Wasserman's Inc. v. Township of Middletown

Supreme Court of New Jersey · Contracts

Contractsliquidated damagespenalty clausereasonablenessgross receiptscommercial leasemunicipal contractretroactivity

Facts

The Township leased municipally owned commercial property to Wasserman's after two public advertisements produced only Wasserman's as a bidder. The executed lease allowed the Township to cancel, but required payment of both a pro rata share of improvement costs and twenty-five percent of the lessee's average gross receipts for one year, even though the gross-receipts component had not appeared in the original bid specifications. Wasserman's improved the property, later sublet it to Jo-Ro, and the Township eventually cancelled the lease and sold the property in 1989. The Township refused to pay the agreed cancellation damages and challenged the lease's validity and the enforceability of the gross-receipts damages provision.

Issue

Was the lease invalid because the gross-receipts cancellation term was not included in the original bid specifications or because a later statute requiring public bidding should apply retroactively? If the lease was valid, was the clause requiring payment of twenty-five percent of the lessee's average gross receipts an enforceable liquidated damages provision or an unenforceable penalty?

Rule

A stipulated damages clause is enforceable only if the amount is reasonable in light of the anticipated or actual harm caused by the breach, the difficulty of proving loss, and the inconvenience or infeasibility of obtaining an adequate remedy otherwise; clauses are presumptively reasonable in commercial transactions, and the party challenging them bears the burden of proving unreasonableness. The validity of a contract is determined by the law in effect at the time of contracting, absent clear legislative intent for retroactive application.

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

Beacon Loft Studios leased production space in Cleveland to Harborline Media under a commercial agreement negotiated by counsel. The contract provided that if Harborline wrongfully terminated early, it would pay Beacon a fixed amount equal to six months of estimated carrying costs and relocation expenses, and both parties anticipated that actual losses from a sudden termination would be difficult to quantify at the outset.

If Harborline challenges the clause as an unenforceable penalty, which is the strongest argument for enforcement?

Explanation. The majority adopted a reasonableness standard: stipulated damages are enforceable only if reasonable in light of anticipated or actual harm, difficulty of proof, and inconvenience or non-feasibility of obtaining another adequate remedy. In commercial transactions between parties with comparable bargaining power, such clauses are presumptively reasonable. Exact equality with actual damages is not required, and difficulty of estimation is a factor, not an absolute prerequisite. (Derived from Wasserman's Inc. v. Township of Middletown (n.d.).)