Will our liquidated damages figure survive in Kansas, or be struck as a penalty?
It is judged as of the day it was agreed, not with hindsight. Carrothers, quoting its own earlier decision in Beck, records two things "given special weight in support of a holding that a contractual provision is for liquidated damages rather than a penalty — the first is that the amount stipulated is conscionable, that it is reasonable in view of the value of the subject matter of the contract and of the probable or presumptive loss in case of breach; and the second is that the nature of the transaction is such that the amount of actual damages resulting from default would not be easily and readily determinable", and the burden of proving a clause is an unenforceable penalty "falls on the party challenging the provision". In Carrothers Construction Co. v. City of South Hutchinson the Supreme Court held that "the reasonableness of a liquidated damages clause in a contract deliberately entered into should be determined with regard to the conditions of the parties existing at the time the contract was executed, not from hindsight after the contract is breached", and said its decision was "intended to lay aside any further doubt and embrace a prospective analysis as the sole basis for evaluating a liquidated damages provision in a contract", overruling prior Court of Appeals decisions that had added a retrospective test. It then declined "to adopt a rule that operates solely to invalidate liquidated damages clauses that were freely entered into just because damages would be applicable after occupancy" and affirmed both the district court and the Court of Appeals, so the $850-per-day clause stood. For a sale of goods the statute states the test in its own terms: 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 (K.S.A. 84-2-718(1)).
The trap
Because the test is prospective, the record made before signing is what saves the clause, and what sinks it. In Carrothers the engineer had itemised the owner's anticipated costs of delay before the contract was let, the parties recited that time was of the essence and that actual damages would be difficult to ascertain, and the contractor had opportunities to object during bidding and did not. Note the mismatch to watch for: the common-law test Carrothers adopted looks to conditions at execution, while K.S.A. 84-2-718(1) speaks of "the anticipated or actual harm" and adds the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy, so a sale-of-goods clause is measured by the statute's wording, not by Carrothers'.
7 authorities
- case207 P.3d 231Carrothers Construction Co. v. City of South HutchinsonKan.decided 2009read it at the source ↗
The words that state the rule
In doing so, we explain below that the reasonableness of a liquidated damages clause in a contract deliberately entered into should be determined with regard to the conditions of the parties existing at the time the contract was executed, not from hindsight after the contract is breached.
- case207 P.3d 231Carrothers Construction Co. v. City of South HutchinsonKan.decided 2009read it at the source ↗
The words that state the rule
To that end, our decision in this case is intended to lay aside any further doubt and embrace a prospective analysis as the sole basis for evaluating a liquidated damages provision in a contract. To the extent any prior decisions of our Court of Appeals have contributed to that doubt by adding a retrospective test in their determination of this issue, they are overruled as to this limited point.
- case207 P.3d 231Carrothers Construction Co. v. City of South HutchinsonKan.decided 2009read it at the source ↗
The words that state the rule
We decline to adopt a rule that operates solely to invalidate liquidated damages clauses that were freely entered into just because damages would be applicable after occupancy. We believe the better rule is to require a liquidated damages clause applicable to a delay in achieving final completion to withstand the prospective analysis described in this opinion. We affirm the district court and the Court of Appeals for the reasons stated.
- statuteK.S.A. 84-2-718enactment 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.
- case207 P.3d 231Carrothers Construction Co. v. City of South HutchinsonKan.decided 2009read it at the source ↗
The words that state the rule
The provisions recited above show at the time the contract was entered into by the parties, the City and Carrothers agreed: (1) Time was of the essence in completing the project; (2) actual damages would be difficult to ascertain, so the parties chose to use the liquidated damages provision if a breach occurred rather than requiring proof of actual damages; (3) the same per diem amount of liquidated damages applicable to a failure to achieve substantial completion would apply to a failure to achieve final completion; (4) the $850 per diem liquidated damages amount for failure to achieve either substantial or final completion was not a penalty; and (5) the project engineer’s opinion would be relied upon by both parties to determine whether the completion dates were met.
- case207 P.3d 231Carrothers Construction Co. v. City of South HutchinsonKan.decided 2009read it at the source ↗
The words that state the rule
In considering the issue, this court previously stated: “In determining whether contractual agreements are to be treated as penalties or as liquidated damages, courts look behind the words used by the contracting parties to the facts and the nature of the transaction. The use of the terms ‘penalty’ or ‘liquidated damages’ in the instrument is of evidentiary value only. It is given weight and is ordinarily accepted as controlling unless the facts and circumstances impel a contrary holding. [Citations omitted.] The instrument must be considered as a whole, and the situation of the parties, the nature of the subject matter and the circumstances surrounding its execution taken into account. There are two considerations which are given special weight in support of a holding that a contractual provision is for liquidated damages rather than a penalty — the first is that the amount stipulated is conscionable, that it is reasonable in view of the value of the subject matter of the contract and of the probable or presumptive loss in case of breach; and the second is that the nature of the transaction is such that the amount of actual damages resulting from default would not be easily and readily determinable. [Citations omitted.]” Beck, 153 Kan. at 726 .
- case207 P.3d 231Carrothers Construction Co. v. City of South HutchinsonKan.decided 2009read it at the source ↗
The words that state the rule
In TMG Life Ins. Co. v. Ashner, 21 Kan. App. 2d 234, 250, 898 P.2d 1145 (1995), the Court of Appeals ruled the burden of proving a liquidated damages clause is an unenforceable penalty falls on the party challenging the provision. See Oriental Gardens, 32 Kan. App. 2d at 561 . We agree. By placing the burden of proof on the party challenging a liquidated damages clause, we promote a public policy favoring settlement and avoidance of litigation, and .allowing parties to make, and live by, their own contracts.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.