Liquidated damages in New Jersey

(1) 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 non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. (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, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller. (3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes (a) a right to recover damages under the provisions of this Chapter other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

As the law has evolved, a stipulated damage clause “must constitute a reasonable forecast of the provable injury resulting from breach; otherwise, the clause will be unenforceable as a penalty and the non-breaching party will be limited to conventional damage measures.” Goetz & Scott, supra, 77 Colum.L.Rev. at 554. So viewed, “reasonableness” emerges as the standard for deciding the validity of stipulated damages clauses. See Wassenaar, supra, 331 N.W.2d at 361 (noting that “[t]hq overall single test of validity is whether the clause is reasonable under the totality of circumstances”).

Because stipulated damages clauses are presumptively reasonable, supra at 252-53, 645 A.2d at 108, the burden of production and of persuasion rests on the Township.

We remand 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. The judgment of the Appellate Division is affirmed in part, reversed in part, and the matter is remanded to the Law Division.

Consistent with the trend toward enforcing stipulated damages clauses, the Appellate Division has recognized that such clauses should be deemed presumptively reasonable and that the party challenging such a clause should bear the burden of proving its unreasonableness.

Although the Appellate Division has indicated that courts should determine the enforceability of a stipulated damages clause as of the time of the making of the contract, Westmount Country Club, supra, 82 N.J.Super. at 206 , 197 A.2d 379 , the modern trend is towards assessing reasonableness either at the time of contract formation or at the time of the breach.

As the law has evolved, a stipulated damage clause “must constitute a reasonable forecast of the provable injury resulting from breach; otherwise, the clause will be unenforceable as a penalty and the non-breaching party will be limited to conventional damage measures.” Goetz & Scott, supra, 77 Colum.L.Rev. at 554. So viewed, “reasonableness” emerges as the standard for deciding the validity of stipulated damages clauses. See Wassenaar, supra, 331 N.W.2d at 361 (noting that “[t]hq overall single test of validity is whether the clause is reasonable under the totality of circumstances”).

We conclude that the parties’ characterization of stipulated damages as “liquidated damages” or as a “penalty” should not be dispositive.

Because stipulated damages clauses are presumptively reasonable, supra at 252-53, 645 A.2d at 108, the burden of production and of persuasion rests on the Township.

Actual damages, moreover, reflect on the reasonableness of the parties’ prediction of damages. “If the damages provided for in the contract are grossly disproportionate to the actual harm sustained, the courts usually conclude that the parties’ original expectations were unreasonable.” Wassenaar, supra, 331 N.W.2d at 364

On balance, we believe we should remand this matter to the trial court to consider the reasonableness of the clause in light of this opinion. In resolving that issue, the court should consider, among other relevant considerations, the reasonableness of the use of gross receipts as the measure of damages no matter when the cancellation occurs; the significance of the award of damages based on twenty-five percent of one year’s average gross receipts, rather than on some other basis such as total gross receipts computed for each year remaining under the lease; the reasoning of the parties that supported the calculation of the stipulated damages; the lessee’s duty to mitigate damages; and the fair market rent and availability of replacement space.

To summarize, we affirm the judgment of the Appellate Division that the Township is liable to plaintiffs for terminating the lease. The agreement did not violate N.J.S.A. 40:60-42, and N.J.S.A 40A:12-14 does not apply retroactively to the lease. We also affirm the judgment of the Appellate Division awarding plaintiffs damages of $55,748.27 for renovation costs. We remand 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. The judgment of the Appellate Division is affirmed in part, reversed in part, and the matter is remanded to the Law Division.

Determining enforceability at the time either when the contract is made or *252 when it is breached encourages more frequent enforcement of stipulated damages clauses.

Consistent with the trend toward enforcing stipulated damages clauses, the Appellate Division has recognized that such clauses should be deemed presumptively reasonable and that the party challenging such a clause should bear the burden of proving its unreasonableness.