Wasserman's Inc and Jo-Ro v. Township of Middletown
Supreme Court of NJ - 1994
Facts:
P entered into commercial lease with D. The agreement contained a clause providing that if D cancelled the lease, it would pay P reimbursement for any improvement costs and damages of 25% of P's average gross receipts for one year.
P sold its business and subleased the property to Jo-Ro. The township approved this action.
D cancelled the lease, sold the property, and refused to pay the agreed damages.
Procedural History:
Lower court found for P, cancellation clause enforceable, damages $346k (improvement costs + gross receipt damages).
Appellate court affirmed, found for P, cancellation clause enforceable.
NJ Supreme Court affirmed renovation cost damages, reversed cancellation clause damages, remanded for new hearing on cancellation clause damages.
Issues:
Under what circumstances should a court enforce a stipulated damages clause (liquidated damages clause) in event of breach?
Holding/Rule:
A court should enforce a stipulated damages clause (liquidated damages clause) only if the set amount for damages is a reasonable forecast of just compensation for the harm caused by the breach.
Reasoning:
"Reasonableness" has emerged as the standard for deciding the validity of stipulated damages clauses.
Stipulated damages clauses allow for greater judicial economy and freedom of contract, but public law should define the remedies of the parties.
The Restatement says, "Damages for breach by either party may be liquidated in the agreement but only at an amount this is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.
The purpose of a stipulated damages clause is not to compel the promisor to perform, but to compensate the promisee for non-performance.
The cancellation clause is unreasonable if it does more than compensate P for their approximate actual damages caused by the breach.
Damages based on gross receipts run the risk of being found unreasonable since they do not reflect actual losses incurred because of the cancellation. They do not take expenses into account. Gross receipts do not bear a close enough relationship to the probable loss suffered by P to justify the enforcement of the clause.
Damages sustained by a business must relate to loss of net profits.
Jo-Ro earned a net profit of ~$400 in 1986 and a net loss of ~300 in 1987. The award of $290k for gross receipt damages is unreasonable.
Dissent:
None.
Notes:
Neither party was negotiating from a disadvantageous position.
