Summary of Wasserman’s Inc. v. Township of Middletown
Supreme Court of New Jersey, 1994
Facts: P and D made a leasing K. According to the K, if D broke the lease, it would pay P a pro-rata reimbursement for any improvement costs and damages of twenty-five percent of P’s average gross receipts for one year. D cancelled the lease.
Procedure: Trial court held that the cancellation clause was enforceable and required P to pay $55,748 in construction compensation and $290,310 in gross receipts compensation.
Issue: Was the gross receipts compensation clause of K reasonable?
Holding: No- new trial for this issue
Rationale: The difference between liquidated damages and penalty is that liquidated damages are good faith effort to estimate actual damages and penalty is not actual damages, but punishment for breach. The current law accepts liquidated damages in Ks where the amount is reasonable. Reasonableness should appear at the time the K is made or is breached. The greater the difficulty of estimating or proving damages, the more likely the stipulated damages will appear reasonable. D has the burden to prove to the court that the damages are unreasonable. In the current case, the receipts compensation clause seems to award P more than he suffered due to the breach. So the case is remanded and if it is found that amount is unreasonable, then that clause of the K will be unenforceable.