when a contract has a liquidated damages provision, the party enforcing the provision cannot obtain a judgment in excess of the stipulated liquidated damages.

The appellate court found nothing to indicate that the default provision in the contract between Seller and Buyer was not mutual, unequivocal and reasonable. The appellate court determined that the liquidated damages provision was enforceable.

In accordance with the terms of the default provision, the appellate court ruled that Seller was permitted to retain (and re-sell) the machine and keep the monies that Buyer had paid, but that the trial court's award of the $21,255 in additional damages was improper. In addition to reversing the $21,255 damages award, the appellate court reversed the trial court's award of attorney's fees to Seller because Seller "sued for damages to which it was not entitled." So, by filing the lawsuit and incurring attorney's fees at both the trial and appellate levels, Seller eroded the success that its contract had provided.