Enforcement of Liquidated Damages – May 2016

 

Earlier this month I tried a case which brought an interesting result regarding the enforcement of liquidated damages.

 

Liquidated damages are common in many commercial contracts, particularly as concerns performance delays. These provisions are routinely enforced under the Uniform Commercial Code where the agreed amount is reasonable in light of the anticipated harm caused by the breach.  A term fixing unreasonably large liquidated damages is generally void as a penalty.

 

Liquidated damages are usually enforced by judges as a matter of law. However, my recent experience demonstrated that a jury may be more suspect as to the fairness of such terms.

 

The contract in my case required the seller's delivery of LED displays by a date certain and provided for liquidated damages of $1000 per day of delay. Delivery was 60 days late and the buyer accordingly sought liquidated damages of $60,000. There was testimony that such terms were typical within the industry and buyer had some trepidation concerning seller's performance, having had no prior dealings.  On cross-examination the buyer acknowledged that the purpose of including the liquidated damage term was to "ensure timely delivery;" ... that is, by penalizing late delivery.  While the buyer was purportedly being pressured by its own customer for timely delivery, there was no evidence that the buyer suffered any actual damages as a result of the seller's delay.  To the contrary, there was disputed evidence that the displays, once delivered, sat in storage for over a month pending installation.

 

Focusing more on the absence of actual damages in hindsight than any harm anticipated on entry into the agreement, seller argued that under these circumstances, buyer's recovery of liquidated damages would constitute an undeserved windfall. The jury agreed, answering that the liquidated damage provision was not enforceable.

 

Though the result was obviously specific to the circumstances of the case, the jury's verdict serves as a reminder that the enforcement of "standard" liquidated damage terms is not automatic. The party claiming liquidated damages should be prepared to clearly articulate its anticipated damages upon breach and remain cognizant that too large a recovery based upon the liquidated damage formula may be perceived as unfair – particularly if addressed to a jury.