liquidated damages clause in Massachusetts

2011The court reasoned that if the parties, in the default/ acceleration clause, agreed in advance on a sum that reasonably estimated the potential damages from a material breach of the commercial lease, they “exchange[d] the opportunity to determine actual damages after a breach, including possible mitigation, for the ‘peace of mind and certainty of result’ afforded by a liquidated damages clause.” Id. at 423 , quoting from Kelly v. Marx, 428 Mass. 877, 881 (1999).

2006In Kelly v. Marx, supra, we provided guidance as to how a judge should analyze the enforceability of a liquidated damages clause in a purchase and sale agreement.

2005Clean Harbors, relying on A-Z Servicenter, Inc. v. Segall, 334 Mass. 672 (1956), takes the position that the payment was compelled pursuant to John Hancock’s acceleration, and that the make whole amount constituted a prohibited penalty under a liquidated damages analysis.

1998Defendant also urges that a determination of whether a liquidated damages clause is so oppressive as to constitute a “penalty,” is a question of fact for a juiy, citing AZ Servicecenter, Inc. v. Segall, 334 Mass. 672 (1986).

2004Its disinclination to do so is, at least to some extent, consistent with its much more recent holding in Kelly v. Marx, supra at 880 , “that a judge, in determining the enforceability of a liquidated damages clause, should examine only the circumstances at contract formation.” In so doing, the Court disagreed with the Appeals Court’s view “requiring in some circumstances a ‘second look’ as of the time of the breach to determine if the sum stipulated as liquidated damages is ‘unreasonable and grossly disproportionate to the real damages from a breach, or is unconscionably excessive.’” Kelly v.

1999See also Colonial at Lynnfield, Inc. v. Sloan, 870 F.2d 761, 765 (1st Cir. 1989) (applying A-Z Servicenter test); Kelly v. Marx, supra at 827-828 (same). 4 We agree with the dissenting Justice, id. at 833 (Spina, J., dissenting), and the decisions of many other States, 5 that a judge, in determining the enforceability of a liquidated damages clause, should examine only the circumstances at contract formation.

2026“Determining the validity of a liquidated damages clause is usually a fact-specific exercise.” Honey Dew Assocs., Inc. v. M & K Food Corp., 241 F.3d 23, 28 (1st Cir. 2001) (applying Massachusetts law).

2006The United States Court of Appeals for the First Circuit recognized this gap in Honey Dew Assocs., Inc. v. M & K Food Corp., 241 F.3d 23, 27 (1st Cir. 2001), and concluded that if this court were to decide the issue, “it would assign the burden of proving the unenforceability of a liquidated damages clause to the party raising that defense.” Id.

2000Our position is that ‘[w]here actual damages are difficult to ascertain and where the sum agreed upon by the parties at the time of the execution of the contract represents a reasonable estimate of the actual damages, such a contract will be enforced." [quoting A-Z Servicenter, Inc. v. Segall, 334 Mass. 672, 675 (1956)] Liquidated damages will not be enforced if the sum is “grossly disproportionate to a reasonable estimate of actual damages” made at the time of contract formation, [quoting Lynch v. Andrew, 20 Mass.App.Ct. 623, 628 (1985)] Kelly v. Marx, 428 Mass. 877, 880 (1999).

2000See Lynch v. Andrews, 20 Mass.App.Ct. 623, 627, fur. rev. den., 396 Mass. 1102 (1985).

2024"Where damages Cir. Mar. 19, 1996) (applying South Carolina law to liquidated damages clause and noting, in relevant part, "[o]ften, the language of the liquidated damages clause is flexibly designed to preserve the option of the non-breaching party to use the liquidated damages remedy or to seek one of the normal remedies for breach" [citation omitted]). 8 9 are easily ascertainable, and the amount provided for is grossly disproportionate to actual damages, or unconscionably excessive, the court will award the aggrieved party no more than its actual damages." NPS, LLC, supra. As there is "'no

2024"Where damages Cir. Mar. 19, 1996) (applying South Carolina law to liquidated damages clause and noting, in relevant part, "[o]ften, the language of the liquidated damages clause is flexibly designed to preserve the option of the non-breaching party to use the liquidated damages remedy or to seek one of the normal remedies for breach" [citation omitted]). 8 9 are easily ascertainable, and the amount provided for is grossly disproportionate to actual damages, or unconscionably excessive, the court will award the aggrieved party no more than its actual damages." NPS, LLC, supra. As there is "'no

2007In Commissioner of Ins., supra at 771, we held that where a liquidated damages clause establishes the same damages for breach of any provision within the contract, regardless of the severity of the breach (or the difficulty of calculation), it will be struck down as a penalty even for those breaches for which it would not be disproportionate.

2004As noted in Commissioner of Insurance v. Massachusetts Accident Co., 310 Mass. 769 (1942), a liquidated damages clause in such a case would not be enforced where a breach “resulted] in a loss which could be accurately determined and would be inconsiderable in comparison with the amount required by the lease to be paid....” Id. at 771 .

2006See Kelly, 428 Mass. at 881 (court will not decide actual damages post-breach and apply a “second look” approach after the parties have stipulated to reasonable liquidated damages because “they will be taken to mean what they say and will be held to their word,” quoting Guerin v. Stacy, 175 Mass. 595, 597 (1900)).

1999The parties agreed to the extent of their damages when they agreed on a liquidated damages clause. “[T]he proper course is to enforce contracts according to their plain meaning and not to undertake to be wiser than the parties, and therefore that in general when parties say that a sum is payable as liquidated damages they will be taken to mean what they say and will be held to their word.” Guerin v. Stacy, 175 Mass. 595, 597 (1900) (Holmes, C.J.).

2024Corp., supra. In determining whether the liquidated damages provision is reasonable, "we look to the circumstances at the time of contract formation." 15 NPS, LLC, supra. The burden of showing that a liquidated damages provision is unenforceable lies with the party challenging enforcement of the provision.

2023Corp., 446 Mass. 422 (TAL), the Appeals Court concluded that the liquidated damages clause was an unenforceable penalty because it did not account for rent that Cummings collected from the new tenant during the original lease term.

2004Its disinclination to do so is, at least to some extent, consistent with its much more recent holding in Kelly v. Marx, supra at 880 , “that a judge, in determining the enforceability of a liquidated damages clause, should examine only the circumstances at contract formation.” In so doing, the Court disagreed with the Appeals Court’s view “requiring in some circumstances a ‘second look’ as of the time of the breach to determine if the sum stipulated as liquidated damages is ‘unreasonable and grossly disproportionate to the real damages from a breach, or is unconscionably excessive.’” Kelly v.

1995In the circumstances at bar, however, where the damages are not difficult to ascertain, the court is to consider whether the sum of money awarded under the liquidated damages clause is “so ‘unreasonably and grossly disproportionate’ to, or is ‘unconscionably excessive’ of, the actual damages so as to make [the Clause] a penalty.” Id. at 605 .

1996Identical to the liquidated damages clause in Schrenko v. Regnante, 27 Mass. App. Ct. 282 (1989), paragraph 22 herein “departed in a material way from the classic pattern ... [by giving the] seller... the right to consider the damages unliquidated and to seek additional damages beyond the amount of the forfeited deposit.” Id. at 286 .

1996Identical to the liquidated damages clause in Schrenko v. Regnante, 27 Mass. App. Ct. 282 (1989), paragraph 22 herein “departed in a material way from the classic pattern ... [by giving the] seller... the right to consider the damages unliquidated and to seek additional damages beyond the amount of the forfeited deposit.” Id. at 286 .

2023Corp. v. CSC Consulting, Inc., 446 Mass 422, 431 (2006), citing Kaplan v. Gray, 215 Mass. 269, 270-273 (1913). 6 Generally, jurisdictions test the enforceability of a liquidated damages clause in one of two ways: by analyzing the circumstances at the time the contract was formed, known as the "single look" approach, or by considering the circumstances at the time of the breach, i.e., the "second look" approach.

2023See Cummings Props., LLC v. National Communications Corp., 449 Mass. 490, 496 (2007) (Cummings Props.).

2023Kelly, 428 Mass. at 880-881 , quoting Kelly v. Marx, 44 Mass. App. Ct. 825, 833 (1998) (Spina, J., dissenting). 8 of a breach." NPS, LLC, 451 Mass. at 420 , quoting Cummings Props., 449 Mass. at 494 .

2023The Appeals Court reversed, concluding that because the liquidated damages provision did not account for the possibility that Cummings could relet the premises and collect rent from a new tenant in mitigation of the breach, it was an unenforceable penalty. 5 Cummings Props., LLC v. Hines, 102 Mass. App. Ct. 28, 33-34, 37 (2022).

2023Cummings Props., LLC, 102 Mass. App. Ct. at 33-34 . 10 Even though Hines failed to meet his burden to demonstrate that the liquidated damages provision amounted to a penalty, he nevertheless contends that the sum should be decreased by the amount Cummings collected by reletting the space.

2023See, e.g., Old Colony Constr., LLC v. Southington, 316 Conn. 202 , 222 (2015); Proulx v. 1400 Pa. Ave., SE, LLC, 199 A.3d 667, 673-674 (D.C. 2019).

2012An indemnity clause differs from a liquidated damages clause in that it “do[es] not provide for liquidation of damages . . . , nor indeed for any right to damages for breach of the covenant to pay rent.” Manhattan Properties, Inc. v. Irving Trust Co., 291 U.S. 320, 337 (1934).

2010See McMann v. McGowan, 71 Mass. App. Ct. 513, 516 (2008).

2008There, the Court held that it was appropriate to enforce a liquidated damages clause of the contract where the seller ultimately sold the property at a higher price to another party, and thereby suffered no loss but had realized an actual gain as a result of the buyer’s breach, because “potential damages were difficult to determine at the time of the contract formation, and the amount agreed to was a reasonable forecast of damages in the event of future breach, at that time.” Perroncello v. Donahue, 448 Mass. 199, 205 (2007).

2007Winchester bargained for an automatic $1 million penalty in the event that Host Marriott breached the agreement, and a review of the record here can lead to no conclusion other than that Host Marriott was in breach. 9 See Bray v. Hickman, 263 Mass. 409, 412 (1928) (contract “should be given a construction which will make it a rational business instrument and will effectuate what appears to have been the intention of the parties”); Waldo Bros.

2006See Town Planning & Eng’g Assocs., Inc. v. Amesbury Specialty Co., 369 Mass. 737, 744 (1976); Hastings Assocs., Inc. v. Local 369 Bldg.

2005See, e.g., Renda v. Gouchberg, 4 Mass. App. Ct. at 786 (liquidated damages analysis did not apply to the borrower’s voluntary election to prepay a loan). (b) Rational relation of the make whole amount to the lenders’ loss.

2004See also Cummings Properties, LCC v. Empire Technologies, Inc., 2002 Mass. App. Div. 84 , 86 n.2.

1999See also Colonial at Lynnfield, Inc. v. Sloan, 870 F.2d 761, 765 (1st Cir. 1989) (applying A-Z Servicenter test); Kelly v. Marx, supra at 827-828 (same). 4 We agree with the dissenting Justice, id. at 833 (Spina, J., dissenting), and the decisions of many other States, 5 that a judge, in determining the enforceability of a liquidated damages clause, should examine only the circumstances at contract formation.

1995Although there is no indication of any actual damages to the Marxs, their retention of the Kellys’ $17,750.00 deposit is, nevertheless, neither unreasonable nor excessive under the circumstances of the breach, the overall value of the contract, and the customary nature of this 1ype of a deposit. 3 Compare, Lynch v. Andrew, 20 Mass.App.Ct. 623, 627-628 (1985), with Begelfer v. Najarian, 381 Mass. 177, 186 (1980) (invalidating a clause which doubled the interest rate charged on loan in default from 17% to 32%); Security Sctfety Corp. v. Kuznicki, 350 Mass. 157, 157-58 (1966) (holding a 33 1/3% l

1995Although there is no indication of any actual damages to the Marxs, their retention of the Kellys’ $17,750.00 deposit is, nevertheless, neither unreasonable nor excessive under the circumstances of the breach, the overall value of the contract, and the customary nature of this 1ype of a deposit. 3 Compare, Lynch v. Andrew, 20 Mass.App.Ct. 623, 627-628 (1985), with Begelfer v. Najarian, 381 Mass. 177, 186 (1980) (invalidating a clause which doubled the interest rate charged on loan in default from 17% to 32%); Security Sctfety Corp. v. Kuznicki, 350 Mass. 157, 157-58 (1966) (holding a 33 1/3% l

1994In McCray v. Cole, 259 La. 646, 654-656 (1971), the Supreme Court of Louisiana concluded that a liquidated damages clause, enforceable if the defendant practiced as a psychologist within two years of leaving *181 the plaintiffs’ employment in the parish where his former employers were located, violated Louisiana’s statutory prohibition against noncompetition agreements. 6 In States which do not have a statutory provision governing covenants not to compete, courts recognize that compensation for competition (as well as forfeiture for competition) clauses obviously constitute restrictions on an

1985Liquidated damages represent the “sum fixed as an estimate made by the parties at the time when the contract is entered into, of the extent of the injury which a breach of the contract will cause.” Factory Realty Corp. v. Corbin-Holmes Shoe Co., 312 Mass. 325, 331 (1942).

1984“Clearly the defendant cannot be heard to complain that its requests for rulings were granted and we need not consider whether these rulings were fight.” Korb. v. Albany Carpet Cleaning Company, 301 Mass. 317, 318 (1938).