Liquidated Damages

Chapter 21 Liquidated Damages

■ ■ ■

It often makes sense for the parties to agree in the contract how much money will be awarded if there is a breach of the contract. These agreed-upon damages are referred to as "liquidated damages."

Provisions for liquidated damages allow the non-breaching party to recover when a limiting doctrine, such as the requirement that damages be proven with certainty, would otherwise make it impossible to recover a meaningful amount of damages. Alternatively, by acting as an agreed-upon limitation of liability, they can allow a party to limit its potential exposure so that it can safely enter into a contract without worrying that an inadvertent breach would expose it to damages out of all proportion to the profit it was making from the deal. Liquidated damages provisions also reduce litigation costs. Proving damages is often costly and fraught with uncertainty, requiring extensive investigation by accountants, financial experts, economists, and the like.

Present-day courts are usually favorably disposed toward liquidated damages clauses, in part because they save resources by reducing litigation and in part because giving effect to them furthers the general principle of freedom of contract. But if you took the language of the opinions---even recent ones---too literally you might think that courts are hostile to liquidated damages. Courts will often recite older, traditional rules limiting liquidated damages clauses and then uphold clauses that seem to violate these rules. The reason for this, as for most anomalies in law, is historical.

Early in the history of contract law, parties ensured the performance of contracts with a penal bond. The bond was a sealed instrument in which the promisor promised to pay a sum of money, but the bond provided that the obligation to pay would become "null and void" if the promisor performed his obligations under the accompanying contract. The amount of the bond was often a substantial sum intended to ensure that the contract was performed. For example, a wool merchant might promise to deliver 10 bushels of wool at Cardiff, and the bond might be a promise to pay several times the value of the wool if he failed to deliver it.

In the 1600's, courts of equity began enjoining the enforcement of penal bonds and requiring that the non-breaching party institute a suit at law for the determination of his loss. Thus, the principle emerged that a 594 penalty designed to coerce performance was unenforceable, but a reasonable attempt to estimate damages that would be difficult to prove with sufficient certainty was valid and enforceable. This principle continues to be repeated in case law today.

At first, courts were jealous of their prerogatives---including the fixing of damages---and viewed liquidated damages clauses with hostility. More recently, however, courts have become susceptible to arguments in favor of economic efficiency, and liquidated damages clauses are met with favor. Some legislatures have joined the fold. For example, California has amended its Civil Code to create a presumption that a liquidated damages clause is valid in a non-consumer contract unless it is proven that the clause is "unreasonable." Cal. Civ. Code § 1671. That is probably the case in other jurisdictions as well, but most other jurisdictions aren't so forthcoming about it. They go on quoting rules from the old cases but apply them in such a way that the result is as if they had adopted the California rule.

As a practical matter, one of the authors advises students and clients that, in a non-consumer context, a liquidated damages clause is very likely to be enforced if it is not procedurally unconscionable and amounts to no more than 10% of the contract's overall value. Further, it is likely---not "very likely," just "likely"---to be enforced if it is not procedurally unconscionable and amounts to no more than 20--25% of the value of the contract. Liquidated damages clauses of over 20--25% of the contract's value are anyone's guess as to whether a court will enforce them, and require a totality of the circumstances analysis.

One caveat is in order, however. A liquidated damages provision is likely to be struck down if it gives the non-breaching party a sum that clearly puts it in a better position than it would be in if the contract were performed. Also, a lawyer is asking for trouble if she doesn't attempt to tailor the damages to the severity of the breach. For instance, absent unusual circumstances, liquidated damages for a tenant's breach of a lease should vary according to the term remaining at the time of breach. A lease that gave the same amount of damages whether the tenant breached in the first month or the last would normally not be a reasonable attempt to estimate damages and would not pass muster. Similarly, per-day late charges in a contract for construction or supply of a product are more likely to be enforced than a one-size-fits-all default fee.

If the court does invalidate the liquidated damages provision, the non-breaching party is of course entitled to recover damages calculated in the usual manner unless the terms of the contract dictate otherwise. Further, if the liquidated damage clause is upheld and was drafted to be a baseline or minimum measure of damages rather than the exclusive remedy, 595 additional damages may be pled, proven, and recovered in the usual manner.

The R2d recites the traditional standards for liquidated damages in section 356. The comparable UNIDROIT provision is article 7.4.13.

Diffley v. Royal Papers, Inc.

Court of Appeals of Missouri 948 S.W.2d 244 (1997)

Crane, P.J.

[1]Plaintiffs, pension plan trustees, filed an action to collect \$210.80, which represented a late fee of 10% of total contributions due, against defendant employer for making late contributions to the pension plan in two months in 1995. After hearing the trustees' and employer's motions for summary judgment, the trial court entered summary judgment in employer's favor. The trustees appeal. We affirm on the grounds that the late fee is an unenforceable penalty.

[2]The undisputed facts before the court on the motions for summary judgment were as follows: Defendant, Royal Papers, Inc., (employer) had a collective bargaining agreement with Teamsters Local #688 covering its warehouse employees. Pursuant to this agreement, employer contributes \$31.00 per week, per employee, to the Teamsters Negotiated Pension Plan (the Pension Plan). The Pension Plan is administered by the Trustees pursuant to the Trust Agreement which is incorporated by reference into the collective bargaining agreement. The collective bargaining agreement and the Trust Agreement do not provide for a penalty for late payments to the Pension Plan. On May 9, 1994 the Trustees issued a Memorandum to all contributing employers of the Pension Plan which established a policy for late contributions. The memorandum provided:

Effective February 15, 1994, the Trustees of the Teamsters Negotiated Pension Plan adopted a policy regarding employers who are delinquent in contributions to the Fund. A late penalty of ten percent (10%), unless specified otherwise in the collective bargaining agreement, of the total contributions due for the month will be assessed against an employer who is fifteen (15) days late in submitting reports and contributions to the Fund office (to be mailed to: Teamsters Insurance & Welfare Fund Administrative Office, P.O. Box 503092, St. Louis, MO. 63150--3092).

A completed report form and contribution check is due in the Teamsters Negotiated Pension Fund office (address listed above) not later than fifteen (15) days after the end of the month being 596 reported. Therefore, in order to avoid a late penalty, a contribution must be received by the Fund not later than thirty (30) days after the end of the month being reported.

[3]Plaintiff Richard Diffley signed as the Union Trustee and Allan Barton signed as the Employer Trustee. Employer subsequently made two late contributions to the Pension Plan. According to the Trustees' motion, the September payment, which was due on October 30, 1995, was not received until November 9, 1995. The October payment, which was due on November 30, 1995 was not received until December 6, 1995.

[4]The Trustees appeal from the trial court's entry of summary judgment against them. They contend that the 10% late penalty was a valid liquidated damages provision which the trial court should have enforced. We disagree.

* * *

[5]Under state law, the Trustees argue that the 10% late fee is a proper liquidated damages provision which is entitled to enforcement. Employer, who also does not concede that the May 9th memorandum is a binding contract, argues that the late fee is an unenforceable penalty provision. We do not need to address the question of whether the May 9th memorandum is binding on employer because, even if it is, the 10% late fee contained therein is unenforceable as a penalty clause.

[6]Liquidated damages clauses are valid and enforceable, while penalty clauses are invalid. A penalty provision specifies a punishment for default. On the other hand, liquidated damages are a measure of compensation which, at the time of contracting, the parties agree will represent damages in case of breach.

[7]For a damage clause to be valid as fixing liquidated damages: (1) the amount fixed as damages must be a reasonable forecast for the harm caused by the breach; and (2) the harm must be of a kind difficult to accurately estimate. Furthermore, in determining whether an agreement sets forth a penalty or liquidated damages, we look to the intention of the parties as ascertained from the contract as a whole. The provision must be fixed on the basis of compensation, otherwise it is construed as a penalty clause designed primarily to compel performance. While the label the parties attach to a provision is not conclusive, it is a circumstance to be considered when deciding whether the provision is to be considered liquidated damages or a penalty.

[8]In this case the penalty of 10% of total contributions due for the month is a penalty provision and not a liquidated damages clause. The fee is termed a "late penalty." The amount of the penalty, 10% of all monthly contributions due, is far more than the loss of market interest on the monthly contributions during the time the payment is unpaid and is not a 597 reasonable forecast of the harm caused by the breach. The harm caused by late payments is easily measurable in terms of loss of interest or investment return during the time the payment is unpaid and the expense of administrative costs incurred in pursuing collection. The trial court did not err in entering summary judgment in employer's favor.

The judgment of the trial court is affirmed.

Notes and Questions

1.In the quoted portion of the Trustees' Memorandum, the language used is a "late penalty of ten percent (10%)." This was an unfortunate and uninformed choice of words due to the case law regarding unenforceable penalties discussed in the introduction to this chapter. A well drafted contract will say the sum is payable "as liquidated damages and not as a penalty." Although courts are supposed to look through the form of the transaction and base their decision on substance, using words that the other side can turn against you is never wise.

2.In paragraph 7, the court states: "The provision must be fixed on the basis of compensation, otherwise it is construed as a penalty clause designed primarily to compel performance." The court seems to be saying that the fact that the clause is intended to compel performance makes it an unenforceable penalty. Watch how the next opinion treats that issue.

DJ Manufacturing Corp. v. United States

United States Court of Appeals, Federal Circuit 86 F.3d 1130 (1996)

Bryson, Circuit Judge.

[1]DJ Manufacturing Corporation (DJ) appeals from a decision of the United States Court of Federal Claims granting summary judgment to the government. DJ argued that the liquidated damages clause in the contract between the parties was unenforceable as a penalty. The trial court rejected that argument, as do we.

I

[2]In January 1991, the government solicited an offer from DJ for 283,695 combat field packs to support troops who were then participating in Operation Desert Storm. The solicitation documents set forth a delivery schedule, sought accelerated delivery if possible, and provided for liquidated damages for late delivery. The parties negotiated a contract, which became effective on February 14, 1991. Like the underlying solicitation documents, the contract provided that, for each article 598 delivered after the date fixed in the contract, liquidated damages would be assessed at 1/15 of one percent of the contract price for each day of delay.

[3]DJ missed several delivery deadlines. In accordance with the liquidated damages clause, the government withheld payment in the amount of \$663,266.92,1 a reduction of about 8 percent of the total contract price of \$8,493,828.

[4]DJ filed suit in the Court of Federal Claims to recover the withheld amount, contending that the liquidated damages clause constituted an unenforceable penalty. The government moved for summary judgment. In support of its motion, the government submitted a declaration by an Army logistics management specialist, who stated that possession of the field packs was essential to the troops' combat readiness. In addition, the government submitted a declaration from the contracting officer, who stated that all contracts for items to be used in Operation Desert Shield/Desert Storm contained liquidated damages clauses for late delivery because of the need to get war items to the soldiers quickly.

[5]In response to the government's motion, DJ produced an affidavit of its president, who stated that the rate set forth in the liquidated damages clause "does not seem related to any specific need with respect to the item in question or the time-frame, but, rather, seems to be a fairly standard rate used in many solicitations for many different items." The affidavit listed several other government contracts and solicitations that allegedly contained clauses setting liquidated damages at the same rate. DJ argued that there was therefore a disputed issue of material fact as to whether the contracting officer had "used a standard rate, historically employed by [the agency]" and had made "no attempt to forecast just compensation."

[6]The Court of Federal Claims granted the government's motion. At the outset, the court held that DJ bore the burden of establishing that the liquidated damages clause was unenforceable, and that in order to avoid summary judgment DJ had to point to evidence raising a triable question of fact with respect to that issue. The court then recited the rule that a liquidated damages clause is enforceable if the harm that would be caused by a breach is difficult to estimate and the amount or rate fixed as liquidated damages is a reasonable forecast of the loss that may be caused by the breach.

[7]As to the first element, the court characterized this case as presenting "a paradigmatic example of a situation where accurate estimation of the damages resulting from delays in delivery is difficult, if not impossible." As to the second element, the court rejected DJ's argument that in order to determine the reasonableness of the liquidated damages, 599 it was necessary to inquire into the process that the contracting officer followed in reaching the amount that was inserted into the contract. The inquiry, the court explained, is an objective one. "The proper inquiry focuses on whether the amount itself is a reasonable forecast, not whether, as [DJ] seems to suggest, the individual responsible for proposing the rate engaged in a reasonable attempt to forecast damages." Because DJ failed to offer any evidence that the liquidated damages rate agreed upon in the contract was "greater than that which the government could reasonably suffer as a result of the delayed delivery of the field packs," the court granted the government's motion and ordered DJ's complaint to be dismissed.

II

[8]By fixing in advance the amount to be paid in the event of a breach, liquidated damages clauses save the time and expense of litigating the issue of damages. Such clauses "serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable," Priebe & Sons v. United States, 332 U.S. 407, 411, 92 L.Ed. 32, 68 S.Ct. 123 (1947), which is often the case when there is a delay in the completion of a contract for the government. Id.; United States v. Bethlehem Steel Co., 205 U.S. 105, 120, 51 L.Ed. 731, 27 S.Ct. 450 (1907); Jennie-O Foods, Inc. v. United States, 217 Ct.Cl. 314, 580 F.2d 400, 413 (Ct.Cl.1978) ("Costs to the public convenience and the temporary thwarting of the public goals . . . are hard to measure with precision.").

[9]When damages are uncertain or difficult to measure, a liquidated damages clause will be enforced as long as "the amount stipulated for is not so extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention or oppression." Wise v. United States, 249 U.S. 361, 365, 63 L.Ed. 647, 39 S.Ct. 303 (1919); see United States v. Bethlehem Steel Co., 205 U.S. at 121 ("The amount is not so extraordinarily disproportionate to the damage which might result from the [breach], as to show that the parties must have intended a penalty and could not have meant liquidated damages."). With that narrow exception, "there is no sound reason why persons competent and free to contract may not agree upon this subject as fully as upon any other, or why their agreement, when fairly and understandingly entered into with a view to just compensation for the anticipated loss, should not be enforced." Wise v. United States, 249 U.S. at 365; see also Sun Printing & Publishing Ass'n v. Moore, 183 U.S. 642, 674, 22 S.Ct. 240, 46 L.Ed. 366 (1902) (except where "the sum fixed is greatly disproportionate to the presumed actual damages," a court "has no right to erroneously construe the intention of the parties, when clearly expressed, in the endeavor to make better contracts for them than they have made for themselves").

600 [10]A party challenging a liquidated damages clause bears the burden of proving the clause unenforceable. That burden is an exacting one, because when damages are uncertain or hard to measure, it naturally follows that it is difficult to conclude that a particular liquidated damages amount or rate is an unreasonable projection of what those damages might be. See Restatement (Second) of Contracts § 356 cmt. b (1981) ("The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty . . . the easier it is to show that the amount fixed is reasonable."); 5 Samuel Williston, A Treatise on the Law of Contracts § 783 (W. Jaeger ed. 1961).

[11]While some state courts are hostile to liquidated damages clauses, federal law "does not look with disfavor upon 'liquidated damages' provisions in contracts." Priebe & Sons, Inc. v. United States, 332 U.S. at 411. The few federal cases in which liquidated damages clauses have been struck down provide some indication of how rare it is for a federal court to refuse to enforce the parties' bargain on this issue. For example, in Priebe & Sons, Inc. v. United States, the Supreme Court struck down a liquidated damages clause when it was "certain when the contract was made" that the breach in question "plainly would not occasion damage." 332 U.S. at 413. The contract in Priebe contained two liquidated damages clauses: one for delay in the delivery of eggs and a second for failure to have the eggs inspected and ready for delivery by a specific time prior to the delivery date. The contractor was late in meeting the inspection requirement, but delivered the eggs on time. Thus, only the second liquidated damages clause was at issue in the case. As the Court viewed that clause, a delay in inspection that did not result in a delay in delivery could not cause any loss to the government. At the same time, however, the Court stated that if the breach had involved "failure to get prompt performance when delivery was due," the Court would have had "no doubt of the validity of the provision for 'liquidated damages' when applied under those circumstances." Id. at 412.

* * *

III

[12]In light of these principles, the trial court was correct to grant summary judgment to the government. DJ argues that the government should bear the burden of proving the clause enforceable and that the evidence before the trial court did not establish the government's right to recovery as a matter of law. That argument, however, flies in the face of settled law regarding the burden of proof and the standards for granting summary judgment.

[13]As noted above, it was DJ's burden to prove that the liquidated damages clause was unenforceable. When a party moves for summary judgment on an issue as to which the other party bears the burden of proof, 601 the moving party need not offer evidence, but may obtain summary judgment merely by pointing out to the court "that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 91 L. Ed. 2d 265, 106 S.Ct. 2548 (1986).

[14]The only evidence that DJ produced at the summary judgment stage was the affidavit of its president, which alleged that the liquidated damages rate was a "standard" rate, rather than a rate selected specifically for the field pack contract. In addition, DJ relies on the declaration of the contracting officer, which stated that the liquidated damages clause was put into the field pack contract, as well as other contracts for items to be used in Operations Desert Shield/Desert Storm "due to the almost overwhelming need to get war items, such as field packs, into the soldiers' possession as soon as possible."

[15]Neither of those two items of evidence raises an issue of material fact requiring a trial. DJ argues that the contracting officer's statement about the need to get war items into the soldiers' possession quickly shows that the liquidated damages clause was designed to be a "spur to performance" and thus was an unenforceable penalty. That assertion, however, is at odds with several Supreme Court decisions, which make clear that a liquidated damages clause is not rendered unlawful simply because the promisee hopes that it will have the effect of encouraging prompt performance by the promisor. In Robinson v. United States, for example, the Court explained that in the case of construction contracts, "a provision giving liquidated damages for each day's delay is an appropriate means of inducing due performance, or of giving compensation, in case of failure to perform." 261 U.S. 486, 488 (1928) (emphasis added). Similarly, in Wise v. United States, the Court stated that courts should "look with candor, if not with favor," on liquidated damages clauses "as promoting prompt performance of contracts and because adjusting in advance, and amicably, matters the settlement of which through courts would often involve difficulty, uncertainty, delay and expense." 249 U.S. at 366 (emphasis added). And in United States v. Bethlehem Steel Co., the Court held that a liquidated damages clause may provide "security for the proper performance of the contract as to time of delivery" unless the amount of the liquidated damages is "extraordinarily disproportionate to the damage which might result from the [breach]." 205 U.S. at 121 (emphasis added).

* * *

[16]There is no inconsistency in a promisee's seeking assurance of performance through a guarantee of fair compensation for breach. As Williston noted with respect to standard (and legitimate) liquidated damages provisions, "there can be no doubt that these provisions are intended not merely as a provision for an unfortunate and unexpected contingency but also to secure the promisee in the performance of the main 602 obligation and to make the promisor more reluctant to break it." 5 Samuel Williston, supra, § 778, at 692. In this respect, at least, Corbin was in agreement. See 5 Arthur J. Corbin, Corbin on Contracts § 1058, at 339--40 (1964 ed.) ("The purpose of providing for a money payment in case of breach, whether it be called a penalty, a forfeiture, liquidated damages, or merely a sum of money, is primarily to secure the performance promised. . . . Penalties are said to be in terrorem to induce performance as promised; in large measure the same is true of liquidated damages"). What the policy against penalties is designed to prevent is a penal sanction that is so disproportionate to any damage that could be anticipated that it seeks "to enforce performance of the main purpose of the contract by the compulsion of this very disproportion." 5 Samuel Williston, supra, § 776, at 668 (emphasis added). Nothing that DJ offered or pointed to in the evidence before the trial court remotely suggested that the liquidated damages clause in this case is of that character.

* * *

[17]Finally, DJ argues that there was a triable issue as to whether the liquidated damages rate that the parties agreed upon in the field pack contract was unreasonable. Once again, DJ bore the burden of pointing to evidence establishing a material factual dispute on that issue, and the trial court correctly held that DJ failed to carry that burden.

[18]The damages that are likely to flow from delays in the delivery of goods is often difficult to assess, particularly when the goods are to be produced in the uncertain setting of wartime. As the Third Circuit put the matter in United States v. Le Roy Dyal Co., 186 F.2d 460, 463 (3d Cir. 1950), cert. denied, 341 U.S. 926, 95 L. Ed. 1357, 71 S.Ct. 797 (1951), "in dealing with some matters pertaining to governmental activities, the question of ascertaining how much pecuniary loss is caused by failure of one contracting with the government to keep his promise is especially difficult." To illustrate the point, that court cited a colorful English case that is closely analogous here (id.):

But how much damage could accrue to the Spanish government because a shipyard failed to deliver, at the time agreed upon, four torpedo-boat destroyers? This question was involved in testing the validity of a provision for liquidated damages for delay in the House of Lords decision in Clydebank Engineering and Shipbuilding Co., Ltd. v. Castaneda. How could the damages be accurately determined? As Lord Halsbury said in an opinion upholding the provision . . . "in order to do that properly and to have any real effect upon any tribunal determining that question, one ought to have before one's mind the whole administration of the Spanish Navy."

* * *

603 [19]In this case, not only did DJ fail to raise a triable question with respect to the difficulty of forecasting damages at the outset, but it also failed to raise any factual issue casting doubt on the reasonableness of the stipulated damages rate. Nor is there anything inherently unreasonable about that rate---a reduction in the contract price of 1/15 of one percent per day, or two percent per month, on a contract that was supposed to be completed within a period of only a few months.

* * *

AFFIRMED.

Notes and Questions

1.In paragraph 6 of the opinion the circuit court states (with apparent approval) the rule that the trial court applied. Read carefully R2d § 356. How does the Restatement rule differ from the rule the trial court applied?

2.Why have rules such as these? Why not allow freedom of contract where the parties can agree to whatever damage provisions they want?

3.A Federal Communications Commission decision synthesized and summarized the law of liquidated damages as follows:

When parties enter into a contract, the law allows them to apportion risk through the establishment of a liquidated damages clause. A liquidated damage clause will be enforced as long as the amount stipulated for is not so extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or to imply fraud, mistake, circumvention, or oppression. With that narrow exception, there is no sound reason why persons competent and free to contract may not agree upon this subject as fully as upon any other, or why their agreement, when fairly and understandingly entered into with a view to just compensation for the anticipated loss, should not be enforced.

In re BDPCS, Inc., 15 F.C.C.R. 17590, 17610 (2000) (footnotes and internal citations omitted).

Vanderbilt University v. DiNardo

United States District Court, Middle District, Tennessee 974 F. Supp. 638 (1997)

Echols, District Judge.

[1]Presently pending before the Court is Defendant's Motion for Summary Judgment, to which Plaintiff has responded in opposition. 604 Plaintiff has also filed a Cross-Motion for Summary Judgment, to which Defendant has responded in opposition. For the reasons outlined herein, Defendant's Motion is DENIED and Plaintiff's Motion is GRANTED.

[2]Plaintiff, Vanderbilt University, filed this Complaint against Defendant, Gerry DiNardo, seeking damages arising from Defendant's alleged breach of an employment contract. Defendant filed a Motion for Summary Judgment asserting that he is entitled to judgment as a matter of law because the liquidated damage provision contained in the employment contract upon which Plaintiff's claim is based is: 1) an unlawful penalty provision under Tennessee law, and/or 2) inapplicable because Defendant was given permission to breach the employment contract.2

[3]Plaintiff also filed a Motion for Summary Judgment contending that it is entitled to judgment in its favor because the liquidated damage provision at issue is enforceable as a matter of law.

* * *

[4]The facts upon which Plaintiff's claim is based are as follows: On December 3, 1990, Defendant, Gerry DiNardo, and Plaintiff, Vanderbilt University, executed an employment contract ("Contract") under which Defendant was employed as Plaintiff's head football coach. The original termination date of the Contract was January 5, 1996. Section 8 of the Contract provided as follows:

Section 8. Mr. DiNardo recognizes that his promise to work for the University for the entire term of this 5-year Contract is of the essence of this Contract to the University. Mr. DiNardo also recognizes that the University is making a highly valuable investment in his continued employment by entering into this Contract and its investment would be lost were he to resign or otherwise terminate his employment as Head Football Coach with the University prior to the expiration of this Contract.3 Accordingly, Mr. DiNardo agrees that in the event he resigns or otherwise terminates his employment as Head Football Coach (as opposed to his resignation or termination from another position at the University to which he may have been reassigned), prior to the expiration of this Contract, and is employed or performing services for a person or institution other than the University, he will pay to the University as liquidated damages an amount equal to his Base Salary, less amounts that would otherwise be deducted 605 or withheld from his Base Salary for income and social security tax purposes, multiplied by the number of years (or portion(s) thereof) remaining on the Contract.

[5]During the negotiations, the language of Section 8 was modified at the request of Defendant so that any liquidated damages would be calculated based on Defendant's net pay, rather than on his gross pay.

[6]Defendant's base salary was initially set at \$100,000 per year. By amendment to the Contract dated June 25, 1992, Plaintiff increased Defendant's base salary to \$110,000, effective January 1, 1992. By amendment dated June 25, 1993, the base salary was increased to \$125,000 per year. In April 1994, Plaintiff increased Defendant's base salary to \$135,000 per year retroactive to January 1, 1994.

* * *

[7]In November 1994, near the end of the 1994 football season, Joe Dean, the Athletic Director at Louisiana State University ("LSU"), asked [Vanderbilt Athletic Director Paul] Hoolahan for permission to speak with Defendant about a possible job at LSU. Defendant also asked Hoolahan for permission to speak with LSU regarding possible employment. Hoolahan verbally granted permission for LSU and Defendant to speak about the matter. On December 12, 1994, Defendant announced his decision to accept the job as LSU's head football coach and he resigned from his employment as head football coach at Vanderbilt University.

[8]Defendant contends that the liquidated damage provision contained in the employment contract is an unlawful penalty under Tennessee law. It is well established that parties to a contract may stipulate to an amount of liquidated damages. . . . Courts will not enforce liquidated damage provisions, however, where the provision is a penalty that punishes the defaulting party. In order to determine whether a liquidated damage provision is a penalty, the Court must consider "whether the amount stipulated was reasonable in relation to the amount of damages that could be expected to result from the breach." (Harmon, 699 S.W.2d at 163). If the provision is a reasonable estimate of the damages that would occur from a breach, then the provision is normally construed as an enforceable stipulation for liquidated damages. The Court must also determine whether the parties contemplated that such damages would flow from a failure to perform the contract, and that such damages would be indeterminate or difficult to ascertain.

[9]In the present case, under Section 8 of the Contract, upon breach, Defendant would be required to pay an amount equal to his base salary, less that which would otherwise be deducted or withheld from his base salary for income and social security tax purposes multiplied by the number of years remaining on the Contract. At the time that Defendant 606 terminated his employment, he was receiving a gross base salary of \$135,000 and a net salary of \$91,781.60 per year. Defendant terminated his Contract on December 12, 1994. The Contract with the Addendum expired on January 5, 1998. As such, the liquidated damage provision provided that Defendant pay Plaintiff \$281,886.43.

[10]It is the opinion of the Court that the liquidated damage provision in the Contract is not an unlawful penalty and that the established damages in the sum of \$281,886.434 are reasonable when compared to the potential actual damages to be suffered by Vanderbilt on account of Defendant's breach. According to Vanderbilt, expenses associated with recruiting a new head coach amounted to more than \$27,000. Moreover, because Defendant took his coaching staff with him to LSU, Vanderbilt had to pay \$86,840 in order to move the new coaching staff to Nashville and into Vanderbilt facilities. The yearly compensation for the new coaching staff was \$770,000, while the DiNardo coaching staff was paid \$708,563, a difference of \$61,437. If this amount is multiplied by the three years remaining in the Contract, it totals \$184,311.5 Furthermore, the aforementioned specific damages sustained by Vanderbilt do not include the potentially extensive other damages to Vanderbilt which may result in having to suddenly replace a head football coach. Such damages are difficult to quantify, but may include damage to reputation and public relations, lost profits from reduced football ticket sales, lost talents of resigning assistant coaches, broken promises and relationships with players, lost recruits and future recruiting opportunities, reduced membership in athletic clubs and alumni support, decline in donations to the athletic program, redesigning publicity, media guides, logos and uniforms, etc.

[11]Under the circumstances of this case, the Court finds the use of the formula based on Defendant's salary to determine the amount of liquidated damages is reasonable. Although DiNardo's base salary is not specifically related to any specific anticipated damages in the event he resigns, it is reasonable given the nature of the unquantifiable damages in this case. The potential damage to Plaintiff extends far beyond the cost of merely hiring a new head football coach. It is this uncertain potentiality that the parties sought to address by providing for a sum certain to apply towards anticipated expenses and losses. It is impossible to estimate how the loss of a head football coach will affect alumni relations, public support, football ticket sales, contributions, etc. Indeed, the success and reputation 607 earned by the resigning coach, as well as that of the new coach may dramatically impact the situation. As such, to require a precise formula for calculating damages resulting from the breach of contract by a college head football coach would be tantamount to barring the parties from stipulating to liquidated damages in advance. In addition, the damage provision of the Contract does reflect a projected declining loss to Plaintiff based upon the length of service remaining on the coach's contract. This decrease is reasonable given Vanderbilt's concern about the stability of its football program and the investment made into DiNardo's "continued employment" as head football coach.6

[12]Defendant asserts that in determining whether the liquidated damage clause is reasonable, the Court may not consider the consequential damages sustained by Vanderbilt, and instead is limited to consideration of the actual cost of replacing him as head coach. This argument is without merit. Parties to a contract may include consequential damages and even damages not usually awarded by law in a liquidated damage provision provided that they were contemplated by the parties.

[13]In the present case, it is clear from the plain language of the Contract that the parties contemplated that the effect of a breach of contract by Defendant would have an impact beyond the cost of simply replacing his services. As quoted in Section 8 of the Contract, the liquidated damage provision, "the University is making a highly valuable investment in [DiNardo's] continued employment by entering into this Contract and its investment would be lost were he to resign or otherwise terminate his employment as Head Football Coach with the University prior to the expiration of this Contract." Furthermore, the Contract also provided that "a long-term commitment by Mr. DiNardo [was] important to the University's desire for a stable intercollegiate football program." As such, the parties contemplated damages other than the mere cost of replacement services that could result from Defendant's breach and the effect such a breach would have on Plaintiff's football program.

[14]In further support of the reasonableness of the liquidated damage clause is the fact that the Contract was the result of arms-length negotiations. Not only was Defendant represented by counsel during the contract negotiation process, Defendant's counsel was successful in negotiating a substantial reduction in the liquidated damage provision by providing that the measure of damages would be Defendant's net rather than gross salary. Under the circumstances of Defendant's breach, this reduces the amount of liquidated damages by over \$100,000.7

608 [15]For the foregoing reasons, the Court finds that the liquidated damage clause in Section 8 of the Contract is reasonable, and thus enforceable, under the circumstances of this case.

* * *

[16]In conclusion, the Court finds the liquidated damage clause contained in Defendant's employment contract is reasonable as a matter of law. Since this clause provides designated damages of \$281,886.43 as discussed in this Memorandum, Plaintiff's Motion is GRANTED, and judgment is entered in favor of Plaintiff in the amount of \$281,886.43. For the reasons stated herein, Defendant's motion is denied.

Notes and Questions

1.Review section 8 of DiNardo's contract. What is the point of the first sentence? Doesn't the next sentence contain the operative language of the parties' agreement?

2.In paragraph 6 of the opinion, the court notes that the language of section 8 was "modified at the request of" DiNardo. What is the point, if any, of this?

3.This case perhaps underscores the importance of a forum selection clause in a contract. Vanderbilt would probably prefer to sue to collect its liquidated damages in Nashville rather than in Baton Rouge. Assuming that one is well regarded in one's community, it is generally preferable to sue or be sued at home. The rule of law is, to some degree, as you have probably guessed, a malleable one. In any event, don't ignore the elephant in the corner that nobody is talking about. Or the Commodore. Or the Tiger.

4.In October, 2003, ESPN.com reported that the \$47 million contract between the San Diego Chargers and wide receiver David Boston provided the team could recover liquidated damages of up to \$3 million if Mr. Boston committed certain specified infractions, including being suspended for "conduct detrimental to the team." In recent years, such clauses have become quite common in professional sports contracts. Jim Trotter, Boston's stay here might be a short one, Union Tribune, Mar. 9, 2004.

609 Monsanto Co. v. McFarling

United States Court of Appeals, Federal Circuit 363 F.3d 1336 (2004)

Clevenger, Circuit Judge.

[1]The United States District Court for the Eastern District of Missouri entered summary judgment against defendant Homan McFarling and in favor of the Monsanto Company ("Monsanto") under Federal Rule of Civil Procedure 54(b) on some, but not all, of the claims being litigated. The district court held that, when McFarling replanted some of Monsanto's patented ROUNDUP READY® soybeans that he had saved from his prior year's crop, McFarling breached the Technology Agreement that he had signed as a condition of his purchase of the patented seeds. The district court also held that McFarling had failed to demonstrate a genuine issue of material fact that prevented entry to summary judgment on any of his counterclaims or his defenses to Monsanto's breach-of-contract claim. Finally, the district court held that a liquidated damages provision in the Technology Agreement was valid and enforceable under Missouri law and entered a judgment in the amount of \$780,000. McFarling appeals the district court's rulings on several of his counterclaims and defenses, as well as its ruling on the contractual damages provision. We affirm the district court on the counterclaims and defenses, but we vacate the district court's judgment as it relates to the damages provision and remand for a determination of Monsanto's actual damages.

[2]Monsanto manufactures ROUNDUP® herbicide. ROUNDUP® contains glyphosate, a chemical that indiscriminately kills vegetation by inhibiting the metabolic activity of a particular enzyme, 5-enolpyruvyl-shikimate-3-phosphate synthase ("EPSPS"). EPSPS is necessary for the conversion of sugars into amino acids---and thus for growth---in many plants and weeds.

[3]Monsanto also markets ROUNDUP READY® genetic-modification technology. In soybean seeds, the ROUNDUP READY® technology operates by inserting the gene sequence for a variant of EPSPS that is not affected by the presence of glyphosate but that still performs the sugar-conversion function required for cell growth. Thus, ROUNDUP READY® soybean seeds produce both a "natural" version of EPSPS that is rendered ineffective in the presence of the glyphosate in ROUNDUP® herbicide, and a genetically modified version of EPSPS that permits the soybean seeds to grow nonetheless. ROUNDUP®, or other glyphosate-based herbicides, can thus be sprayed over the top of an entire field, killing the weeds without harming the ROUNDUP READY® soybeans.

[4]Monsanto licenses its proprietary ROUNDUP READY® technology through two interrelated licensing schemes. First, it licenses the patented gene to seed companies that manufacture the glyphosate- 610 tolerant seeds that are sold to farmers. Under this license, seed companies gain the right to insert the genetic trait into the germplasm of their own seed (which can differ from seed company to seed company), and Monsanto receives the right to a royalty or "technology fee" of \$6.50 for every 50-pound bag of seed containing the ROUNDUP READY® technology sold by the seed company. Monsanto also owns several subsidiary seed companies that comprise approximately 20 percent of the market for ROUNDUP READY® soybeans.

[5]Second, Monsanto requires that seed companies execute licenses, rather than conduct unconditional sales, with their farmer customers. The 1998 version of this "Monsanto Technology Agreement" (the "Technology Agreement") between Monsanto and the soybean farmers using ROUNDUP READY® soybeans places several conditions on the soybean farmers' use of the licensed soybeans. In exchange for the "opportunity to purchase and plant seed containing" the ROUNDUP READY® technology, soybean farmers agree, inter alia:

To use the seed containing Monsanto gene technologies for planting a commercial crop only in a single season.

To not supply any of this seed to any other person or entity for planting, and to not save any crop produced from this seed for replanting, or supply saved seed to anyone for replanting.

To not use this seed or provide it to anyone for crop breeding, research, generation of herbicide registration data or seed production.

[6]The technology Agreement also contains a clause specifying damages in the event of the breach by the farmer:

In the event that the Grower saves, supplies, sells or acquires seed for replant in violation of the Agreement and license restriction, in addition to other remedies available to the technology provider(s), the Grower agrees that damages will include a claim for liquidated damages, which will be based on 120 times the applicable Technology Fee.

[7]Homan McFarling operates a 5000-acre farm in Pontotoc County, Mississippi. In 1998, McFarling executed the Technology Agreement in connection with the license of 1000 bags of ROUNDUP READY® soybean seed. McFarling concedes that he saved 1500 bushels of seed from his 1998 crop, enough to plant approximately 1500, acres, and that he replanted them in 1999. He subsequently saved 3075 bags of soybeans from his 1999 crop, replanting them in 2000.

[8]Soybeans destined for replanting are apparently cleaned after harvest. When McFarling sent his seeds saved from 1998 season to a third party for cleaning, Monsanto had some samples taken, had genetic makeup 611 of the seeds tested at Mississippi State University, and thus learned that McFarling was saving ROUNDUP READY® seeds.

[9]In January 2000, Monsanto filed suit against McFarling, alleging, inter alia, infringement of the '435 and '605 patents and breach of the Technology Agreement, and seeking a preliminary injunction prohibiting McFarling from "planting, transferring or selling the infringing articles to a third party." In his answer, McFarling raised affirmative defenses (styled alternatively as counterclaims when possible) both to liability---including, inter alia, violations of the Plant Variety Protection Act ("PVPA"), 84 Stat. 1542, as amended, 7 U.S.C. § 2321 et seq., the federal antitrust laws, the patent misuse doctrine, and the patent exhaustion and first sales doctrines---and to damages as calculated under the 120 multiplier in the Technology Agreement. He did not, however, challenge the validity of Monsanto's patents. Because McFarling's only connection with Missouri was a forum selection clause in the Technology Agreement, McFarling also brought a motion to dismiss based on a lack of personal jurisdiction.

[10]The district court held that the forum selection clause was valid and entered a preliminary injunction against McFarling. On appeal, we affirmed the district court on both issues. See Monsanto Co. v. McFarling, 302 F.3d 1291, 1296, 1299--300 (Fed. Cir. 2002) ("McFarling I"). Addressing Monsanto's likelihood of success on the merits, we held that the district court did not err in finding that McFarling had not demonstrated a reasonable likelihood of success on his affirmative defenses. Id. at 1297--99.

[11]Back in the district court, Monsanto moved for summary judgment on the infringement claim under the '605 patent, the breach of the Technology Agreement claim, and all of McFarling's affirmative defenses. The district court granted summary judgment in favor of Monsanto on all of McFarling's defenses as well as on liability with respect to Monsanto's '605 patent infringement claim and the Technology Agreement claim. On damages, however, the district court denied Monsanto's summary judgment motion. It left the damages issue regarding infringement of the '605 patent for trial. Additionally, although it held the liquidated damages clause in the Technology Agreement to be valid and enforceable (provided the 120 multiplier was applied to the number of bags of seed purchased rather than the number replanted), it concluded that there was insufficient evidence of the number of bags purchased by McFarling in 1998 to enter judgment on damages on the breach-of-contract claim. After McFarling stipulated that he purchased 1000 bags of ROUNDUP READY® soybean seed in 1998, the district court entered final judgment pursuant to Federal Rule of Civil Procedure 54(b) on Monsanto's breach-of-contract claim only in the amount of \$780,000.00 (120 × \$6.50 × 1000), and against McFarling on his counterclaims.

612 [12]In the district court, Monsanto had argued that the 120 multiplier in the liquidated damages clause should be interpreted to produce damages of 120 times the technology fee times the number of bags of seed replanted by McFarling. The district court rejected that formula, reasoning that it would constitute an unlawful penalty because it simply imposes a multiple of the liquidated damages, clause, the district court fashioned a formula that multiplies 120 times the licensing fee times the number of bags of seed purchased.

[The court discussed several procedural matters and rejected McFarling's argument based on federal patent law and antitrust law.---‍Eds.]

[13]Finally, McFarling argues that the district court erred in holding that 120 multiplier on the technology fee in the Technology Agreement was a valid and enforceable liquidated damages clause under Missouri law. Upon independent review, see Robert Blond Meat Co. v. Eisenberg, 273 S.W.2d 297, 299 (Mo. 1954) (holding that the validity of a liquidated damages clause is a question of law and reviewing it without reference), we agree with McFarling that the liquidated damages clause in the Technology Agreement is invalid and unenforceable under Missouri law as it applies to McFarling's breach of replanting of saved seed.

[14]Missouri law distinguishes between liquidated damages clauses, which are valid and enforceable, and penalty clauses, which are neither. See Diffley v. Royal Papers, Inc., 948 S.W.2d 244, 246 (Mo. Ct. App. 1997); Paragon Group, Inc. v. Ampleman, 878 S.W.2d 878, 880--81 (Mo. Ct. App. 1994); Burst v. R.W. Beal & Co., 771 S.W.2d 87, 90 (Mo. Ct. App. 1989); Grand Bissell Towers, Inc. v. Joan Gagnon Enters., Inc., 657 S.W.2d 378, 379 (Mo. Ct. App. 1983).

* * *

[15]One long-standing litmus test that the Missouri courts use to determine whether a contractual provision determining damages is a reasonable estimate of the anticipated harm is what we term the "anti-one-size rule":

[A]court may consider whether the agreement contains various stipulations of various degrees of importance, the breaches of which would be easy to calculate in damages as to some and difficult as to others, in which the event the sum specified would be construed as a penalty and not as liquidated damages "even though the parties in express terms have declared the contrary."

Wilt v. Waterfield, 273 S.W.2d 290, 295 (1954) (quoting Sylvester Watts Smyth Realty Co. v. Am. Sure. Co. of N.Y., 292 Mo. 423, 238 S.W. 494, 499 (Mo. 1921)).

613 [16]This fixed rule of Missouri Contract law is not unusual. Variations on this anti-one-size rule are applied in a number of jurisdictions.

[17]The anti-one-size rule is an intuitive corollary of the two-prong Missouri test that applies when a single formula for liquidated damages applies to multiple provisions pertains. It reminds us that the validity of a damages clause must be measured on a provision-by-provision basis; the fact that the harm flowing from the breach of one provision may be difficult to measure does not validate a contractual damages provision as it applies to the breach of another provision. Additionally, the anti-one-size rule provides a rule of thumb assay to determine if a contractual damage provision was fixed on the basis of compensation: If the same formula is used to calculate damages for breaches of two different provisions that would be expected to require two substantially different methods of compensation, then the contract on its face admits that the parties did not view the specified damages as compensatory. In some cases, this evidence intrinsic to the contract may provide a more reliable measure of the parties' intent than a hindsight comparison of the sum specified in the contract and the damage award required to compensate the nonbreaching party for the damages actually sustained.

[18]We conclude that the 120 multiplier in the Technology Agreement is not valid under Missouri law. It was not, at the time of contracting, a reasonable estimate of the harm that Monsanto would likely suffer in the event that McFarling breached the contractual prohibition on saving ROUNDUP READY® soybeans.

[19]Monsanto's principal argument to the contrary is that ROUNDUP READY® soybeans can self-replicate at an exponential rate. One bag of soybean seed can yield 36 bags of soybean seed to save for the following season, although this figure may vary with different types of crops, seed varieties, geographic growing locations, planting rates, cultural practices, and growing conditions, among other factors. Based on this figure together with assumptions of infinite acreage on which to plant and no commercial sale of any soybeans, a farmer planting one bag of soybeans in year one would reap 36 bags to replant in year two, 1296 bags to replant in year three, and 46,656 bags to replant in year four. This simple narrative is forceful insofar it illustrates the potential magnitude of the harm that Monsanto could suffer from losing control of its proprietary technology. However, an illustration that breach of the Technology Agreement under particular conditions may be reasonably expected to lead to harm of great magnitude is not sufficient to uphold the validity of the damages clause in its entirety. The damages clause is not valid as applied to the provision of the technology Agreement that prohibits saving soybean seed and that was breached by McFarling. In other words, the 120 multiplier does not pass muster under Missouri's anti-one-size rule.

614 [20]The 120 multiplier in the Technology Agreement also violates the anti-one-size rule because it specifies the same measure of damages in the event of breach of several different restrictive provisions of the contract that led to different types of damages. The license can trigger the 120 multiplier in the Technology Agreement by violating any one of several distinct provisions: "In the event that the Grower saves, supplies, sells or acquires seed for replant in violation of this Agreement and license restriction . . . the Grower agrees that damages will include a claim for liquidated damages . . ." (emphasis added). We conclude that the nature of the harm to Monsanto flowing from breach of the provision prohibiting seed saving is fundamentally different from the nature of the harm to Monsanto flowing from breach of the provision prohibiting seed supplying and seed selling.

[21]In fact, Monsanto repeatedly acknowledged the importance of the distinction between seed saving by the farmer for replant on his own farm and seed transfer to third parties for replant. Monsanto argues in its brief that "whether an infringer saves seed for himself only or transfer saved seed to other growers . . . significantly impacts the multiplier effect and the harm to Monsanto." Additionally, the following exchange occurred at oral argument between the court and Monsanto's attorney:

Court: The character or quality of the breach when [McFarling] breaches on his own farm is really different from Monsanto's perspective than the quality of the breach if he goes to the county fair and sells 5000 bags to 5000 different purchasers. Am I right?

Counsel: Absolutely. And that's why the 120 times multiple is so reasonable.

* * *

[22]Under the anti-size-one rule, a liquidated damages clause is invalid if even one breach covered by the clause fails to qualify for enforceability as liquidated damages. Since the breach of seed saving cannot warrant liquidated damages, for the reasons we state, we need not consider the consequences of the breach of acquiring seed for replant. Proof of loss is of course substantially more difficult when the breaching farmer supplies or sells the seed to another farmer in violation of the agreement. If a farmer transfers seed to a third-party for replant, Monsanto not only has no privity of contract with the purchasers, but it also faces difficulty tracing the seed, location and deposing the individuals who purchased it, and thus determining the amount of harm caused by the breach. In this situation, the difficulty of proof of loss would be considerable. However, if a farmer saves seed for replant in a future growing season, the number of bags planted is more readily ascertainable from a single defendant who is in privity with Monsanto.

615 [23]Monsanto's expectations of the compensable loss flowing from the breach should also be lower when the breaching farmer replants on his own farm. The testimony of Monsanto's own damages expert suggests that a distinction between replanting and transferring is in part due to different rates of seed-replication in each scenario. The acreage of an individual grower for replanting is finite, placing a brake on the replication rate, whereas the geographical area available to plant resold seed is practically unlimited. Monsant[o]'s damages expert assumed that soybeans self-replicated at a linear rather than an exponential rate in his only example demonstrating the harm to Monsanto that could flow from a farmer breaching by replanting seed rather than by transferring seed. The damages expert presumed that the farmer would save the same amount of seed each year, likely just enough to plant the farm's acreage.

* * *

[24]When a damages clause is a penalty clause, the clause is unenforceable under Missouri law and only actual damages are available. We therefore remand to the district court to compute actually damages based on the number of bags of seed saved and replanted.

Note

More than 90% of the soybeans and 70% of the corn and cotton produced in the United States come from Roundup Ready seeds. But evolution has produced several varieties of Roundup Ready resistant weeds. See https://‌www.‌chem.‌purdue.‌edu/‌courses/c‌hm333/‌Spring‌%20‌2012/‌Handouts/‌Roundup‌%‌20‌resistant‌%20‌weeds‌%20‌USATODAY‌%20‌DEC‌%20‌2010.‌pdf (". . . the problem is spreading quickly across the Corn Belt and beyond, with Roundup now proving unreliable in killing at least 10 weed species in at least 22 states").

Problem 21-1

Read carefully U.C.C. §§ 2--719(1)(a) and 2--719(3) and Restatement (Second) § 356. Which of the following clauses limiting remedies would be upheld?

(a)The contract for the sale of a burglar alarm provides that damages for the failure of the burglar alarm are limited to \$100. The alarm fails to function and \$50,000 worth of jewelry and antiques are stolen from the buyer's home.

(b)The contract for the sale of photographic film provides that if the film is defective, the buyer's remedies are limited to a return of the purchase price. The film is defective and the buyer is left without any pictures of her wedding, the first ever wedding on the summit of Mount Everest.

616 (c)The contract for the delivery of an overnight package provides that if the package is not delivered on time, the shipper's only remedy is the return of her money. The package fails to arrive on time, a billion dollar corporate merger is delayed, and the lawyer who sent the package goes from being on the fast track for partnership to looking for a job.

Problem 21-2

Reconsider the Diffley case. If you had been representing the Teamsters, what could you have done to give your liquidated damages provision a good shot at being enforceable while still making it a strong incentive for employers to get their money in on time?

Problem 21-3

A general contractor had a contract to build an office building. The general contract provided that if completion of the building was delayed, the general contractor would pay liquidated damages of \$1,000 a day. The lowest bid on the electrical work was from a new and rather small company. The general contractor told the electrical contractor he would like to give them the job, but he could not take the risk that the sub would be late in completing the electrical work and throw the whole project off schedule. The electrical sub therefore suggested that the electrical subcontract provide for liquidated damages of \$2,000 per day. The head of the electrical sub stated that the reason for this provision was "to show that we have confidence we can perform." At the time the parties entered into the subcontract, they both knew that each day of delay in the completion of the electrical work would result in no more than one day's delay in the completion of the entire project, and there was a substantial likelihood that the delay in the completion of the entire project would be even less.

As it turned out, the electrical work was completed 30 days late. The project was completed 21 days late, and if the electrical work had been completed on time, the project still would have been 15 days late.

How much is the general contractor entitled to recover as damages?

Problem 21-4

A law professor and law book publisher entered into a contract under the terms of which the professor would revise a chapter in the publisher's treatise on contract damages. The contract provided that the professor's fee would be \$600 if the manuscript were delivered by March 1, \$450 if it were delivered by April 15, and \$200 if it were delivered at any time thereafter.

Is there a problem with this provision?

617 Problem 21-5

Mark Dove, a law student, entered into an employment contract with Rose Acre Farms, a large agri-business concern. Under the terms of the contract, Mr. Dove would work for Rose Acre Farms for ten weeks during the summer for the sum of \$7,500. The contract provided that if a certain construction project on which Mr. Dove was to be working in a supervisory capacity was not completed on time OR if Mr. Dove was late for work even one time, Mr. Dove would pay "as liquidated damages and not as a penalty," the sum of \$5,000.

Is the liquidated damages provision enforceable?

Problem 21-6

Mark Dove, a law student, entered into an employment contract with Rose Acre Farms, a large agri-business concern. Under the terms of the contract, Mr. Dove would work for Rose Acre Farms for ten weeks during the summer for the sum of \$2,500. The contract provided that if a certain construction project on which Mr. Dove was to be working in a supervisory capacity was completed on time and if Mr. Dove was not late for work even one time, Mr. Dove would receive a bonus of \$5,000.

Mr. Dove was late for work one morning because his car wouldn't start. (He planned to use the bonus to buy a new one). Because he was late, he didn't get the bonus and he sued to recover it. Should he win?

Problem 21-7

Your client has agreed to pay liquidated damages of \$200,000 if it fails to perform its part of a contract. It wants to be sure it is not required to pay more. What provisions would you put into the contract to make sure its exposure is limited to \$200,000?

Lawyering Skills Problem

When Trista Rehn was chosen to be The Bachelorette on the reality-based television program of that name, she was required to sign a contract of 17 single-spaced pages. One clause provided:

F.Liquidated Damages: I agree that any breach or violation by me of any of the terms or provisions of this Agreement shall result in substantial damages and injury to Producer and/or the Network, the precise amount of which would be extremely difficult or impracticable to determine. Accordingly, Producer and I have made a reasonable endeavor to estimate a fair compensation for potential losses and damages to Producer and/or the Network which would result from any breach by me of any material term of this Agreement, including, but not limited to paragraph IV D. [paragraph IV D. provides that she assumes the risk of all the dangers and hazards she will encounter on the show, including the risk of pregnancy and sexually- 618 transmitted diseases---as we'll see in the next two chapters, it's not clear how one would breach a clause like this; possibly she could do it by suing on account of damage from one of the risks she assumed] and, therefore, I further agree that, in addition to the remedies set forth hereinabove, I will also be obligated to pay, and I agree to pay to Producer and/or the Network, the sum of Five Million Dollars (\$5,000,000) as a reasonable and fair amount of liquidated damages to compensate Producer and/or the Network for any loss or damage resulting from each breach by me of the terms hereof. I further agree that such sum bears a reasonable and proximate relationship to the actual damages which Producer and/or the Network will or may suffer from each breach by me.

This clause was separately initialed by Ms. Rehn, as were most of the other significant clauses in the contract. There were a total of 35 provisions in the contract to be initialed by Ms. Rehn. Among the provisions, the breach of which would trigger the liquidated damages clause, were:

Paragraph I A. requiring her to appear on news shows, talk shows etc. "when and where designated by Producer in its sole discretion."

Paragraph II A. requiring her to refrain from taking photographs during the period of the show's taping without the permission of the producer.

Paragraph VI A. requiring her to refrain from using the series name in any publicity except as provided in the agreement.

Paragraph VI B. requiring her to refrain from taking refuge in any place where the series cameras cannot photograph her.

Paragraph VI C. requiring her to refrain from wearing any apparel with a nationally recognized logo unless it has been provided by the producer and further requiring her to "abide by . . . all U.S. laws and all applicable local laws."

(1)If Ms. Rehn were arrested for speeding while wearing her Mickey Mouse wristwatch, could the producer get a judgment for five million? (Or could they get ten million? She's breached two provisions.)

(2)If Ms. Rehn breached the contract in a way that caused the producer damage that was serious but not provable with reasonable certainty, how would you argue that Ms. Rehn is not liable for the five million?

(3)What is the intended effect of the provision that states "Producer and I have made a reasonable endeavor to estimate a fair compensation for potential losses and damages . . . ?" Can you think of an unintended effect it may have?

1[\$663,266.92 in 1996 dollars is roughly the equivalent of \$1,060,000 in 2019 dollars using the CPI and the GNP Deflator.---Eds.]

2 Defendant also claims that the damage provision is not a liquidated damages clause but instead is a thinly-disguised covenant not to compete. The Court disagrees that the damage clause should be so characterized. The clause provides for specific damages for a breach of contract if Defendant becomes employed elsewhere. However, the clause is applicable even if Defendant procures employment in a completely unrelated field.

3[Why say all of this? Doesn't the next sentence do the job all by itself?---Eds.]

4[\$281,886.43 in 1997 dollars is roughly the equivalent of \$441,000 in 2019 dollars using the CPI and the GNP Deflator.---Eds.]

5In response to Plaintiff's Statement of Undisputed Facts, Defendant denies that Plaintiff had to pay for the moving expense for a new head coach, etc. However, while Plaintiff submitted admissible evidence in support of its allegations regarding damages incurred, Defendant merely denied that Plaintiff's allegations are correct without citing to any admissible evidence contained in the record. Conclusory denials are insufficient to raise a genuine issue of material fact.

6It is also reasonable that the amount of damages increased when the Addendum was executed as Vanderbilt made yet another commitment into the DiNardo football program.

7It is interesting to note that the Contract contained a similar liquidated damage provision in favor of Defendant in the event Plaintiff terminated the contract prior to its expiration date.

" CASE BRIEFS PROMPTS _From the Contracts reading below, create a detailed and comprehensive case brief of the **Vanderbilt University v. DiNardo, United States District Court, Middle District, Tennessee, 974 F. Supp. 638 (1997)** case._

_From the Contracts reading below, create a detailed and comprehensive case brief of the **Monsanto Co. v. McFarling, United States Court of Appeals, Federal Circuit, 363 F.3d 1336 (2004)** case._

## 👉 INSTRUCTIONS: 👈

"

_I pasted my Contracts class reading below._

_From the Contracts reading below, create a detailed and comprehensive case brief of the **DJ Manufacturing Corp. v. United States, United States Court of Appeals, Federal Circuit, 86 F.3d 1130 (1996)** case._

_Focus on the factual details of the parties---their contractual relationship---the legal rules presented and applied (from the UCC and Restatement (Second) of Contracts), and how the rules presented in the case interact._

"

----------------------------------------------------

## 📜 CONTRACTS CLASS READING BELOW: 📜

OVERVIEW PROMPTS ## 👉 INSTRUCTIONS: 👈

"

_I pasted my Contracts class reading below._

_Create a **comprehensive** and **detailed outline** of my **Contracts class reading** below._