Brief Fact Summary. Defendant and Plaintiff entered into a contract in which Plaintiff would provide a database service for Defendant’s travel agencies. The contracts contained liquidated damages clauses. Defendant canceled each contract before the expiration of the contract, breaching each one.
Synopsis of Rule of Law. Liquidated damage provisions that do not serve as punitive damages against a breaching party are considered reasonable. Ambiguous portions that could be construed as either punitive or not punitive will be construed a not punitive.
Issue. Were the liquidated damages provisions in the contracts reasonable and enforceable?
Unless liquidated damages provision exact a punishment against the other party, they are deemed reasonable-that is to say, they must exact a reasonable charge for the estimated loss caused by the breach.
Charging 80% of the subscription fee for the remaining time on the contract is not unreasonable because it credits Defendant back for the money Plaintiff saves by not having to run the database for that time. Some sellers of services like to charge the client for the entire contract when they terminate early.
Defendant argued that the liquidated damages provision was unfair because it charged the same amount of damages for every breach no matter how big or small. This court construes the provision to be only enforceable for material breaches of contract
Discussion. The court upheld the punitive damages clauses in the contracts because it deemed the damages to be reasonable estimates of what Plaintiff’s damages would be in the event of a breach. The court construed the portion that was ambiguous to have a reasonable meaning.