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FROM THE CONTRACTS FILE:
Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc. 41 N.Y.2d 420
• P contracted D to lease a fleet of 25 new milk trucks for a term of 7 years
• Under the provisions of the lease and service agreement entered into, P was to supply the trucks and make all necessary repairs
• D was to pay an agreed upon weekly rental fee. P would finance the purchase of the trucks through a bank, paying the prime rate of interest on the date of the loan plus 2%
• The rental charges on the trucks were to be adjusted in the event of a fluctuation in the interest rate above or below specified levels. D was granted the right to purchase the trucks, at any time after 1 year following the commencement of the lease, by paying to P the amount then due and owing on the back loan, plus and additional $100 per truck purchased, P therefore had the option of prepaying the remaining balance on the loan
• There was also a liquidated damages clause in the contract in the result of D’s breach. It stated that P would be entitled to damages “liquidated for all purposes” in the amount of all rentals that would have come due from the date of termination to the date of normal expiration of the term less the “re-rental value” of the vehicles, which was set at 50% of the rentals that would have become due. D would be obligated to pay P, one half of all rentals that would have become due had the agreement ran its full course
• The clause stated that the parties, in creation of the clause, took into account substantial investment in purchasing or reconditioning for D’s service of demised vehicles, the uncertainty of P’s ability to re-enter the said vehicles, the costs to P during any period if the trucks should not be rented or bought, and the uncertainty of prices
• D breached stating that P did not properly maintain the trucks. P warned to sue under the liquidations clause. D dropped the trucks off at P’s and P sued. P entered evidence that D only breached because allied corporations had bought trucks and D could save money by utilizing a “shadow fleet”
• Trial court found that P had done its duty under the contract and D breached wrongfully. The court found that P would have been entitled to 177k in rent remaining in the lease had it been completed and awarded under the liquidation contract, half of that, 88.6k
Issue: Should a provision in a truck lease agreement which requires the payment of a specified amount of money to the lessor in the event of the lessee’s breach be an enforceable liquidated damages clause, or instead, provide for an unenforceable penalty?
Holding: Affirmed for P with costs
• Liquidated damages, if included and agreed upon by both parties are enforceable unless it is against public policy to do so. If the amounts under liquidation clause are unreasonable or unconscionable to the breaching party, they may not be enforced as a promisor may be compelled, out of fear of economic devastation, to continue performance and his promise, in the event of default would reap a windfall well above actual harm sustained
• In interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for “liquidated damages” as in this case, or have styled it as a penalty
• In this case the amount stipulated by the parties as damages bears a reasonable relation to the amount of probable actual harm and is not a penalty. It was foreseeable that in the case of a breach, there may not be an actual market for the sale or re-rental of the specialized trucks. To be sure, P’s lost profit could readily be measured by the amount of he weekly rental fee. However, it was permissible for the parties, in advance, to agree that the re-rental or sale value of the vehicles 351 would be 50% of the weekly rental. This takes into account that upon breach, the trucks would no longer be “new and shiny” Both parties also took into account that if D breached, P would assume the cost of storing and maintaining trucks idled by D’s refusal to use them
• It is true that D could have simply purchased the trucks for a much smaller cost, but the fundamental fact is that they chose not to do so. By wrongfully terminating the contract, and then simply dumping the trucks at P’s property, D attempted to evade all obligations to P, whether for rent or for the agreed upon purchase price. They could have paid 48k had they opted to do so, but instead now face charges of 92k based on the breach and liquidation
• There is no significance to the fact that the liquidated damages clause appears on the preprinted form portion of the agreement Possible Defense for Puritan: The interplay of these two clauses means that P will always receive a windfall, because it will always get an amount greater than that of the loan, and it will still own the trucks, making the liquidations clause unreasonable. There is tension between the printed clause and the original document This case deals with the requirements of enforcing a liquidations clause and what factors must be taken into account to determine whether or not it should be Had there not been a buy-out option, the liquidated damages clause would have no doubt been enforceable…as it is there was a defense that the clause was a penalty