Citation. 22 Ill.867 F.2d 737 (2d Cir. 1989)
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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.
Plaintiff operated a computer database that travel agents use to book airline tickets, rental cars, and hotel rooms. Plaintiff earns money by charging a subscription fee to the travel agents and by charging airlines other than Plaintiff that get customers, through this system a small fee.
Plaintiff and Defendant, a corporation that runs travel agencies, made contracts with Plaintiff to use the database in four of their locations.
Each of the contracts provided for liquidated damages for breach of contract. For two of the locations, the liquidated damages were, 80% of the subscription fee for the time remaining in the contract, and 80% of the fees gained by ticket sales using the system, averaged in the past six months and divided by the time remaining on the contract, 50% of the average booking fee revenues using the last six months to calculate times the amount of time remaining in the contract. The two other contracts had only the first two provisions.
Defendant abandoned all of their contracts with Plaintiff. Plaintiff sued for the liquidated damages.
Defendant claimed that the liquidated damages provisions were unenforceable.
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
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.