19. COLONIAL AT LYNNFIELD, INC. SLOAN
United States Court of Appeals 870 F.2d 761 (1st Cir. 1989)
FACTS
There was an agreement of Sale between the seller, Colonial Lynnfield, Inc (Colonial) and buyer, Colonial Associates(Associates) where Associate promised to pay $3, 375,000 for 49% interest in the Colonial Hilton Inn in the towns of Lynnfield and Wakefield, Massachusetts. Associate failed to notice to proceed the contract according to the provisions but wanted to extend to close the contract. Colonial refused at 2nd time when associate requested to extend, and subsequently declared associates in default. Few months later, Colonial sold 50% interest in the hotel for $3.7 million to Lincoln National Development Corporation of Indiana. Then colonial sued the associates for breach of contract and liquidated damages in the amount of $200,000 which was a provision in the contract. The district court found that the associate was at fault, and held that Colonial was entitled to the liquidated damages.
ISSUE
Whether the defendant is liable for liquidated damage which was a provision in the contract when the actual damage was not occurred.
RULE
Security Safety Corp. v. Kuznicki, 350 Mass. 157, 158, 213 N.E. 2d (1966)
The amount of liquidated damages specified in a contract must be reasonably related to the anticipated or actual loss caused by the breach.
Lynch, 20 Mass. App
When losses are difficult to quantify, considerable defense is due the parties’ reasonable agreement as to liquidated damages
A provision setting an unreasonably large liquidated damages amount is unenforceable on public policy grounds as a penalty.
A-Z Servicenter, INC., 334 Mass. at 675
When the actual damages turn out to be “easily ascertainable” a court must consider whether the stipulated sum is unreasonably and grossly disproportionate to the real damages from a breach.
APPLICATION
Defendant contends that (3)..the liquidated provision is unenforceable as a matter of public policy because it is disproportionate to any reasonable estimate of damages that plaintiff might suffer, and therefore represents a substantial penalty.
The Court agreed to the District Court opinion that it was enforceable at the time the agreement was signed in 1980. Because the loss was difficult to ascertain, and thus the provision did not constitute a penalty. Colonial could not know, at that time, when the hotel would eventually be sold in the event that defendants defaulted. Colonial would suffer a loss of interest on the $1.8 million at 21% rate of interest, and a six-month delay would have cost Colonial $189,000. Additionally, the new sale price could have been lower than that in the Agreement with defendants and would have costs additional fees.
However, accroding to A-Z Servicenter, INC., 334 Mass. at 675 when the actual damages turn out to be “easily ascertainable” a court must consider whether the stipulated sum is unreasonably and grossly disproportionate to the real damages from a breach. In this case, it is easy to ascertain that Colonial in fact suffered no damages. (Damage calculation below). And the liquidated damages provision is unenforceable as a penalty.
***DAMAGE CALCULATION between Colonial and Associates***
Nov 12, 1980 sales agreement with Associate
(1)$3,375,000 for 49% of the hotel
(2)$200,000 liquidated damages
May 22, Colonial obtained a $318,000 loan from EssexBank
July 21, Colonial accepted a proposal $3.7 million for 50% of the hotel from Lincoln
(sale took place in early September)
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Colonial sold hotel 50% for $3.7 million = $251,000 more
(Associates 1% of $3,375,000 = $68,877
Lincoln 1% = $74,000
$74,000 * 49% = $3,626,000
Difference $3,375,000 and $3,626,000 = +$251,000)
New purchase incurred after “3 months” in September
Colonial lost interest for that period on the $1.8 million which was = -$94,500 (21% rate of interest)
BUT Lincoln paid Colonial $2.7 million which is $900,000 more than $1.8 million (Associate would pay) and Colonial enjoyed annual interest which would be $189,000 (21%). “time value” for the period from October to March 6 months = +$94,500