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Authored - NJ Contract Law Update - Supreme Security v. Aaron Medical: (1) Liquidated Damages, and (2) Lost-Volume Sellers
SEPTEMBER 11, 2012 | Windels Marx - Commercial Litigation

Supreme Security Systems v. Aaron Medical Transportation, 2012 WL 2923299 (N.J.App.Div. July 19, 2012), is instructive in two different respects:

1. The Court explored jurisprudence involving the distinction between liquidated damages and a penalty. Probably the most compelling fact in the case--which undoubtedly colored the Court's reasoning--was the fact that 80% of the gross contract revenues would be due under the contract in the event of default, even if the items in question were immediately returned following a very early default. The Court clearly 'had a problem' with an ostensible liquidated-damages provision calling for 80% of the gross, without credit for expenses that the courts have opined are usually associated with revenues. If nothing else, the cost of the items seemed overpriced. A final compounding factor was the plaintiff's apparent failure to adduce much in the way of evidence regarding the liquidated-damages issue, despite an earlier appellate remand on that precise issue.

The Court went on to hold that the purpose and "bona fides" of the 80% formula needed to be analyzed on further remand. The Court added, somewhat more questionably, that the idiosyncratic affect on this particular defendant (because the defendant-tenant's premises were being demolished) should also be factored in, as a possible "frustration of purpose".

The Court also presented analysis about the difference between liquidated damages and "penalties"; the fact that in a commercial setting, there is a presumption in favor of a liquidated-damages clause being enforceable, rather than being declared an unenforceable penalty, the fact that the parties' contractual declaration that the clause constituted "liquidated damages" (rather than a penalty) is not dispositive; and similar factors. However, the Court's analysis seemed more consumer-oriented than commercial--undoubtedly influenced by the extremely generous formula noted above, and the issue discussed in the following paragraph.

Another factor in such circumstances, in this author's experience, is that although each party to a commercial contract of this sort may have bargaining power, in reality (simply by virtue of the way the marketplace actually operates) contracts such as these (i.e., security contracts and the like) are usually preprinted and rarely negotiated, even though there is competition in the industry. Thus, although the Court did not talk about 'contracts of adhesion' (probably because of the commercial and competitive factors noted above), nonetheless the general impression of the 'real marketplace' is not lost on judges, especially when dealing with an 80% gross-volume figure.

2. On the issue of "lost volume seller", the Court instructively explained that a seller of goods may be relieved of its responsibility to mitigate damages (by re-using/re-selling repossessed items) if "the seller has sold fungible products to a breaching buyer, and the seller has already maximized the sales that it could generate to other customers." Of course, such a theory presupposes that a new customer cannot be located; but the claim is at least theoretically available to a seller who has the facts and diligence to present that information. Again, the Court found the proofs wanting on this last-minute theory by plaintiff; and remanded on that issue as well, believing it could affect the equitable application of the "penalty" issue.

In sum, although, the Court did little more than remand, its Opinion does serve to educate on these legal theories.

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Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

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