Opinion
No. 24187-4-III.
Filed: April 18, 2006.
Appeal from Superior Court of Spokane County. Docket No: 04-2-04323-3. Judgment or order under review. Date filed: 05/02/2005. Judge signing: Hon. Harold D. Clarke.
Counsel for Appellant(s), Jay Patrick Manon, Waldo Schweda Montgomery PS, 2206 N Pines Rd, Spokane, WA 99206-4721.
John Montgomery, Waldo Schweda Montgomery PS, 2206 N Pines Rd, Spokane, WA 99206-4721.
Counsel for Respondent(s), Michael H. Church, Attorney at Law, 720 W Boone Ave Ste 200, Spokane, WA 99201-2560.
Matthew Thomas Ries, Stamper Rubens Stocker Smith PS, 720 W Boone Ave Ste 200, Spokane, WA 99201-2560.
UNPUBLISHED OPINION
This is a dispute over the enforceability of a purported liquidated damages clause in a proposed lease agreement. But we cannot say as a matter of law that the parties here entered into a contract or that, even if they did, the facts underlying the litigation were undisputed so as to permit summary judgment. But, even if this were a binding contract and the facts were undisputed, we would conclude that the forfeited sum was a penalty and not liquidated damages. We accordingly reverse and remand for entry of a judgment for the appellant.
FACTS
Riverside Sand and Gravel, a two-man partnership, had a specialized piece of construction equipment called a screen plant. A screen plant is used to salvage usable rocks from construction debris. Joe Bascetta is a former Riverside partner. He was either buying or leasing the screen plant from its owner, Construction Machinery, Inc. (CMI).
Mr. Bascetta left Riverside. The partnership was dissolved and reconstituted with Leonard Rist and Basil Sanders as principals of some sort. It is not clear what Mr. Sanders' legal relationship to Riverside was. Mr. Rist declared bankruptcy and his bankruptcy papers show him as sole proprietor. Yet Riverside's credit application to Advantage Equipment Leasing, L.L.C., says Mr. Rist and Mr. Sanders each own 50 percent. Mr. Rist and Mr. Sanders themselves disagreed about what their relationship should be called. Clerk's Papers (CP) at 66.
The partnership dissolution agreement lists CMI as a creditor of Riverside `for lease of screen.' CP at 36. But CMI declined to deal directly with Riverside after Mr. Bascetta left. Instead, it referred Mr. Rist and Mr. Sanders to Advantage. Advantage checked Riverside's credit and interviewed Mr. Rist and Mr. Sanders. Advantage then drafted a document called a lease proposal, outlining the general terms of a proposed lease of the screen plant. The parties have stipulated that the terms of this proposal, read together with a subsequent lease approval, formed a contract under which Advantage would arrange financing of the screen plant by means of a lease. The heading of the lease proposal identifies Riverside as the proposed lessee. It says the duration of the lease is 60 months, the monthly rate is $3,039.83, and the cost of the equipment is $119,000.00. It says a 25 percent security deposit is due in advance. The proposal does not identify a proposed lessor.
And the proposal included this paragraph:
Performance and Expense Deposit: A deposit payment of $31,914.83 (25% security deposit 1st payment) plus application fee of $1500.00 will be paid in advance. In the event that this transaction is approved as proposed, the deposit will be applied to the first payment due. If the transaction is not approved as proposed, the deposit will be returned promptly. If the transaction is Approved as proposed but not executed by election of the Lessee, the deposit will be retained as compensation for expenses incurred and services provided.
The math is wrong — $31,914.83 is 25 percent of $119,000 plus $2,164.83, not $3,039.83.
CP at 68. Significantly, this provision has 10 verbs but no actor. Specifically, the passive voice does not reveal precisely what Advantage is proposing to do.
Mr. Sanders signed the proposal as an `owner' of Riverside and sent Advantage Riverside's check for $33,414.83. Mr. Bascetta concedes that Advantage was entitled to keep the $1,500 application fee.
A week after Mr. Sanders submitted the signed proposal and the check, Advantage sent Riverside a second document called a lease approval. The terms approved were close, but not identical, to those proposed. The cost of the equipment increased to $119,500 from $119,000. Riverside was to provide additional security in the form of two Caterpillar wheel loaders. And Riverside would pay taxes, insurance, and maintenance on the leased equipment. Again, the lessor remained anonymous.
Not quite two weeks later, Mr. Rist of Riverside called Advantage and announced that he was in financial difficulties and could not proceed with the proposed lease. A few days later, Mr. Rist filed chapter 13 personal bankruptcy. Tim Anderson of Advantage called Mr. Sanders to confirm the status of the proposed lease. Until Mr. Rist's call, Mr. Anderson had dealt primarily with Mr. Sanders. The parties dispute whether Mr. Rist said Riverside was pulling out, or just Mr. Rist himself. The parties also disagree as to what Mr. Sanders told Mr. Anderson. Advantage says Mr. Sanders confirmed that he and Riverside were also pulling out. Mr. Bascetta says Mr. Sanders assured Advantage that Mr. Sanders and Riverside fully intended to proceed. Advantage insists that, even if Mr. Sanders did say the deal was still on, he was acting as an individual, not as a principal of Riverside. Mr. Bascetta says Mr. Sanders was acting for the company.
Three months later, a lease agreement for the screen plant was drawn up. It names Joe Bascetta and Basil Sanders as lessees. The lessor is a California firm called Allegiant Partners, Inc. The terms are 61 months at $3,500 per month, cost $119,500. The security deposit is $0.00. Mr. Bascetta and Mr. Sanders did not sign this lease. Allegiant signed, and Advantage signed as the lessees' `representative.' CP at 146. In March 2004, Advantage still had not forwarded Riverside's deposit of $31,914.83 to Allegiant. Mr. Rist and Mr. Sanders assigned their interest under the lease proposal to Mr. Bascetta.
Mr. Bascetta filed an action in the superior court to recover the deposit. He alleged that the lease proposal and lease approval together constitute a contract which Advantage breached by not arranging financing as promised. In the alternative, Mr. Bascetta alleged that the purported agreement is not a contract because it contains no return promise by Advantage.
Both sides moved for summary judgment. Each asserted there were no disputed material facts. The trial court resolved the dispute on summary judgment based on that stipulation. But here on appeal each side insists on a different version of the `undisputed facts.' Advantage says that it agreed to buy the equipment and lease it to Riverside, and that everyone agreed that the deposit amount was a fair estimate of the risk. But Mr. Bascetta say the parties agreed to no such thing.
The trial court accepted as undisputed fact that the contract was for a lease `by and between' the parties, despite the lack of a named lessor. Also it accepted that Riverside repudiated the contract. The court then ruled that the deposit provision was an enforceable liquidated damages clause. The court based this conclusion on the finding that the deposit clause was a reasonable forecast of just compensation for potential harm to Advantage if Riverside were to breach. The court was persuaded by the argument that Advantage could have sued Riverside for `lost profits' of $50,592.44, under the Uniform Commercial Code Article 2, governing the sale of goods. The court viewed this as confirmation that $31,914.83 was a reasonable forecast of potential damages. The court concluded that the deposit retention clause was not a penalty and that it constituted enforceable liquidated damages. The court entered summary judgment for Advantage. Mr. Bascetta appeals.
DISCUSSION
The question the parties submitted here on appeal is whether this is an enforceable liquidated damages clause. But we first address certain obstacles that make it difficult to reach that issue. Existence of a Contract
An assignee of a contract stands in the shoes of his assignor. Paullus v. Fowler, 59 Wn.2d 204, 212, 367 P.2d 130 (1961). In his complaint, Mr. Bascetta asserted that a contract was formed and Advantage breached it. He also alleged that no contract was formed, due to failure of consideration because Advantage did not actually promise to do anything in the lease proposal. CP at 6-7. Then, according to the trial court's letter opinion, Mr. Bascetta stipulated at oral argument that a contract did exist for the purposes of summary judgment. The judge decided the case on that basis. Here, Mr. Bascetta affirms the existence of a contract in his opening brief. Appellant's Br. at 7. But in his reply brief, he reverts to denying the existence of a contract and argues that an agreement to enter into a lease is not a contract by definition. Reply Br. at 2-3.
We may affirm summary judgment on grounds other than those relied on by the trial court provided that the disposition is supported by the record and is within the pleadings and proof and the parties had a full and fair opportunity to develop the relevant facts. Plein v. Lackey, 149 Wn.2d 214, 222, 67 P.3d 1061 (2003). We resolve ambiguities in a contract against the drafter. Lynott v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA., 123 Wn.2d 678, 690, 871 P.2d 146 (1994).
To be valid, a contract must contain all the material terms contemplated by the agreement. See, e.g., Sea-Van Invs. Assocs. v. Hamilton, 125 Wn.2d 120, 127-28, 881 P.2d 1035 (1994). Essential elements of a valid executory contract will ordinarily include "competent parties, a legal subject matter, and a valuable consideration." Lager v. Berggren, 187 Wash. 462, 467, 60 P.2d 99 (1936) (quoting 58 C.J. 929). There must be mutuality of obligation, and all the material terms of the contract must be complete and reasonably certain. Id.
Whether the essential elements of a contract are present is a question of law. See, e.g., Underwood v. Sterner, 63 Wn.2d 360, 364, 387 P.2d 366 (1963). And the existence of a meeting of the minds is a question of fact. Sea-Van, 125 Wn.2d at 126 .
Here, the essential elements of a contract are missing. There was no meeting of the minds as to the essential nature of the agreement. Riverside and Mr. Rist thought it was an agreement to enter into a lease with someone in the future. Advantage thought it was agreeing to purchase the equipment and lease it itself. The proposal does not say Advantage will actually do anything. It names no proposed lessor. Only Riverside has any obligations.
The acceptance of an offer must be identical to the offer, "or there is no meeting of the minds and no contract." Sea-Van, 125 Wn.2d at 126 (quoting Blue Mt. Constr. Co. v. Grant County Sch. Dist. 150-204, 49 Wn.2d 685, 688, 306 P.2d 209 (1957)). Here, the offer and acceptance do not match. The price of the leased property is $119,000 in the `proposal' or offer but $119,500 in the `approval' or acceptance, and additional items of consideration appear.
Advantage purports to make an offer that will become a contract upon Riverside's acceptance. But Advantage retains the right to reject Riverside's acceptance. It is essentially an invitation by Advantage for Riverside to make an offer. A purported offer that reserves the power to withdraw at will even after a supposed acceptance is not an offer at all. It is an invitation to submit an offer. Felice v. Clausen, 22 Wn. App. 608, 611, 590 P.2d 1283 (1979) (quoting 1 A. Corbin, Contracts sec. 39 (1963)). `If the provisions of an agreement leave the promisor's performance entirely within his discretion and control, the `promise' is illusory. Where there is an absolute right not to perform at all, there is an absence of consideration.' Id. (citing Interchange Assocs. v. Interchange, Inc., 16 Wn. App. 359, 557 P.2d 357 (1976)). Consideration may be found in an implied promise. See, e.g., Strong v. Sunset Copper Co., 9 Wn.2d 214, 220, 114 P.2d 526 (1941). But here, we cannot even imply a promise to Riverside by Advantage.
In return for Riverside's promise and payment, Advantage might have promised to buy the equipment from CMI and lease it to Riverside. This would obligate Advantage to CMI for the cost of the equipment, and liquidated damages in the amount of the deposit would be reasonable. Or Advantage might have promised to broker a deal whereby another company would obtain title to the unit and lease it to Riverside. In that case, Advantage would serve as an escrow and transfer the deposit funds to the eventual lessor.
But Advantage promises nothing here. It presents a proposal that Riverside will be a lessee on the terms stated. We may imply the proposed future existence of a lease and a lessor. But all the writing says is that the proposed lease transaction may or may not be `approved' and that Riverside's deposit will either `be applied' or `be returned' or `be retained.' It says final approval will be by `the secured party.' But we have no clue who this might be. CP at 68.
This is an invitation to Riverside to submit an offer. It is not a contract. Clausen, 22 Wn. App. at 611 .
Disputed Facts
Advantage says it would have assumed the financial risk of purchasing the screen plant and would have been the lessor. Mr. Bascetta says Advantage's proposed role was more that of a broker. The contract itself simply says a lease is proposed; it does not say what Advantage will actually do. CP at 68. Advantage says it was to `provide financing' or `obtain financing.' CP at 81, 99. Advantage provided financing for the screen plant before and after this agreement by brokering third party leases. CP at 77, 160.
These disputed facts are material to the validity of an alleged liquidated damages clause, because the reasonableness of the deposit amount as a forecast of potential damages depends on whether Advantage agreed to acquire and lease the specialized equipment or simply to make a few phone calls and arrange for a third party lessor.
The parties also dispute whether Mr. Rist and Mr. Sanders repudiated the agreement in fact, whether Advantage treated Mr. Rist's bankruptcy as a constructive repudiation, or whether Mr. Sanders effectively withdrew Mr. Rist's repudiation so that Advantage breached the contract by not providing financing. These facts are material to whether a liquidated damages clause in the contract would be enforceable if it was valid.
The facts material to the trial court's disposition of the case are thus disputed.
Liquidated Damages Clause
We conclude, however, that even if these parties entered into a valid contract and agreed on the factual circumstances surrounding that contract, this deposit retention clause is a penalty. It is not, therefore, enforceable as a liquidated damages clause.
Whether a purported liquidated damages clause is enforceable `depends upon the facts and circumstances of each case.' Walter Implement, Inc. v. Focht, 107 Wn.2d 553, 559, 730 P.2d 1340 (1987). On motion for summary judgment, the court must view the facts alleged and all reasonable inferences from them in the light most favorable to the nonmoving party. Judgment should be entered only if reasonable people could reach but one conclusion from the facts so viewed. Chelan County Deputy Sheriffs' Ass'n v. County of Chelan, 109 Wn.2d 282, 294-95, 745 P.2d 1 (1987). Even where the facts are not disputed, if reasonable minds could draw different conclusions from those facts, then summary judgment must be denied. Id. at 295.
Generally, Washington courts favor liquidated damages clauses and will uphold them so long as the sums involved do not amount to a penalty. Walter, 107 Wn.2d at 558; Mgmt., Inc. v. Schassberger, 39 Wn.2d 321, 326-27, 235 P.2d 293 (1951). The courts take the view that `liquidated damages agreements fairly and understandingly entered into by experienced, equal parties with a view to just compensation for the anticipated loss should be enforced.' Walter, 107 Wn.2d at 558 (citing Wise v. United States, 249 U.S. 361, 39 S. Ct. 303, 63 L. Ed. 647 (1919)).
Whether the parties to a contract `fairly and understandingly' agreed that a deposit would justly compensate the non-breaching party for its losses is a question of fact. It comes down to the intent of the parties. Id. at 559. If the parties call the sum to be retained in case of breach `liquidated damages,' the court will give that serious consideration. Schassberger, 39 Wn.2d at 326 . That is not the case here, however. And even the parties' characterization is not dispositive. If the amount to be retained "bears no reasonable relation to actual damages," the courts will construe it as a penalty. Walter, 107 Wn.2d at 559 (quoting Nw. Collectors, Inc. v. Enders, 74 Wn.2d 585, 594, 446 P.2d 200 (1968)).
The essence of liquidated damages is "a genuine covenanted pre-estimate of damages." Watson v. Ingram, 70 Wn. App. 45, 50, 851 P.2d 761 (1993) (emphasis added) (quoting Schassberger, 39 Wn.2d at 326), aff'd, 124 Wn.2d 845, 881 P.2d 247 (1994). A penalty, by contrast, is not understood by the parties as a reasonable measure of compensation. It is either a punishment for default or "security for actual damages" that may be sustained. Id. (quoting Schassberger, 39 Wn.2d at 326). It is not related to the amount of damages reasonably anticipated. "Its essence is a payment of money stipulated as in terrorem of the offending party." Id. (quoting Schassberger, 39 Wn.2d at 326).
The deposit here is 25 percent of the cost of the leased equipment. This is arguably a reasonable sum to compensate a lessor for the breach of a lease in which the lessor's obligations and risks are fixed by the lease agreement. See Walter, 107 Wn.2d at 560 . The distinguishing feature of the Riverside-Advantage contract, however, is that it is not a lease. It is a proposal for a future lease in which only Riverside's obligations are spelled out. The specifics of Advantage's proposed obligations and risks are reserved. We simply do not know to whom the passive verbs in the agreement apply.
Therefore, absent parol evidence that the parties to the lease proposal reached a genuine covenant of a reasonable forecast of compensation, this element of liquidated damages is not met. Moreover, the enforceability test has a second element, which the trial court did not consider in this case. Both enforceability elements must be present. Schassberger, 39 Wn.2d at 327-28 .
Besides an amount that is a reasonable forecast of just compensation for the harm that would be caused by a breach, for a liquidated damages clause to be enforceable, the actual harm must be `incapable or very difficult of ascertainment.' Walter, 107 Wn.2d at 559; Schassberger, 39 Wn.2d at 327-28 (quoting 1 Restatement of Contracts sec. 339, at 552 (1932)). The anticipated damages must be of a sort that will not be readily calculated after the breach. Walter gives the example of damages for violation of a no-compete agreement. Walter, 107 Wn.2d at 559 .
See also Restatement (Second) of Contracts sec. 356 cmt. b (1981).
A lessor's losses upon breach of a lease are easily determined, however, after the fact. They are not of the sort for which liquidated damages are approved. Id. at 561. Advantage's potential damages were incapable of pre-determination solely because its promised performance was undefined.
The second element of liquidated damages is also not present. Uniform Commercial Code
The parties argue the remedies available under Article 2 of the Uniform Commercial Code. The trial court incorporated this into its memorandum decision. But the code has no application to these facts. This was not a sale of goods. Even if Article 2 applied, moreover, the fact that Advantage could calculate its hypothetical lost profit damages at precisely $50,592.44 defeats the second prong of the liquidated damages test.
SUMMARY
Again, it is disputed what Advantage intended to do and what Riverside understood that Advantage intended to do. This would be material and would preclude summary judgment if the sole question were whether the parties fairly and knowingly covenanted to the deposit amount as reasonable compensation. We might then remand for adjudication of the disputed material facts.
But, regardless of what these parties intended, the second prong of enforceable liquidated damages is not met. Advantage demonstrated that it could calculate its actual damages to the penny. If it were the eventual lessor, Advantage would be protected by the lease agreement. If it acted simply as a broker, it was compensated by the non-refundable $1,500 application fee.
The deposit retention provision was, then, a penalty as a matter of law.
We reverse the summary judgment and remand for entry of summary judgment in favor of Mr. Bascetta for the deposit. Neither side is entitled to attorney fees.
A majority of the panel has determined that this opinion will not be printed in the Washington Appellate Reports but it will be filed for public record pursuant to RCW 2.06.040 .
KATO, J. and BROWN, J., concur.