Will Alabama enforce this liquidated damages clause or call it a penalty?
It is tested against three criteria, as a question of law, and doubt is resolved against the clause: because penalty provisions are void as against public policy, Alabama courts lean against any interpretation of a contract which will make the provision one for liquidated damages and, in all cases of doubtful intention, pronounce the stipulated sum a penalty. In Camelot Music, Inc. v. Marx Realty & Improvement Co. the Supreme Court of Alabama said the courts generally identify three criteria by which a valid liquidated damages clause may be distinguished from a penalty: first, the injury caused by the breach must be difficult or impossible to accurately estimate; second, the parties must intend to provide for damages rather than for a penalty; and third, the sum stipulated must be, in the published words, "a reasonable pre-breach of the probable loss", the sentence as published omits the noun, and it reads as a reasonable pre-breach estimate of the probable loss. It then applied the three criteria, held the sum compensatory rather than a penalty and affirmed. Determining whether a liquidated damages provision is valid is a question of law to be determined by the trial court based on the facts of each case. For a sale of goods the statute states the same idea with its own consequence: damages may be liquidated only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy, and a term fixing unreasonably large liquidated damages is void as a penalty (Ala. Code § 7-2-718(1)).
The trap
Validity is decided by the court, not the jury, so the clause lives or dies on the record about the deal rather than on sympathy. Reciting "as liquidated damages and not as a penalty" goes only to the second criterion; it does nothing for the first or the third. In a sale of goods, § 7-2-718 adds a consequence the common-law test does not state in terms: an unreasonably large stipulated sum is void, not reduced. But voiding the term does not hand the buyer back everything. Where the seller justifiably withholds delivery because of the buyer's breach and there is no valid liquidation term, the buyer's restitution is measured against a statutory figure of 20 percent of the value of the total performance or $500, whichever is smaller (§ 7-2-718(2)).
4 authorities
- case514 So.2d 987Camelot Music, Inc. v. Marx Realty & Improvement Co.Ala.decided 1987read it at the source ↗
The words that state the rule
It is true in Alabama that, because penalty provisions are void as against public policy, "Courts ... are disposed to lean against any interpretation of a contract which will make the provision one for liquidated damages and, in all cases of doubtful intention, will pronounce the stipulated sum a penalty." Cook v. Brown, 408 So.2d 143, 144 (Ala.Civ.App. 1981); see also, Keeble v. Keeble, 85 Ala. 552 , 5 So. 149 (1888). In Alabama, liquidated damages are a sum to be paid in lieu of performance, Forsyth v. Central Foundry Co., 240 Ala. 277 , 198 So. 706 (1940), while a penalty is characterized as a security for the performance of the agreement or as a punishment for default. Standard Tilton Milling Co. v. Toole, 223 Ala. 450 , 137 So. 13 (1931). The courts generally identify three criteria by which a valid liquidated damages clause may be distinguished from a penalty. First, the injury caused by the breach must be difficult or impossible to accurately estimate; second, the parties must intend to provide for damages rather than for a penalty; and, third, the sum stipulated must be a reasonable pre-breach of the probable loss. See, C. Gamble and D. Corley, Alabama Law of Damages, § 5-4 (1982). Determining whether a liquidated damages provision is valid is a question of law to be determined by the trial court based on the facts of each case.
- case514 So.2d 987Camelot Music, Inc. v. Marx Realty & Improvement Co.Ala.decided 1987read it at the source ↗
The words that state the rule
It is clear that the damages awarded by the trial court in this case are compensatory, are to be paid in lieu of performance, and are approximately in a sum that the parties reasonably could have expected to be suffered by the lessor in the event of a breach. In other words, the calculations by the trial court gave an amount that would have been paid had Camelot performed its obligations under the contract. Because the liquidated damages assessed here are those that Camelot reasonably could have expected to result from its breach of the contract, we hold that the liquidated damages clause of the contract was not a penalty, and that the trial judge did not err in assessing damages in the sum found by him to have been suffered by the lessor. The judgment of the trial court is due to be, and it hereby is, affirmed. AFFIRMED.
- statuteAla. Code § 7-2-718enactment date not established
The words that state the rule
Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
- statuteAla. Code § 7-2-718enactment date not established
The words that state the rule
(2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds: (a) The amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1), or (b) In the absence of such terms, 20 percent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.