Summary
holding a stipulated damages clause was unenforceable under the second factor because it allowed the injured party to recover as income the "gross profits" of the violating party "without incurring any of the expenses ordinarily required to produce income."
Summary of this case from Nutritional Biomimetics, LLC v. Empirical Labs Inc.Opinion
June 12, 1973.
Editorial Note:
This case has been marked 'not for publication' by the court.
Murphy, Morris & Murphy, John Patrick Murphy, Colorado Springs, for plaintiff-appellant.
Raymond S. Duitch, Colorado Springs, for defendants-appellees.
SMITH, Judge.
Plaintiff, Peerless Enterprises, Inc., appeals from a judgment in favor of T.N.T., Inc. Peerless and Virgil Block, as agent for T.N.T., Inc., entered into a contract whereby Peerless agreed to install and service a coin-operated phonograph and a cigarette vending machine in a bar owned by T.N.T., Inc. Peerless agreed to pay T.N.T. one-half of the receipts from the vending machines, and T.N.T. agreed to pay Peerless a commission on cigarettes sold through the vending machines and to display the machines to the general public. The term of the agreement was to be five years from the date of the contract. When ownership of the bar was transferred to Elgie Young, Peerless was requested to remove, and did remove, the vending machines from the bar.
Peerless asserted a breach of contract and sued for damages based on the following contractual provision:
'It is further understood and agreed, in consideration of the large expense assumed by the OWNER in purchasing, installing and maintaining said equipment and the USER in allowing the same to be installed in said premises and because damages to either party would be difficult to ascertain, that should there be a breach of this agreement by the OWNER, then the OWNER will pay the USER a sum equal to the average monthly income received by the USER under this agreement prior to the breach, times the number of months remaining under this agreement; and, on a breach by the USER, the USER agrees to pay to the OWNER an amount similarly computed. It is agreed that this sum is not a penalty or a forfeiture, but a reasonable amount at which damages shall be liquidated in the event of breach by either party.'
The trial court determined that plaintiff could not recover under the above provision because plaintiff would receive an amount as 'income' which would be equal to gross receipts without incurring any of the expenses ordinarily required to produce income. The court concluded that the provision for liquidated damages did not bear a reasonable relationship to the actual losses which were likely to be suffered by plaintiff and that the clause was therefore a penalty clause.
Plaintiff urges that the trial court erred in concluding that the clause was not a valid provision for liquidated damages. To be enforceable, a liquidated damages clause must manifest the intention of the parties that the damages be liquidated and must quantify damages which would otherwise be uncertain in amount or difficult to prove. The amount provided must be reasonable and not disproportionate to the presumed loss or injury. Perino v. Jarvis, 135 Colo. 393, 312 P.2d 108.
The clause in question provides for damages in an amount equal to the average monthly income previously received by the user of the vending machines times the number of months remaining under the agreement at the time of the breach. The trial court properly concluded that this amount, referred to as 'income,' amounts to nothing more than gross receipts from the vending machines. In the absence of the clause in question, plaintiff's damages suffered for breach of contract would be loss of net profits as a result of not having the machines in use. Gross receipts do not bear a close enough relationship to the probable loss suffered by plaintiff to justify the enforcement of the clause in question as a liquidated damages provision.
Judgment affirmed.
DWYER and PIERCE, JJ., concur.