c

 



 
    
 !"

# 
$Plaintiff (Wasserman) entered into a commercial lease with Defendant (Middletown). The
contract contained a liquidated damages clause that provided that if Defendant cancelled the
lease, it would pay Plaintiff a pro-rata reimbursement for any improvement costs and damages of
25% of Plaintiff¶s average gross receipts for one year^
  

 



 
 
  . Subsequently,
Defendant cancelled the lease. When Defendant refused to pay, Plaintiff sued to recover under
the agreement.
ï $ On cross-motions for summary judgment, the Law Division held that the lease and
the cancellation clause were enforceable. It subsequently required the Township to pay damages


$ Is the liquidated damages clause enforceable?

%
&$Not determined; remanded to the Law Division for resolution of factual issues. A
liquidated damages clause is a predetermined sum that a contracting party agrees to pay if he
breaches, said sum being a good faith estimate of the actual damages in the event of a breach. By
contrast, a penalty clause is a predetermined sum that a contracting party agrees to pay if he
breaches, said sum being a fixed amount, not meant to be an estimate of actual damages, but
rather a punishment intended to prevent breach. Liquidated damages clauses are enforceable if
³the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by
the breach.´ Such clauses are presumed to be reasonable, and the burden is on the party
challenging the clause to prove its unreasonableness. Notably, the parties¶ own characterization
of the clause is in no way controlling, but rather, the courts must look to the circumstances of the
case. Here, even though the Supreme Court of New Jersey stated that the enforceability of
liquidated damages clauses is a question of law for the court, it did not decide the ultimate issue
of enforceability. Instead the case was remanded for the resolution of certain factual issues.

'(  
 "  &
  

    )     &
*
)  
 
 )       
)) 


+ &$Affirmed the judgment of the Appellate Division that the Township is liable to
plaintiffs for terminating the lease. Also Affirmed the judgment of the Appellate Division
awarding plaintiffs damages of $55,748.27 for renovation costs. Remanded to the Law Division
the issue whether the clause requiring payment of stipulated damages based on the lessee¶s gross
receipts is a valid liquidated damages clause.


' ,% 

 ) 
-   . 
 /0"

# 
$Carborundum manufactures Ferro Carbo an abrasive powder used in making steel. Carb
entered into a contract with Lake River by which Lake River agreed to provide distribution
services in its warehouses in Illinois. Lake River would receive Ferro Carbo in bulk from Carb¶s
bag it and ship it to Carbo¶s customers. Carbo insisted that Lake River install a new bagging
system to handle the contract. It cost $89000. To cover the cost and make a 20% profit Lake
River insisted on a minimum guarantee clause. If the full minimum quantity was shipped Lake
River would make $533000. Carborundum only shipped 12000 of the 22500 tons of the Ferro
Carbo when the contract expired. Carbor had paid for the amount billed and bagged. The clause
left Carborundum owing $241000, $533000 (ferro shipped) minus what Carborundum had paid.
Lake retained 500 tons of bagged Ferro($31000).

ï $The district ct bench trial gave judgment to both parties.

Carborundum$42000($269000 +$31000 -$241000-$17000[prejudgment interest]).Remanded.



$Whether the formulae in the minimum guarantee clause imposes a penalty for breach of
contract or is merely an effort to liquidate damages?

.&
$
ï $The guarantee clause discourages willful breaches and ³guarantees,´ that the
non-breaching party is able to make its profit, minus mitigating cost. This clause insures
against non-credible parties entering into contracts.
1 $The provision is greatly disproportionate. The fixed sum greatly exceeds the
actual damages inflicted by a breach.

%
&$When a contract specifies a single sum in damages for any and all breaches even
though it is apparent that all are not of the same gravity, the specification is not a reasonable
effort to estimate damages; and when in addition the fixed sum greatly exceeds the actual
damages likely to be inflicted by a minor breach, its character becomes a penalty. From the face
of the contract the damages provided for by liquidated damages are grossly disproportionate to
any probable loss and penalizes some breaches more heavily than other regardless of cost.

The unpaid contract price ($241000) minus the costs saved by not having to complete the
contract (the variable costs on the other 45 % of the Ferro that it never had to bag).

'(   &

) 
 )
     & ,
  &
 )   
    
)
 ) 
 ,  
&    &
 )  ) 




#   
    ( 
&  )