Wassenaar v. Panos

Supreme Court of Wisconsin · Contracts

ContractsLiquidated damagesEmployment contractsMitigation of damagesPenalty doctrineliquidated damagespenaltystipulated damages

Facts

Donald Wassenaar entered a written three-year employment contract to serve as general manager of the Towne Hotel. The contract provided that if the hotel terminated the contract before expiration, it would be responsible for fulfilling the entire financial obligation under the agreement for the full three-year period; the court read this to mean salary for the unexpired term, not all three years regardless of termination date. The employer terminated Wassenaar without just cause on March 31, 1978, leaving 21 months on the contract, and he was unemployed for about two and a half months before obtaining other hotel employment. The employer asserted failure to mitigate, but the circuit court struck that defense and entered judgment based on the stipulated damages amount of $24,640.

Issue

Was the employment contract's stipulated damages clause, requiring payment of the employee's salary for the unexpired term if the employer terminated early, a valid liquidated damages provision or an unenforceable penalty? If valid, does the employee's post-breach earnings reduce the recovery under the clause through the mitigation doctrine?

Rule

A stipulated damages clause is enforceable as liquidated damages if it is reasonable under the totality of the circumstances. In assessing reasonableness, the court considers factors such as the difficulty of estimating or proving damages and whether the stipulated amount is a reasonable forecast of anticipated or actual harm, viewed from both the time of contracting and the time of breach or trial; the challenger bears the burden of proving unreasonableness. Once a stipulated damages clause is found reasonable and enforceable, the nonbreaching employee's damages are not reduced by amounts earned or that could have been earned after breach.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Madison, Wisconsin, Lakefront Civic Group hired Elena Ortiz as operations director under a written two-year contract. The agreement stated that if the group terminated Elena without cause before the term expired, it would pay her the salary due for the remainder of the term; after firing her ten months in, the group argued the clause was a penalty but introduced no evidence about Elena's later earnings, alternative opportunities, or lack of actual harm.

How should a court most likely rule on the enforceability of the clause?

Explanation. The majority places the burden on the party seeking to avoid the stipulated damages term to prove facts showing unreasonableness. Reasonableness is assessed under the totality of the circumstances, including anticipated and actual harm. Where the challenger produces no evidence showing no injury or gross disproportionality, the clause is not set aside merely by argument. Once valid, mitigation is not required to reduce recovery. (Derived from Wassenaar v. Panos (n.d.).)