Question

Speedi Lubrication Centers Inc. and Atlas Match Corp. entered into a contract that provided for Speedi to buy 400,000 advertising matchbooks from Atlas, to be paid for within thirty days of delivery of each shipment. Orders for such matches required artwork, artists’ commissions, and printing plates. Atlas sent twenty-two cases of matches to Speedi with an invoice showing $2,100 owed. Almost ninety days later, Speedi sent Atlas a check for $1,000, received the same day Atlas sent Speedi a letter declaring Speedi to be in material breach of the contract. A second check for $1,100 was later received; it bounced but was later replaced by a cashier’s check. The contract provided that an untimely payment was a breach, and it included these provisions related to liquidated damages: Atlas shall have the right to recover from Purchaser the price of all matchbooks and packaging delivered and/or identified to this agreement at the time of Purchaser’s breach hereof and shall be additionally entitled to recover fifty percent (50%) of the contract price of matchbooks and/or packaging ordered hereby, but not delivered or identified to this Agreement at the time of Purchaser’s breach. Purchaser agrees that the percentage as specified hereinabove…will be reasonable and just compensation for such breach, and Purchaser hereby promises to pay such sum as liquidated damages, not as penalty in the event of any such breach. On appeal, Speedi complained that the liquidated damages clause was a penalty. Is the matter settled by the contract saying the liquidated damages are reasonable? On what criteria would a court determine whether liquidated damages are reasonable?

Answer 1

Answer:-

If the amount of the liquidated damages is gross disproportionate to the actual harm incurred, a court will likely find it is a penalty or punishment and will not enforce the provision. When making this analysis, courts usually consider what was reasonable at the time the contract was entered into as opposed to when the breach occurred. There have been cases, however, where courts will decide the reasonableness of the damage estimate based on the actual harm at the time of breach.