Will this liquidated-damages figure be enforced, or struck down as a penalty?
Minnesota has long regarded provisions for liquidated damages as prima facie valid when 'entered into deliberately between parties who have equality of opportunity for understanding and insisting upon their rights', on the assumption that the parties in naming a liquidated sum intended it to be a fair compensation for an injury caused by a breach and not a penalty for nonperformance (Gorco). The test is not what the parties called it: 'The controlling factor, rather than intent, is whether the amount agreed upon is reasonable or unreasonable in the light of the contract as a whole, the nature of the damages contemplated' and the surrounding circumstances. Where the actual damages resulting from a breach cannot be ascertained or measured by the ordinary rules, a provision not manifestly disproportionate to the actual damages will be sustained; where the measure of damages is susceptible of definite measurement, Minnesota has uniformly held an amount greatly disproportionate to be a penalty. A provision having an impact that is punitive rather than compensatory will not be enforced.
The trap
Measurability is what decides most Minnesota cases, and it is a fact about the damages you listed, not about the percentage you chose. In Gorco a 15 percent cancellation charge failed because the clause itself named three items (salesman's commission, advertising, and committing labour and equipment) that were 'clearly and readily susceptible of definite measurement and proof by ordinary rules', and the record showed no commission was paid and no labour or equipment was committed. Reciting general overhead does not help: Gorco quotes Goodell for the point that rent, utilities, bookkeeping and accounting are general expenses of conducting business that the breach neither increased nor decreased. Minnesota's rule is stated by the Court as being in accord with Restatement, Contracts § 339 (a reasonable forecast of just compensation for harm that is incapable or very difficult of accurate estimation). Minn. Stat. § 336.2-718 (liquidation of damages in a sale of goods) is not among the statutes available for this rule and is not stated here.
8 authorities
The words that state the rule
The modem trend is to look with candor, if not with favor, upon a contract provision for liquidated damages when entered into deliberately between parties who have equality of opportunity for understanding and insisting upon their rights, since an amicable adjustment in advance of difficult issues saves the time of courts, juries, parties, and witnesses and reduces the delay, uncertainty, and expense of litigation. 10 Accordingly this court has long regarded provisions for liquidated damages as prima facie valid 11 on the assumption that the parties in naming a liquidated sum intended it to be a fair compensation for an injury caused by a breach of contract and not a penalty for nonperformance.
The words that state the rule
This court has held that where the actual damages resulting from a-breach of the contract cannot be ascertained or measured by the or *483 dinary rules, a provision for liquidated damages not manifestly disproportionate to the actual damages will be sustained. 18 On the other hand, when the measure of damages resulting from a breach of contract is susceptible of definite measurement, we have uniformly held an amount greatly disproportionate to be a penalty.
The words that state the rule
Punishment of a promisor for breach, without regard to the extent of the harm that he has caused, is an unjust and unnecessary remedy 16 and a provision having an impact that is punitive rather than compensatory will not be enforced.
The words that state the rule
The controlling factor, rather than intent, is whether the amount agreed upon is reasonable or unreasonable in the light of the contract as a whole, the nature of the damages contemplated, and the surrounding cir- | cumstances.
The words that state the rule
In the instant case the provision for liquidated damages covered specific elements of damages which were clearly and readily susceptible of definite measurement and proof by ordinary rules. These elements were: (1) Salesman’s commission, (2) advertising, and (3) commitment of labor and equipment to perform contract. Obviously the amount of a salesman’s commission is easily ascertained. No- attempt was made to prove the payment of any commission. Likewise the actual committing of any labor or equipment to perform the contract was susceptible of proof without difficulty. The record, however, discloses that plaintiff learned that defendant had cancelled the contract prior to any commitment of labor or equipment and therefore no expenses therefor were incurred by plaintiff.
The words that state the rule
On cross-examination of Mr. Coplin it was brought out that plaintiff’s ratio of general and administrative expenses to sales included such expenses as rent, utilities, the bookkeeper’s salary, and accounting and legal fees. With respect to these types of expenses, this court in Goodell v. Accumulative Income Corp. 185 Minn. 213, 219 , 240 N. W. 534, 537 , in holding that a stipulated-damage provision was a penalty, made the following comment: “Defendant states that the court will take judicial notice that defendant suffered damages in the matter of expense of selling the certificate, salaries of officers, maintenance of office, bookkeeping, investment of funds, etc. These are general expenses of conducting its business. Plaintiff’s default neither increased nor decreased such expenses.”
The words that state the rule
The Minnesota rule is in accord with Restatement, Contracts, § 339, which provides: “(1) An agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless “(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and “(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.”
The words that state the rule
Since the provision for liquidated damages relates solely to items readily subject to definite proof, and in view of the fact that the record is almost devoid of any evidence that would tend to support a conclusion that the sum stipulated for liquidated damages (i. e., 15 percent of $1,800 or $270) bears any reasonable relation to plaintiff’s pecuniary loss, it must be concluded that the provision for liquidated damages is in the nature of a penalty and is therefore unenforceable.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.