Will our liquidated-damages figure be enforced, or struck down as a penalty?
Reasonable liquidated-damages clauses are valid and enforceable in Ohio, but where the amount specified is manifestly inequitable and unrealistic a court will ordinarily regard it as a penalty. The test is the three-part one taken from paragraph two of the syllabus of Jones v. Stevens, which the Supreme Court of Ohio quoted and applied in Samson Sales: where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if (1) the damages would be uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.
The trap
Calling the number liquidated damages does not help. Samson Sales holds that the seller's standard reference 'to the sum of Fifty Dollars ($50.00) as liquidated damages and not as a penalty' is 'by no means conclusive or controlling', and that whether a particular sum is intended as a penalty or as liquidated damages depends upon the operative facts and circumstances surrounding each particular case. Samson Sales itself struck the clause down. The Court found the $50 manifestly disproportionate to both the $10,500 paid and the foreseeable loss, thought it beyond comprehension that the parties intended $50 to follow a negligent breach, and held the sum had the nature and appearance of a penalty; the judgment refusing to enforce it was affirmed. The first limb is the one that kills most clauses in a commercial deal: the court of appeals in Samson Sales had found the damages 'patently estimable', which the Supreme Court said was attuned to the fact that they would be as readily ascertainable as damages in a multitude of other situations involving negligence or breach of contract.
6 authorities
The words that state the rule
but time has apparently had no undermining influence upon the guiding principles initially set forth in Jones v. Stevens, supra, where the court held at paragraph two of the syllabus: “Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.”
The words that state the rule
Hence, Honeywell’s standard reference “to the sum of Fifty Dollars ($50.00) as liquidated damages and not as a penalty” is by no means conclusive or controlling in this case.
The words that state the rule
the court of appeals expressly noted that “the damages here are patently estimable,” and this finding is attuned to the indisputable fact that the damages in this case would be as readily ascertainable as the damages in a multitude of other conceivable situations involving negligence and/or breach of contract.
The words that state the rule
Whether a particular sum specified in a contract is intended as a penalty or as liquidated damages depends upon the operative facts and circumstances *29 surrounding each particular case
The words that state the rule
While some jurisdictions have rejected such contract provisions on policy grounds, clauses in contracts providing for reasonable liquidated damages are recognized in Ohio as valid and enforceable. Lange v. Werk (1853), 2 Ohio St. 519 ; Jones v. Stevens (1925), 112 Ohio St. 43 ; 30 Ohio Jurisprudence 3d (1981) 136-137, Section 128. However, reasonable compensation for actual damages is the legitimate objective of such liquidated damage provisions and where the amount specified is manifestly inequitable and unrealistic, courts will ordinarily regard it as a penalty. Sheffield-King Milling Co. v. Domestic Science Baking Co. (1917), 95 Ohio St. 180 , paragraph one of the syllabus
The words that state the rule
As to the second guideline recommended by this court, the stated sum of $50 in the contract involved in this case is manifestly disproportionate to either the consideration paid by Samson or the possible damage that reasonably could be foreseen from the failure of Honeywell to notify the police of the burglary. And with particular emphasis upon the third condition proposed in Jones v. Stevens, supra, it is beyond comprehension that the parties intended that damages in the amount of $50 should follow the negligent breach of the contract. In other words, an examination of the minute type used in the standard contract issued by Morse, as well as a fair construction of the contract provision as a whole, fails 'to evince a conscious intention of the parties to consider, estimate, or adjust the damages that might reasonably flow from the negligent breach of the agreement. See, particularly, American Financial Leasing Co. v. Miller (1974), 41 Ohio App. 2d 69 [ 70 O.O.2d 64 ]. Surely, Samson, which apparently had some business experience, did not pay $10,500 for the mere possibility of recouping $50 if Honeywell provided no service at all under the terms of the contract. Characteristically, therefore, and by way of analysis, the nominal amount set forth in the contract between Samson and Honeywell has the nature and appearance of a penalty. Accordingly, the judgment of the court of appeals is affirmed.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.