Will this stipulated-damages figure be enforced, or struck down as a penalty?
It is enforced if it passes a two-part test measured as of contracting: a contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss AND the amount of actual loss is incapable or difficult of precise estimation. Two further conditions ride with that test: parties have the right to agree to such a clause only provided the clause is neither unconscionable nor contrary to public policy, and the agreement is interpreted as of the date of its making and not as of the date of its breach. A liquidated-damages provision is an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained by breach. Where the amount is plainly disproportionate to the probable loss it is an unenforceable penalty, and the label the parties used does not decide it: in interpreting a provision fixing damages it is not material whether the parties called it liquidated damages or styled it a penalty. On that test the Court of Appeals upheld the clause in front of it (a truck-lease formula fixing damages at one half of all the rentals that would have come due), and affirmed the lessor's judgment, with costs.
The trap
New York judges the clause at FORMATION, on the parties' own recital of the difficulty of estimation: in Truck Rent-A-Center the court relied on the clause's recitation of the lessor's investment, the uncertainty of re-renting and the idle-vehicle costs, and on the 50% re-rental credit built into the formula, to find a genuine estimate rather than a penalty. The practical lesson is that the clause must show its arithmetic and give credit for mitigation; an acceleration of all remaining payments with no offset invites the penalty attack. Two more things carried the clause that survived: it sat in the preprinted part of the form and survived anyway, because the agreement was fully negotiated and the form had been amended in many other respects, and there was no indication of any disparity of bargaining power or of unconscionability. A pure form clause in a take-it-or-leave-it deal has neither of those going for it. Note also that the New York rule is stated in common law, not in a statute: UCC 2-718 is not among the New York statutes available for this research, so the sale-of-goods overlay is not established here.
11 authorities
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
Parties to a contract have the right to agree to such clauses, provided that the clause is neither unconscionable nor contrary to public policy.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
In effect, a liquidated damage provision is an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
In interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for "liquidated damages”, as in this case, or have styled it as a penalty. (E.g., Wirth & Hamid Fair Booking v Wirth, 265 NY 214, 225 , supra; Ward v Hudson Riv. Bldg. Co., 125 NY 230, 234 , supra.) Such an approach would put too much faith in form and too little in substance. Similarly, the agreement should be interpreted as of the date of its making and not as of the date of its breach.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
In applying these principles to the case before us, we conclude that the amount stipulated by the parties as damages bears a reasonable relation to the amount of probable actual harm and is not a penalty. Hence, the provision is enforceable and the order of the Appellate Division should be affirmed.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
We attach no significance to the fact that the liquidated *427 damages clause appears on the preprinted form portion of the agreement. The agreement was fully negotiated and the provisions of the form, in many other respects, were amended. There is no indication of any disparity of bargaining power or of unconscionability. The provision for liquidated damages related reasonably to potential harm that was difficult to estimate and did not constitute a disguised penalty. We also find no merit in the claim of trial error advanced by Puritan. Accordingly, the order of the Appellate Division should be affirmed, with costs.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.decided 1977read it at the source ↗
The words that state the rule
Article 16 of the lease agreement provided that if the agreement should terminate prior to expiration of the term of the lease as a result of the lessee’s breach, the lessor would be entitled to damages, "liquidated for all purposes”, in the amount of all rents that would have come due from the date of termination to the date of normal expiration of the term less the "re-rental value” of the vehicles, which was set at 50% of the rentals that would have become due. In effect, the lessee would be obligated to pay the lessor, as a consequence of breach, one half of all rentals that would have become due had the agreement run its full course.
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.decided 1977read it at the source ↗
The words that state the rule
The agreement recited that, in arriving at the settled amount of damage, "the parties hereto have considered, among other factors, Lessor’s substantial initial investment in purchasing or reconditioning for Lessee’s service the demised motor vehicles, the uncertainty of Lessor’s ability to re-enter the said vehicles, the costs to Lessor during any period the vehicles may remain idle until re-rented, or if sold, the uncertainty of the sales price and its possible attendant loss. The parties have also considered, among other factors, in so liquidating the said damages, Lessor’s saving in expenditures for gasoline, oil and other service items.”
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.decided 1977read it at the source ↗
The words that state the rule
The text of article 16 of the lease, in pertinent part, reads as follows: "16. Upon termination of this agreement, * * * Lessor * * * shall be entitled to damages, herein liquidated for all purposes * * * as follows: "(a) The sum of all rents designated as 'Fixed Rental Charges’ which would have become due under the normal operation of this agreement from the date of the said termination * * * including any effective renewal period; less *422 "(b) The re-rental value of said motor vehicles which is hereby agreed upon as fifty per cent (50%) of the sum of such 'Fixed Rental Charges’ as are set forth in subdivision '(a)’ of this article. "In arriving at said liquidated damages, the parties hereto have considered, among other factors, Lessor’s substantial * * * investment in purchasing or reconditioning for Lessee’s service the demised motor vehicles, the uncertainty of Lessor’s ability to re-enter the said vehicles, the costs to Lessor during any period the vehicles may remain idle until re-rented, or if sold, the uncertainty of the sales price and its possible attendant loss. The parties have also considered, among other factors, in so liquidating the said damages, Lessor’s saving in expenditures for gasoline, oil and other service items.”
- case41 N.Y.2d 420Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.N.Y.decided 1977read it at the source ↗
The words that state the rule
Looking forward from the date of the lease, the parties could reasonably conclude, as they did, that there might not be an actual market for the sale or re-rental of these specialized vehicles in the event of the lessee’s breach. To be sure, plaintiffs lost profit could readily be measured by the amount of the weekly rental fee. However, it was permissible for the parties, in advance, to agree that the re-rental or sale value of the vehicles would be 50% of the weekly rental. Since there was uncertainty as to whether the trucks could be re-rented or sold, the parties could reasonably set, as they did, the value of such mitigation at 50% of the amount the lessee was obligated to pay for rental of the trucks.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.