Below is a student contribution by Robert Herz.
I’m looking to buy a new car. But of course I want to test drive it first. Think about the same scenario when buying clothes. I wouldn’t typically buy new clothes without trying to see if they fit. But what if the salesperson asked for a deposit in order to try on the clothes? That’s not so bad because at least I get my money back. But let’s suppose that the clothes don’t fit, or I don’t like the way the clothes look on me, so I decide not to buy them… But I don’t get my deposit back?!
Liquidated damages or penalty?
The hypothetical does not seem to be a likely scenario, but it appears similar to the facts of Ward v. West County Motor Company, Inc., No. ED101613 (Mo.App.E.D. 2015). As stated in the briefs of the Appellants and the Respondent, the facts relevant to the issue are as follows:
Appellants, Tara Ward and Lawrence LaBarge, each engaged in a transaction to purchase a vehicle from the Respondent, West County Motor Company, Inc. (WCMC). During these transactions, each Appellant signed a Buyer’s Order from and deposited $1,000 to WCMC.
The liquidated damages provision at issue is as follows:
ALL DEPOSITS ARE NONREFUNDABLE… Dealer shall have the right, upon failure or refusal of Purchaser to accept delivery of the motor vehicle ordered hereunder and to comply with the terms of this Order, to retain as liquidated damages any cash deposit made by purchaser.
Appellant Ward claims she thought the deposit was for the test drive only, not to the purchase the vehicle. “Ward did some research and found the car did not have as many features as she wanted, so she decided against purchasing it.” (App. Br. 3). Appellant LaBarge was interested in buying a vehicle, but was not certain he could afford one. LaBarge claims he was under the impression that “[he] could get his money back if he did not like the car or financing did not work out.” (App. Br. 4). After signing the Buyer’s Orders, both Appellants independently decided against purchasing the vehicles and subsequently sought the refund of their deposits from WCMC. However, upon Appellants request for a refund, WCMC asserted that the deposits were non-refundable. During the course of trial, WCMC filed a motion for directed verdict alleging, among other things, that each Appellant each failed to make a submissible case that the liquidated damages provision was invalid. The trial court sustained this motion, and a subsequent jury verdict was returned in favor of WCMC.
Stepping back from the specifics alleged to look at the big picture, these are transactions for the sales of goods, namely automobiles, and therefore should fall with the scope of the Uniform Commercial Code (UCC), Article 2.
First issue. Is the liquidated damages provision an exclusive remedy?
Under the UCC, the purpose of contractual remedies is to put the injured party “in as good a position as if the other party had fully performed.” UCC § 1-106(1). That is, the injured party is to receive expectation damages. Liquidated damages are used to compensate the injured party when the damages will be difficult to determine. UCC § 2-718 specifically addresses liquidated damages. The section states as follows:
(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 nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
The Missouri statute restates this section verbatim in Mo. Rev. Stat. 400.2-718(1).
“It is not necessary that the liquidated damage clause expressly state that it is the exclusive measure of damages.” Lawrence’s Anderson on the Uniform Commercial Code, 3d ed. § 2-718:12. This result seems to make sense. In Northern Illinois Gas Co. v. Energy Co-op., Inc., the court stated, “[a] liquidated damages clause is the agreement of the parties as to the amount of damages which must be paid in event of default.” 461 N.E.2d 1049, 1055 (citing 5 Corbin on Contracts, § 1062 at 355-56 (1964)). In essence, a liquidated damages provision is an alternative measurement for actual damages, and thus the nature of liquidated damages remains compensatory. “Failure to demand a contractual right does not create rights greater than those bargained for.” Id. Thus the measurement of damages provided for by the liquidated damages clause in the Buyer’s Order is the only measurement available to WCMC unless alternatives were otherwise bargained for.
In Northern Illinois Gas Co. v. Energy Co-op., Inc., the aggrieved party argued that § 2-719(1)(b) of the UCC states that a liquidated damages clause provides for cumulative measures of damages unless the clause explicitly states exclusivity. Id. However, the court found that the liquidated damages clause provided for exclusive measure of actual damages under the UCC because:
“Liquidation or limitation of damages is governed by section 2–718; limitation of remedies falls under 2–719. The concepts are separate and distinct. The only cross reference between the two sections is found in 2–719 which states that it is “subject to” 2–718. If, instead, 2–718 were made subject to 2–719, then the restrictions of 2–719(1)(b) would arguably apply to a liquidated damages clause. But the fact that 2–719 is subject to 2–718 indicates that any restriction on the right to liquidate damages by agreement is contained in 2–718 and nowhere else. We see no reason to impose the additional restraints of 2–719(1)(b).”
Id. at 1056.
The liquidated damages clause at issue is therefore considered the exclusive measurement of actual damages available to WCMC. This clause “is usually intended to preclude the traditional monetary remedies referenced in Section 2-701 or Section 2-711.” 2 Hawkland UCC Series § 2-718:1. However, “the liquidated damages provision may nonetheless be unenforceable if the provision fails to meet the test stated in Section 2-718(1).” Id.
Second issue. Does this liquidated damages provision meet the three prong validity test as provided by the language of the UCC and Mo. Rev. Stat. 400.2-718(1)?
Under Missouri common law, “(1) the amount fixed as damages must be a reasonable forecast for the harm cause by the breach; and (2) the harm must be of a kind difficult to accurately estimate[,]” for a liquidated damages clause to be held valid. Diffley v. Royal Papers, Inc., 948 S.W.244, 246 (Mo.Ct.App. 1997). This two part common law test does not apply in the instant case though. “Under the UCC, however, reasonableness is the only test.” Kvassay v. Murray. 808 P.2d 896, 900 (Kan.Ct.App. 1991). Mo. Rev. Stat. 400.2-718(1) determines reasonableness of a liquidated damages clause by the following factors:
- Anticipated or actual harm caused by a breach;
- Difficulties of proof of loss; and
- Inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.
Anticipated or actual harm caused by the breach
In determining whether or not the liquidated damages provision is reasonable, the reviewing court should inquire “whether the liquidated damage clause embodies a good faith effort to pre-estimate damages, and whether it is based on the principle of just compensation.” Grumman Flxible Corp. v. City of Long Beach, 505 F.Supp. 623, 626 (E.D.N.Y. 1980) (applying the UCC. Internal citations omitted).
“The party asserting that a liquidated damages clause is, in fact, a penalty provision has the burden of proof.” Baker v. International Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App. 1991) (applying the UCC to breach of contract action against a customer to recover damages for damaged negatives.).
In the instant case, the WCMC alleges actual or anticipated damages are incurred as a result of additional floor plan interest expenses that would not have otherwise been incurred if the transactions were completed as contemplated in the Buyer’s Order. However, WCMC does not support the proposition that $1000 is proportional to additional floor plan interest incurred.
Suppose WCMC re-sells the automobile in two months after the time of breach. Does WCMC incur the same amount of additional floor plan interest if the automobile was instead re-sold two days after the time of breach? WCMC asserts that the liquidated damages amount is approximately 2% to 3% of the total value of the car. However this assertion also does not support the claim that the amount is related to the actual or anticipated damages incurred, but only that the amount is proportional to a small percentage of the total purchase price.
Difficulties of proof of loss
The ability to estimate reasonable damages raises two issues. First, at the time WCMC and the Appellants executed the Buyer’s Orders, did the parties know what the exact amount of damages will be in the future? The answer is no. Neither party disputes that. But the Appellants raised the second and more critical issue: At the time the agreement was executed, would the parties know how to calculate the actual damages? The answer is yes.
In a Maryland court, a Mrs. Kaiden filed suit against an automobile dealer for the return of a $5,000 deposit. Lee Oldsmobile, Inc. v. Kaiden, 363 A.2d 270, 271 (Md. Ct. Spec. App. 1976) (applying the UCC). The court rejected the application of the liquidated damages clause because “it [was] clear that the actual damages [were] capable of accurate estimation.” Id. at 274.
The court will not look at the ability to determine the damages in “hindsight made possible because the actual figures claimed were in evidence.” Id. at 274. “[A]t the time the contract was made, it was clear that the nature of any damages which would result from a possible future breach was such that they would be easily ascertainable.” Id. Like Lee Oldsmobile, it seems apparent that the losses WCMC make explicit are easily ascertainable. The amount of damages WCMC would be entitled to will be discussed further below.
Inconvenience or nonfeasibility of otherwise obtaining an adequate remedy
Upon brief review, it appears there are not many cases addressing this factor. “While this factor may overlap with the second factor regarding anticipated difficulties in proving loss, this factor may also address issues of delay and expense of proving damages.” 2 Hawkland UCC Series § 2-718:1.
Since the liquidated damages provision appears to be invalid, the final question remaining is to what extent WCMC recover damages from the Appellants. Under the Mo. Rev. Stat. 400.2-708, which codifies the UCC, “the measure of damages for nonacceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price[.]” See UCC § 2-708. However, the difference between market price at the time and place for tender and the unpaid contract price may not be an adequate remedy.
The amount of damages recoverable in the instant case therefore turns on whether WCMC is entitled to lost profits as a lost volume seller.
Is WCMC a lost volume seller entitled to lost profits?
“A lost volume seller is one whose supply of goods exceeds the demand. Because he is in a position to satisfy all buyers who are willing to deal with him, other damage provisions of Article Two do not adequately compensate him for the profits lost as a result of the lost sales opportunity.” Great W. Sugar Co. v. Mrs. Allison’s Cookie Co., 563 F. Supp. 430, 433 n. 1 (E.D. Mo. 1983) (applying the UCC).
Whether or not WCMC is entitled to lost profits depends on the specific factual circumstances to each transaction of the Appellants. Appellant LaBarge asserted his interest in a BMW 325i with a manual transmission. Appellant Ward asserted her interest on a BMW X5. In order for WCMC to recover lost profits, the dealership would need to show that it could have readily sold the vehicles to another customer, and the other customer would have bought the automobile anyway. See Famous Knitwear Corp. v. Drug Fair, Inc., 493 F.2d 251, 253-54 n. 5 (4th Cir. 1974) (applying UCC § 2-708).
It appears that WCMC would be less likely to be entitled to lost profits in the transaction with Appellant LaBarge because of the need to special order the BMW 325i with a manual transmission. The fact that WCMC would need to special order Appellant LaBarge’s automobile appears as though WCMC did not have another buyer. Therefore, WCMC would only be entitled to the difference between the market price at the time and place for tender and the unpaid contract price. See UCC § 2-708(1). As for Appellant Ward, more facts are necessary to determine if the BMW X5 transaction entitles WCMC to lost profits.
– Robert Herz