Brief Fact Summary. A producer of baklava entered into a contract with a party that was obligated to purchase a certain amount of baklava. The contract included a liquidated damages clause, applicable if the purchaser did not purchase the requisite amount of baklava.
Synopsis of Rule of Law. The relevant statute "provides three criteria by which to measure reasonableness of liquidated damages clauses: (1) anticipated or actual harm caused by breach; (2) difficulty of proving loss; and (3) difficulty of obtaining an adequate remedy."
Issue. Did the trial court appropriately apply the liquidated damages clause?
Held. No. Since baklava is a good, the Uniform Commercial Code (the "UCC") governs. The relevant provision, K.S.A. 84-2-102, reads "(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." Damages in this case must be "measured against the anticipated or actual loss under the baklava contract as required by 84-2-718." The court examined the Plaintiff's potential loss and determined that "if each case sold for $19, Kvassay would earn a net profit of $3.55 per case after paying himself for time and labor. If he did not pay himself, the projected profit was $4.29 per case." Despite this fact, the parties set the liquidated damages at $5 per case. Further, "[i]n comparing the anticipated damages of $3.55 per case in lost net profit with the liquidated damages of $5 per case, it is evident that Kvassay would collect $1.45 per case or about 41 percent over projected profits if Great American breached the contract. If the $4.29 profit figure is used, a $5 liquidated damages award would allow Kvassay to collect 71 cents per case or about 16 1/2 percent over projected profits if Great American breached the contract." Knowing this information alone, the court hinted at the fact that "enforcing it would result in a windfall for Kvassay and serve as a penalty for Great American." An even better representation of the validity of the liquidated damages clause would be "obtained if the actual lost profits caused by the breach were compared to the $5 per case amount set by the clause." However, this information was not presented by the Plaintiffs.
Discussion. This case offers an interesting discussion of how a court will judge the validity of a provision setting liquidated damages.