Are liquidated damages clauses enforceable in Connecticut?

The plaintiff argues that a contract provision that fixes liquidated damages for breach of contract is enforceable if it satisfies certain conditions; but that a liquidated damages provision that imposes a penalty is contrary to public policy, and therefore, is invalid. See Berger v. Shanahan, 142 Conn. 726, 731, 118 A.2d 311 (1955). "A provision for liquidated damages ... is one

[163 Conn.App. 128]

the real purpose of which is to fix fair compensation to the injured party for a breach of contract. In determining whether any particular provision is for liquidated damages or for a penalty, the courts are not controlled by the fact that the phrase ‘liquidated damages' or the word ‘penalty’ is used. Rather, that which is determinative of the question is the intention of the parties to the contract. Accordingly, such a provision is ordinarily to be construed as one for liquidated damages if three conditions are satisfied: (1) The damage which was to be expected as a result of the breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract." (Internal quotation marks omitted.) American Car Rental, Inc. v. Commissioner of Consumer Protection, 273 Conn. 296, 306–307, 869 A.2d 1198 (2005), quoting Berger v. Shanahan, supra, 142 Conn. at 731–32, 118 A.2d 311.

With regard to the breach of a contract for the sale of real property, a "seller's damages ... include not

[163 Conn.App. 130]

only his expectation damages suffered through loss of his bargain, and his incidental damages such as broker's commissions, but also less quantifiable costs arising out of retention of real property beyond the time of the originally contemplated sale." Vines v. Orchard Hills, Inc., supra, 181 Conn. at 512, 435 A.2d 1022. "It is not unreasonable ... to presume that a liquidated damages clause that is appropriately limited in amount bears a reasonable relationship to the damages that the seller has actually suffered." Id. "A liquidated damages clause allowing the seller to retain 10 percent of the contract price as earnest money is presumptively a reasonable allocation of the risks associated with default." Id. In the present case, the $30,000 down payment was considerably less than 10 percent of the offering price of $716,000, and therefore presumptively reasonable.

Most of the litigation concerning liquidated damages clauses arises in the context of an affirmative action by the party injured by breach to enforce the clause in order to recover the amount therein stipulated. In such cases, the burden of persuasion about the enforceability of the clause naturally rests with its proponent. See, e. g., Norwalk Door Closer Co. v. Eagle Lock & Screw Co., supra, 688, 220 A.2d 263. In the case before us, by contrast, where the plaintiffs are themselves in default, the plaintiffs bear [181 Conn. 512] the burden of showing that the clause is invalid and unenforceable. See Frank Towers Corporation v. Laviana, 140 Conn. 45, 53-54, 97 A.2d 567 (1953); 5A Corbin, Contracts § 1132, p. 64 (1964); Macneil, supra, 517. It is not unreasonable in these circumstances to presume that a liquidated damages clause that is appropriately limited in amount bears a reasonable relationship to the damages that the seller has actually suffered. See Restatement (Second), Contracts § 388, esp. subsection (2) (Tent.Draft No. 14, 1979). ² The seller's

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damages, as Professor Palmer points out, include not only his expectation damages suffered through loss of his bargain, and his incidental damages such as broker's commissions, but also less quantifiable costs arising out of retention of real property beyond the time of the originally contemplated sale. 1 Palmer, Restitution §§ 5.4, 5.8 (1978). See also Goetz & Scott, supra, 577. A liquidated damages clause allowing the seller to retain 10 percent of the contract price as earnest money is presumptively a reasonable allocation of the risks associated with default. See Wilkins v. Birnbaum, 278 A.2d 829, 831 (Del.1971); [181 Conn. 513] Oliver v. Lawson, 92 N.J.Super. 331, 336, 223 A.2d 355 (1966); 1 Palmer, supra, § 5.1, p. 587. ³

The presumption of validity that attaches to a clause liquidating the seller's damages at 10 percent of the contract price in the event of the purchaser's unexcused nonperformance is, like most other presumptions, rebuttable. The purchaser, despite his default, is free to prove that the contract, or any part thereof, was the product of fraud or mistake or unconscionability. Cf. Hamm v. Taylor, 180 Conn. 491, 495-96, 429 A.2d 946 (1980). In the alternative, the purchaser is free to offer evidence that his breach in fact caused the seller no damages or damages substantially less than the amount stipulated as liquidated damages. See Norwalk Door Closer Co. v. Eagle Lock & Screw Co., supra, 153 Conn. 689, 220 A.2d 263.

In Stabenau v. Cairelli, 22 Conn.App. 578, 577 A.2d 1130 (1990), this court held that the trial court's finding of unjust enrichment was not clearly erroneous because there was evidence to support the trial court's finding

[160 Conn.App. 199]

that the purchaser's breach was not willful, but rather was prompted by a fear that he would lose his job and be unable to make the payments necessary for the purchase of the real estate, and that the sellers sold the real estate at a higher price, thereby suffering no damage. Citing Vines, this court stated: "Otherwise valid liquidated damages clauses may not be enforced when the nonbreaching party suffers no damages.

[125 A.3d 255]

[I]f the damage envisioned by the parties never occurs, the whole premise for their agreed estimate vanishes, and ... neither justice nor the intent of the parties is served by enforcement.... A purchaser of real property does not, despite his knowing default, forfeit the right to seek restitution of sums of money earlier paid under the contract of sale, even when such payments are therein characterized as liquidated damages.... A buyer in nonwillful default can recover monies paid upon the contract and retained by the seller, despite an otherwise valid liquidated damages clause, where the seller has sustained no damages.... A conclusion of unjust enrichment required the court to find that the plaintiffs' breach was not willful and that the defendants sustained no damage or damage substantially less than the amount stipulated in the liquidated damages clause.... These conclusions are factual findings that we will not retry on appeal.... Our review is limited solely to the determination of whether, on the record, the court's determinations are clearly erroneous." (Citations omitted; internal quotation marks omitted.) Id., at 580–81, 577 A.2d 1130 (liquidated damages provision in contract not enforceable because nonbreaching seller suffered no damages).

The circumstances which the parties might reasonably foresee at the time of making a contract could, in any given case, be vastly different from the circumstances which actually exist when a court is called upon to enforce the contract. It is not the function of the court to determine by hindsight the reasonableness of the expectation of the parties at the time the contract was made, but it is the function of the court at the time of enforcement to do justice. In the ordinary contract action the court determines the just damages from evidence offered. In a valid contract for liquidated damages, the parties are permitted, in order to avoid the uncertainties and time-consuming effort involved, to estimate in advance the reasonably probable foreseeable damages which would arise in the event of a default. Implicit in the transaction is the premise that the sum agreed upon will be within the fair range of those just damages which would be called for and provable had the parties resorted to proof. Consequently, if the damage envisioned by the parties never occurs, the whole premise of their agreed estimate vanishes, and, even if the contract was to be construed as one for liquidated damages rather than one for a penalty, neither justice nor the intent of the parties is served by enforcement. [153 Conn. 690] To enforce it would amount in reality to the infliction of a penalty. Massman Const. Co. v. City Council of Greenville, Miss., 147 F.2d 925, 928 (5th Cir.); Northwest Fixture Co. v. Kilbourne & Clark Co., 128 F. 256, 261 (9th Cir.)

In Miller v. Macfarlane, 97 Conn. 299, 302, 116 A. 335, 336, we quoted with approval from The Colombia, D.C., 197 F. 661, 664, that 'no provision in a contract for the payment of a fixed sum as damages, whether stipulated for as a penalty or as liquidated damages, will be enforced in a case where the court sees that no damage has been sustained.' See also King Motors, Inc. v. Delfino, supra, 136 Conn. 498, 72 A.2d 233. This principle finds approval in comment (e) of the Restatement, 1 Contracts § 339, where it is stated that '(i) f the parties honestly but mistakingly suppose that a breach will cause harm that will be incapable or very difficult of accurate estimation, when in fact the breach causes no harm at all or noen that is incapable of accurate estimation without difficulty, their advance agreement fixing the amount to be paid as damages for breach * * * is not enforceable.' See also Priebe & Sons, Inc. v. United States, 332 U.S. 407, 412, 68 S.Ct. 123, 92 L.Ed. 32. This is not to say that any burden is placed on a plaintiff to prove actual damage in order to recover under a valid contract for liquidated damages. The proposition is only that equitable principles will be invoked to deny recovery when the facts make [153 Conn. 689] it apparent that no damage has been suffered.

§ 42a-2-718. Liquidation or limitation of damages; deposits

(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

(2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds (a) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or (b) in the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars, whichever is smaller.

(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes (a) a right to recover damages under the provisions of this article other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer's breach before reselling goods received in part performance, his resale is subject to the conditions laid down in section 42a-2-706 on resale by an aggrieved seller.

§ 42-150u. Enforceability of liquidated damages provision in consumer contracts. Consumer contract or consumer lease for personal emergency response system. Death of consumer. Exclusions

(a) No provision in a written contract for the purchase or lease of goods or services primarily for personal, family or household purposes that provides for the payment of liquidated damages in the event of a breach of the contract shall be enforceable unless (1) the contract contains a statement in boldface type at least twelve points in size immediately following such liquidated damages provision stating "I ACKNOWLEDGE THAT THIS CONTRACT CONTAINS A LIQUIDATED DAMAGES PROVISION", and (2) the person against whom such provision is to be enforced signs such person's name or writes such person's initials next to such statement. Nothing in this section shall validate a clause that is a penalty clause or is otherwise invalid under the law of this state.

(b) For purposes of this subsection, "personal emergency response system" means a twenty-four-hour-per-day electronic alarm system placed in an adult's home that enables him or her to obtain immediate help in case of an emergency. In the event a consumer dies during the term of a consumer contract or consumer lease for a personal emergency response system, the consumer contract or consumer lease for such system shall be deemed terminated upon such consumer's death and any penalty provision contained in the contract or lease regarding early termination shall be unreasonable pursuant to section 42-421.

(c) The provisions of subsection (a) of this section shall not apply to (1) contracts between a consumer and an agency of the state or any political subdivision of the state or of the federal government, (2) negotiable instruments, (3) contract provisions for late fees, prepayment penalties or default interest rates, (4) contracts originated or held by an institution, or any subsidiary or affiliate of such institution, that is regulated by the Department of Banking or by a federal bank regulatory agency, provided, in the case of a contract originated or held by a subsidiary or affiliate of such institution, the subject matter of the contract is an activity that is financial in nature or incidental to such an activity as described in the Bank Holding Company Act, 12 USC 1843(k)(4), and (5) contracts originated or held by a person, firm or corporation licensed by the Department of Motor Vehicles in accordance with the provisions of section 14-52 or 14-67 a.