Liquidated Damages Provisions in Illinois: Specific Amount for Specific Breach = Good; Optional or Penalty = Bad

imageLiquidated damages clauses appear frequently in a variety of commercial contracts and similar agreements. Several Illinois cases – some old and some very recent – examine liquidated damages clauses in multiple factual settings.

Here are some bullet-point liquidated damages rules, gleaned from the caselaw:

– Liquidated damages clauses are enforceable where:  (1) the parties intended to agree in advance to the settlement of damages that might arise from a breach;(2) the amount provided as liquidated damages was reasonable at the time of contracting, bearing some relation to the damages which might be sustained; and (3) the actual damages would be uncertain in amount and difficult to prove

– Damages must be in a specific amount for a specific breach – they may not be a penalty to punish nonperformance or a threat to secure performance:

– The key issue is whether the liquidated damages amount is a reasonable forecast of possible loss at the time of contracting.  Parties are not required to make the “best” damages estimate, just one that is reasonable.

Recent cases in which liquidated damages provisions were upheld:

Dallas v. Chicago Teachers Union 408 Ill.App.3d 420, 424 (1st Dist. 2011)(held: liquidated damages clause setting $100K as minimum damages if either party breached a confidential settlement agreement was valid.  $100K was reasonable figure based on plaintiff’s pre-settlement agreement salary history and desire for future employment with Chicago Teachers Union)

Karimi v. 401 N. Wabash Venture, LLC, 2011 IL App (1st) 102670; and Burke v. 401 N. Wabash Venture, LLC, 2013 WL 1442280 (7th Cir. 2013).

In Karimi and Burke, the First District and Seventh Circuit (Burke was a diversity case) respectively, enforced liquidated damages clauses in Trump Tower condo purchase contracts which stated that if buyer breached, seller’s remedy was retention of the buyer’s earnest money deposit – 15% of the condo unit’s sale price.  The courts held that this amount was both specific and reasonable enough to be enforced against the breaching buyer.

Three cases with  unenforceable liquidated damages clauses:

Med+Plus Neck & Back Pain Center v. Noffsinger, 311 Ill.App.3d 853 (2000).

 – liquidated damages clause in two-year employment contract invalid where (a) it’s a penalty to secure performance and (b) damages bore no relationship to possible damages if employee prematurely breached.  Evidence of the penal nature of the provision was the fact that employer’s damages decreased the longer the defendant employee worked for employer and increased the earlier employee breached).  

Grossinger Motorcorp, Inc. v. American National Bank & Trust Co., 240 Ill.App.3d 737 (1992)

– liquidated damages clause in a real estate contract struck down due to its optional nature: plaintiff could either (a) recover liquidated damages (keep the earnest money) or (b) at plaintiffs option, exercise other remedies.

H&M Driver Leasing v. Champion, 181 Ill.App.3d 28 (1st Dist. 1989)

– liquidated damages clause in truck driver services contract clearly a penalty to secure performance where contract provides for baseline liquidated damage amount AND actual damages:

Now What??

– If you are trying to enforce a contractual liquidated damages provision (LDP) in the Illinois courts, Karimi, Burke and Dallas should prove useful.  If you’re opposing and trying to defeat an LDP, you should try to analogize your case’s facts to those of the Med+Plus, Grossinger and H&M Driver Leasing cases.

– If a contract sets forth a specific amount for a specific breach, and it’s a reasonable forecast of possible damages (based on objective data to support the liquidated amount – see Dallas – plaintiff’s salary history provided a quantifiable basis to support minimum damage figure), the liquidated damages term will likely be enforced.

– But, if the provision contains indicators of a penalty or threat to secure performance or is optional (contains the word “option” or gives the non-breaching party the option of pursuing actual damages OR liquidated damages), it will likely be struck down.

 

Illinois Contract Law: Parol Evidence Rule, ‘No Damages for Delay’ Clauses

In Asset Recovery vs. Walsh Construction, 2012 IL App (1st) 101226, the First District affirmed  a bench trial judgment for a general contractor sued by a demolition subcontractor for breach of contract and quantum meruit.  The lawsuit stemmed from numerous delays over the course of a multi-million dollar demolition subcontract in connection with the redevelopment of the Palmolive Building, a high profile building on Michigan Avenue, Chicago.

In affirming the trial court, the First District held that all the delays sued upon by the plaintiff were within the contemplation of the parties and also enforced a “no damages for delay” clause contained in both the subcontract (between plaintiff and defendant) and the prime contract (between defendant and building owner).  In the lengthy opinion, the Asset Recovery Court – citing Illinois precedent – provides a good synopsis of several legal principles which commonly crop up in breach of contract litigation.

The key contract formation, interpretation and damages propositions cited in Asset Recovery include:

– Illinois applies the “four corners rule” and looks to the language of the contract to determine its meaning;

– Contractual ambiguity exists if the contract language is susceptible to more than one meaning; 

– If an ambiguity is present, parol evidence may be admitted to aid the court in resolving the ambiguity;

– If the contract is unambiguous, extrinsic evidence isn’t provisionally admitted to show an external ambiguity;

– Where a contract is signed after its effective date, it relates back to the effective date;

– A party can accept a contract by course of conduct, but it must be clear that the conduct relates to the specific contract in question;

– the parol evidence rule precludes (a) the admissibility of evidence to alter, vary or contradict a written agreement and (b) bars evidence of understandings not reflected in the contract reached before or at the time of execution that vary or modify the contract terms;

– the parol evidence rule does not preclude a contracting party from offering proof of terms (such as an oral agreement to change in schedule) that supplement rather than contradict the contract; 

– Contracting parties may waive delays in performance by words or conduct;

– In such a case, the court may extend the term of a contract for a “reasonable time”;

– “No damages for delay” clauses are enforceable but are construed strictly against the party seeking the provision’s benefit;

– Exceptions to “no damages for delay” clauses include (1) bad faith delay; (2) delay “not within the contemplation of the parties”; (3) delay of unreasonable duration; and (4) delay attributable to inexcusable ignorance or incompetence;

– Under waiver and estoppel rules, a party to a contract may not lull another party into false belief that strict compliance isn’t required and then sue for noncompliance. 

The Asset Recovery case contains detailed facts and an exhaustive chronology. The case illustrates the interplay between prime contracts and subcontracts – the latter of which often mirror the prime contract terms.  The opinion serves as an excellent resource for quick bullet-point research on contract formation, construction and enforceability issues; particularly in the construction law context.

PBP

Exculpatory Clauses in Illinois – The ‘Uneven Bargaining Position’ Issue

Spears v. Ass’n of Illinois Electric Cooperatives, 2013 IL App (4th) 120289 summarizes the general rules and exceptions that govern exculpatory clauses in Illinois.  In the case, the plaintiff college student who signed up for a utility “pole climbing” class the defendant – a non-profit entity – offered through plaintiff’s college.  Before she took the class, plaintiff signed a release that immunized the defendant from all claims and injuries that could result from the class. 

The plaintiff sustained a serious knee injury while descending a utility pole and sued the defendant for negligence.  The defendant moved for summary judgment based on the release. The trial court denied the summary judgment motion and found there was a disparity in bargaining power. 

The appeals court reversed finding there were unresolved fact issues as to whether there was a disparity in bargaining power between the student and school.

Exculpatory Provisions: General Rules

In Illinois, parties may contractually release liability for their own negligence.  Spears, ¶ 24.  Liability release contracts are not favored and are strictly construed against the released party because these contracts pit two public policy interests against each other: (1) a person should be liable for his negligent conduct vs. (2) contracting parties should be free to contract as they see fit.  Id.

A release of liability will be enforced in Illinois if (1) the terms are clear, explicit and precise; (2) the release encompasses the activity, circumstance or situations involved in the contract; (3) it is not against public policy; and (4) there is nothing in the “social relationship” which weighs against upholding the release.  ¶ 25.

The ‘Social Relationship’ and Disparity of Bargaining  Power Exceptions

Several social relationships can lead a court to invalidate an exculpatory clause.  These include: (1) employer-employee; (2) common carrier/innkeeper/public utility – member of public; and (3) bailor-bailee relationships.   

Besides these special relationships, a “disparity of bargaining power” between the contracting parties can work to defeat a liability waiver.  On this point, the key focus is whether the plaintiff had freedom of choice as to whether to sign the release.  ¶ 26.

The disparity in bargaining power factors a court considers include (1) the sophistication of the contracting parties; (2) whether plaintiff was or should have been aware of the risks involved in the activity; (3) whether plaintiff was under economic or other compulsion (was it a “take-it-or-leave-it” situation?); and (4) whether the plaintiff had a reasonable alternative. ¶ 27.

The over-arching question which Spears refused to answer was whether there was a disparity of bargaining power between an educator and a student such that exculpatory releases in school-student contracts are always void.  The Court said it was up to the legislature (not the courts) to decide the question. ¶ 36. 

Generally, if a plaintiff is free to forgo the activity and he can realistically locate a alternative service provider, the release will be upheld.  In determining whether the plaintiff was free to abstain from the class, the Court considered (1) the plaintiff’s monetary and time investment in the activity; (2) whether the plaintiff’s completion of the pole climbing class was essential for future employment; (3) whether plaintiff could have obtained the same or similar instruction elsewhere; (4) would refusing to take the pole climbing class detrimentally impact plaintiff’ employment prospects?; and (5) would plaintiff’s financial aid, grants or scholarship be imperiled if she opted out of the class?  ¶ 39. 

Epilogue:

Spears common-sense take-away is that if the person signing the release had a meaningful choice as to whether to sign it or not, the release will most likely be enforced absent a special-relationship between the parties where a stronger party is trying to take advantage of a weaker one.