TAL Financial Corp. v. CSC Consulting, Inc.

Supreme Judicial Court of Massachusetts · 2006 · Contracts

Contractsliquidated damagespenalty clauseburden of proofwaiverlease defaultautomatic renewalattorney's fees

Facts

TAL leased equipment, furniture, and software to Onward under a master lease with three schedules, and CSC later assumed Onward's obligations after acquiring and merging it. CSC discarded or lost most of the leased items, sought payoff information, paid TAL through May 2001, and then stopped making payments. TAL claimed the lease schedules had automatically renewed because CSC did not give timely written notice of termination and also sought liquidated damages equal to the present value of future rent plus eighteen percent of TAL's acquisition costs. TAL later sent CSC a default letter demanding payment and return of the equipment, and then rejected CSC's settlement offer while disclaiming interest in the return of the items.

Issue

When a defaulting party challenges a contractual liquidated damages clause as unenforceable, which party bears the burden of proof? Also, was the lease provision requiring payment of future rent plus eighteen percent of acquisition costs enforceable, were the schedules automatically extended, and was TAL entitled to attorney's fees under the lease?

Rule

The burden of proving the unenforceability of a liquidated damages clause rests on the party challenging the clause. A liquidated damages provision is enforceable if, at the time of contract formation, anticipated damages were difficult to determine and the clause was a reasonable forecast of expected damages; it is unenforceable if the stipulated sum is grossly disproportionate to a reasonable estimate of actual damages made at that time. A party that elects to treat a contract as terminated and seek damages may waive the right to insist on continued enforcement of an automatic renewal term, and contractual attorney's fees are recoverable only if reasonable.

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Blue Mesa Leasing, a finance company in Denver, leases specialized scanners to Arbor Clinical Group in Providence under a commercial lease. The lease provides that upon default Arbor must pay a stipulated sum labeled "liquidated damages," and after Arbor stops paying, Arbor argues in court that the clause is an unenforceable penalty.

Who bears the burden of proving whether the liquidated damages clause is unenforceable?

Explanation. The majority held that the burden of proving unenforceability rests on the party challenging enforcement of the liquidated damages provision. Under freedom-of-contract principles, parties are generally held to express terms, so the party seeking to set aside the clause must prove it is an unenforceable penalty.