Opinion
DOCKET NO. A-4438-12T1
08-04-2014
STEVEN L. SUGARMAN and LISA M. SUGARMAN, h/w, Plaintiffs-Respondents, v. GABRIEL BUILDING GROUP, INC., Defendant-Appellant.
Salvatore Perillo argued the cause for appellant (Nehmad Perillo & Davis, P.C., attorneys; Mr. Perillo and Michael R. Peacock, on the briefs). Norman L. Zlotnick arged the cause for respondent (Biel, Zlotnick & Feinberg, P.C., attorneys; Mr. Zlotnick, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Grall, Waugh, and Nugent. On appeal from the Superior Court of New Jersey, Law Division, Cape May County, Docket No. L-0809-06. Salvatore Perillo argued the cause for appellant (Nehmad Perillo & Davis, P.C., attorneys; Mr. Perillo and Michael R. Peacock, on the briefs). Norman L. Zlotnick arged the cause for respondent (Biel, Zlotnick & Feinberg, P.C., attorneys; Mr. Zlotnick, on the brief). PER CURIAM
Defendant Gabriel Building Group, Inc. (Gabriel), appeals the Law Division's April 24, 2013 order, entered following a remand from this court, determining that Paragraph 25 of Gabriel's contract with plaintiffs Steven and Lisa Sugarman is unenforceable and reentering the earlier judgment in their favor. We reverse.
I.
We discern the following facts and procedural history from the record on appeal.
In 2004, the Sugarmans contracted with Gabriel for the purchase of property and the construction of a customized home in Ocean City. The parties' contract included a remedies clause (Paragraph 25) that governed the remedies available to the parties in the event of a breach or cancellation of the contract. The Sugarmans eventually filed suit for specific performance, and Gabriel counterclaimed, also alleging breach of contract. Following motion practice and a bench trial, the Law Division awarded the Sugarmans damages in the amount of $200,000, together with prejudgment interest of $58,886.90 and costs. The judge dismissed Gabriel's counterclaim with prejudice.
Gabriel appealed. We affirmed the finding of liability and the calculation of damages, as well as the dismissal of Gabriel's counterclaim. Sugarman v. Gabriel Bldg. Grp., Inc., No. A-0386-10 (App. Div. July 19, 2012) (slip op. at 42). However, we remanded for determination of an issue not addressed by the trial judge. Id. (slip op. at 49).
Before turning to the remand proceedings, we set forth the facts concerning the formation and breach of the contract as set forth in our earlier opinion.
In September 2004, plaintiffs approached Ed McLaughlin, a representative of defendant, and offered to purchase for $1.5 million an unimproved lot (the property) owned by defendant in Ocean City. Sam Gabriel, president of defendant, rejected plaintiffs' offer and instead offered to sell the land in conjunction with also building plaintiffs a "[l]uxury Mediterranean-style home" (the house) using architectural plans being prepared for defendant by the architectural firm Olivieri, Shousky and Kiss (Olivieri). Defendant had contracted with Olivieri in March 2003 to design a home for the property, and those plans (the Olivieri plans) were nearly complete while plaintiffs' and defendant's negotiations were underway. Although defendant was an experienced home building company that had built approximately ninety homes in Ocean City since 1997, this was the first time defendant had contracted with Olivieri.The parties continued negotiations and discussion for another ten months, after which the Sugarmans filed suit in the Chancery Division, seeking specific performance.
Throughout September and October 2004, plaintiffs, Gabriel, and defendant's attorney Robert Penza negotiated the terms of the contract. Multiple drafts of the contract were exchanged by the parties.
On October 11, 2004, Sugarman, a Pennsylvania real estate attorney, emailed Gabriel and Penza a draft of a contract with a blank space where the Olivieri plans could be referenced by date once the plans were completed. The email also noted plaintiffs "understand that [defendant's] office will be forwarding the architectural plans and engineering study regarding the bulkhead to [Sugarman's] office by overnight mail and
that the specifications will be finalized and provided later this week." That same day, and at Gabriel's request, Matthew Hamilton, the architect at Olivieri, sent copies of the Olivieri plans directly to plaintiffs and to McLaughlin; plaintiffs received the plans the following day.
Within a few days after receiving the Olivieri plans, plaintiffs included the date of those plans as part of the contract, signed the contract, and sent it to Gabriel and Penza for approval. In the October 15, 2004 email transmitting those plans, plaintiffs requested that defendant "forward the specifications for the [h]ouse, together with the engineering report for the bulkhead, at [its] earliest possible convenience," and also "let [plaintiffs] know the [a]rchitect's thoughts on the additional half story and/or the rooftop deck with interior access."
Three days later, Gabriel signed the contract on behalf of defendant. In response, plaintiffs made their initial deposit of $1000 as required under the terms of the contract, and plaintiffs again requested that defendant "forward the specifications, surveys, engineering reports and related studies comprising the 'Construction Documents' . . . for [their] review as soon as possible."
In the contract, defendant agreed to sell the property to plaintiffs and to construct a new residential unit on the property, "in accordance with the plans and specifications approved by Buyer," for the purchase price of $2,494,900. The contract further provided as follows:
[Paragraph 3.2]. Permits and Approvals. Attached hereto as Exhibit "A" and made an integral part hereof are copies of certain
architectural plans prepared by Olivieri, Shousky and Kiss P.A. (the "Architect"), dated December 23, 2003 and October 7, 2004, and certain site and foundation plans prepared by the Architect, dated December 23, 2003 (collectively, the "Plans"), in connection with a Mediterranean style, single family home (the "House") Seller proposes to construct on the property. Seller has obtained foundation and piling permits from the City of Ocean City (the "City") and is in the process of applying for and/or obtaining building permits and such other approvals from the City and any other applicable governmental or regulatory authorities as may be required in order to construct the House and all other improvements as shown on the Plans.
[Paragraph 3.3]. Construction Documents. Within ten (10) business days of the execution of this Contract by all parties, Seller shall provide Buyer with copies of all plans and specifications, building permits, governmental approvals, surveys, and engineering reports and studies related to or prepared in conjunction with Seller's development of the property and construction of the House thereon (the "Construction Documents"). Within ten (10) business days of Buyer's receipt of the Construction Documents, Buyer shall elect, upon written notice to Seller, to either (a) accept the Construction Documents and proceed with the purchase of the property as provided herein, or
(b) terminate this Contract in which event all deposit monies shall be returned to Buyer upon the Buyer's return to the Seller of all of the original Construction Documents and the obligations hereunder shall terminate and be of no force and effect.
[Paragraph 3.4]. Commencement of Construction. Seller shall commence construction of the foundation of the House in accordance with the approved foundation plans as soon as practicable following the parties' execution of this Contract and shall diligently and expeditiously apply for and pursue the requisite building permits and approvals for the House upon notification of Buyer's acceptance of the Construction Documents. Seller shall promptly notify Buyer if and when Seller does, or does not, obtain the requisite building permits and approvals. In the event Seller is unable to obtain the requisite building permits and approvals to construct the House and other improvements upon the property in accordance with the plans and specifications accepted by Buyer, then Buyer, within ten (10) business days of Buyer's receipt of Seller's notice, shall elect, upon written notice to Seller, to (a) accept such plans and specifications for the House as will be permitted and approved by the governmental authorities, or (b) terminate this Contract in which event all deposit monies shall be returned to Buyer upon the Buyer's return to the Seller
of all the original Construction Documents and the obligations hereunder shall terminate and be of no force and effect.The contract noted an estimated closing date of June 15, 2005, but also set an outside closing date of July 15, 2005, and provided that "time shall be of the essence in this regard," meaning "the party failing to perform within this time shall be in default under the [c]ontract." The contract further provided that plaintiffs were to make an initial deposit of $1000 upon signing of the contract, an additional deposit of $24,000 due ten business days after plaintiffs' receipt of the Construction Documents, and a final payment of the remainder at closing.
Paragraph 25 of the contract, titled "CANCELLATION OR DEFAULT OF CONTRACT," stated as follows:
If the Buyer does not make settlement in accordance with the terms of this Contract, all deposit monies may be retained by the Seller as compensation for the damages and expenses which the Seller has incurred in which event this Contract shall be canceled without further liability to either party, except as the Seller may be liable to REALTOR(S) for commission or other payment.
In the event that the Seller does not perform in accordance with this Contract or the Seller is unable to deliver marketable title, and the Buyer is unwilling to accept such title as the Seller can make, then the Buyer has the choice of securing the return of all deposit monies, together with
reasonable costs incurred for examination of title, survey and mortgage application fees or bringing any action in court for specific performance to which the Buyer may be entitled. In the event that Seller defaults by failing to substantially complete construction and obtain a municipal certificate of occupancy by the Outside Closing Date, then the Buyer has the choice of pursuing any and all remedies described above or extending the Outside Closing Date for a reasonable period of time to permit Seller to cure the default.
In the event settlement is not held in accordance with this Contract, or any dispute arises in which the parties cannot agree as to the disposition of deposit monies, it is agreed the Title Company shall act as Escrow Agent and shall retain the monies in escrow until the parties otherwise agree or a determination is made by the courts. Additionally, when a dispute arises as to the disposition of deposit monies under this Contract, the third party holding such deposit monies may unilaterally deposit the disputed funds in the Superior Court of New Jersey pursuant to the court rules and the laws of the State of New Jersey.
Finally, the contract contained numerous other provisions not directly relevant to the issues in dispute, such as provisions regarding marketable title, risk of loss, and warranties.
Unbeknownst to defendant, the Olivieri plans included a variety of specifications and allowances not contemplated by defendant as being part of the home. At trial, Gabriel claimed that when he signed the contract, he had not seen the Olivieri plans and did not know the level of detail that they contained. However, Gabriel also admitted that defendant's contract with Olivieri required Olivieri to "prepare complete construction documents . . . [including] plumbing faucet and fixture specifications and general specifications[,]" and that the Olivieri plans were "exactly what [defendant] had contracted with Olivieri to prepare for the construction of the high-end luxury Mediterranean house."
On October 23, 2004, plaintiffs received from defendant a document entitled "New Custom Home Specifications," which contained specifications that contradicted those contained in the Olivieri plans. At trial, Gabriel admitted that his specifications contained lower-cost allowances than the Olivieri plans did for the same items. As a result, plaintiffs emailed Gabriel and Penza, saying:
We have received the additional specifications from Ed McLaughlin, and unfortunately there must be a mistake. As you know, the architectural plans provided to us, dated Dec. 23, 2003 and Oct. 7, 2004, and upon which we based our decision to proceed with this transaction, set forth a number of detailed specifications for the house. We expected to receive specifications from you relating to those items, such as landscaping, pool and spa, not previously described in the plans. Instead, the specifica-
tions forwarded to us by Ed cover the same items already detailed in the plans, and surprisingly, are directly contrary to the specifications in the plans and inconsistent with the "high end" product intended under our Agreement.Plaintiffs requested that Gabriel contact them about this issue at his earliest convenience. On November 1, 2004, Gabriel advised plaintiffs that he would investigate this issue and get back to plaintiffs about it. Plaintiffs requested that Gabriel forward to plaintiffs the additional Construction Documents.
Hence, our conclusion that a mistake has been made.
Within the week, Gabriel responded to plaintiffs. Gabriel disagreed that he must honor the specifications contained in the Olivieri plans. He continued:
In the interest of saving time, I did direct the architect to directly provide you with plans. However, my architect did not obtain from me the allowance specifications he listed in his plans, some of which are in conflict with the specifications I provided to you. The architect's allowance specifications are his estimates, not my approved allowances. Therefore, you were correct in your first e-mail, that there must be a mistake. There is a mistake, which is some of the allowances contained in the architect's plans. The allowances I will honor as part of the Contract are the allowances
contained in my New Custom Home Specifications.Plaintiffs responded to Gabriel by letter, stating, in part:
I also want to be candid with you. I view building a custom home for individuals as a joint project between me and the customer. It is usually a personally rewarding project for both of us, because I can tailor the home to the details and tastes of the customer, so that in the end they will have the home they want. In fact, they usually have a home which is even better than they anticipated, because along the way we may make construction suggestions from our experience, which the customer may not have thought of on their own. Time of completion of the home is frequently a consideration. In your case, a timely completion is something that you have stressed in your Contract. Your current demands and position on this specification issue causes concern for me that I will have a difficult time with you on this project, which in the end will leave either one or both of us dissatisfied. Therefore, I would prefer to instruct the realtor to release your deposit monies to you, and release you from the Contract, so that neither of us will be dissatisfied with this project.
[(Emphasis added).]
Your proposal that we simply "walk away" from our [c]ontract is
categorically rejected. However, in an effort to provide you with an opportunity to cure your breach of the Contract, we offer the following: Build the house in accordance with the [p]lans and [s]pecifications and the terms of our [c]ontract, or alternatively, sell us the [l]ot for the [l]ot [p]urchase [p]rice as originally contemplated.
Please advise on your intensions, in writing, by no later than the close of business on Friday, November 12, 2004. If you refuse to perform under the [c]ontract or the alternative transaction suggested above, then we shall be compelled to initiate appropriate legal proceedings to protect our interests, including the filing of a [l]is [p]endens.
[Id. (slip op. at 2-11) (alterations in original).]
We upheld the trial judge's determinations that the contract was generally valid and enforceable, that Gabriel breached the contract, and that the $200,000 damages award, based on the increase in the value of the property, was reasonable and supported by the record. Id. (slip op. at 42). With respect to the breach, we wrote:
The trial court found that the defendant first breached the contract when it sent to plaintiffs "a wholly different set of specifications" than those included in the Olivieri plans, which specifications "represented a significant decrease in the quality of many specified items including windows, roofing, railings and stairs." This finding is supported by substantial credible evidence. Gabriel admitted that the New Custom Home Specifications differed from the specifications contained in the Olivieri plans and provided for lower allowances. By attempting to override the details of the Olivieri plans, made "integral" to the contract, with contrary specifications, defendant breached the contract.
. . . .
Moreover, defendant's behavior also violated the implied covenant of good faith and fair dealing, in that by attempting to override those details included in the Olivieri plans and made integral to the contract, defendant's new specifications "'ha[d] the effect of destroying or injuring the right of [plaintiffs] to receive the fruits of the contract[.]'" See Wood v. N.J. Mfrs. Ins. Co., 206 N.J. 562, 577 (2011) (quoting Kalogeras v. 239 Broad Ave., LLC, 202 N.J. 349, 366 (2010)).
[Id. (slip op. at 36-37).]
However, we remanded because the trial judge did not address the question of whether the provisions of Paragraph 25 limited the amount of damages available to the Sugarmans.
As an initial matter, we note that it is unclear whether Paragraph 25 is, in fact, a liquidated damages clause. The paragraph sets forth remedies available to the partiesConsequently, we "remanded for further proceedings on the issue of the validity and applicability of Paragraph 25 as well as to develop whatever factual record is necessary to assist the Law Division in reaching a conclusion." Id. (slip op. at 49).
in the event of a breach of contract. However, it also provides plaintiffs with the "choice" of invoking its remedies. See Reiter v. Bailey, 39 P.2d 370 (Wash. 1934) (holding that, where a seller may "elect" to declare a forfeiture of a contract and retain any payments made "in liquidation of all damages sustained," the seller's decision not to declare a forfeiture "made inoperative the provision relating to liquidated damages, and therefore left to [seller] the right either to require specific performance or to sue for damages[.]").
Moreover, even assuming arguendo that Paragraph 25 is a liquidated damages clause, it is far from clear whether that clause is enforceable. Regarding the evaluation of liquidated damages clauses, the Supreme Court has adopted the methodology described in the Restatement (Second) of Contracts § 356, which provides that:
[d]amages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
[MetLife Capital Fin. Corp. v. Wash. Ave. Assocs., 159 N.J. 484, 494 (1999).]
The Court has held that "the difficulty in assessing damages, intention of the parties, the actual damages sustained, and the bargaining power of the parties all affect the validity of a stipulated damages clause," and that the "overall single test
of validity" is whether the liquidated damages clause is "reasonable under the totality of the circumstances." Id. at 495 (citations and internal quotation marks omitted). In a commercial contract between sophisticated parties, liquidated damages clauses are presumptively reasonable, and the party challenging the clause bears the burden of proving its unreasonableness. Id. at 496.
Normally, invalidation of a liquidated damages clause occurs only when a court determines that the liquidated damages are so high that they constitute a penalty. Here, on the other hand, enforcement of Paragraph 25 as defendant suggests would result not in an extremely high award, but rather no award at all, beyond any money plaintiffs deposited into escrow. A low damage provision has also been the subject of discussion and is addressed in comment "a" to the Restatement (Second) of Contracts § 356, which notes that "[a] term that fixes an unreasonably small amount as damages may be unenforceable as unconscionable." Other states have addressed this issue with differing views. Cf., e.g., Mahoney v. Tingley, 529 P.2d 1068, 1071 (Wash. 1975) ("[e]xcept where extraordinary circumstances are involved such as fraud or serious overreaching by the purchaser, a seller who chooses to utilize the device of liquidated damages in an earnest money agreement, with its attendant features of certainty and reliance upon the limitation, cannot avoid the effect of that agreement[.]"); Roscoe-Gill v. Newman, 937 P.2d 673 (Ariz. Ct. App. 1996) (agreeing with Mahoney); Hawkins v. Foster, 897 S.W.2d 80, 85-86 (Mo. Ct. App. 1995) (upholding the trial court's award of $37,000 in damages in the face of a $1000 liquidated damages provision, agreeing with the plaintiffs that such liquidated damages were "unreasonable as a forecast of probable damages and disproportionate to the amount
of damages which would probably result from defendant's breach and that the provision is unconscionable[.]"); Varner v. B.L. Lanier Fruit Co., 370 So.2d 61 (Fla. Dist. Ct. App. 1979) (reversing a judgment limited to liquidated damages, finding that the party "would be entitled to a further recovery if he can prove the unconscionability of the liquidated damages clause[.]").
Our concern here is that there may be legitimate arguments to be advanced as to whether Paragraph 25 is a liquidated damages clause, and if so, whether it is invalid as a matter of law or public policy, either on its face or as applied here. We are constrained in addressing the issue as neither the trial judge nor plaintiffs considered or answered the arguments advanced by defendant as to the viability of the provision. We would not be reluctant to address the issue, but our concern is heightened by the absence of a factual record that could bear on the applicability of this default provision.
[Id. (slip op. at 45-49).]
On remand, the case was assigned to a different judge because the trial judge had retired. The remand judge held a hearing on April 12, 2013. He reviewed the supplementary briefs submitted by the parties and heard arguments but did not take any additional testimony. In an April 24 written decision, the judge determined that Paragraph 25 was not a liquidated damages clause "but a remedies provision that does in fact limit the manner in which [the Sugarmans] can recover." However, he further found that Paragraph 25 was "unenforceable." This appeal followed.
II.
On appeal, Gabriel argues that the remand judge exceeded the scope of the remand in that, having determined that Paragraph 25 was not a liquidated damages clause, he should not have gone on to consider whether it was nevertheless void as against public policy. He also argues that, in any event, the judge erred as a matter of law in finding that Paragraph 25 is not enforceable.
As an initial matter, we reject Gabriel's argument that the judge exceeded the scope of the remand. The concerns that led to the remand were, at their core, twofold: (1) that the provisions of Paragraph 25 precluded the quantum of damages awarded to the Sugarmans and (2) that provisions of Paragraph 25 might be void as against public policy and unenforceable. Although we framed the question in the context of whether it was a liquidated damages provision, there is nothing in our opinion to suggest that the judge was precluded from considering a related argument for invalidity based on his interpretation of the nature of the contractual provision.
In any event, we have concluded that Paragraph 25 is a hybrid provision. As to the seller, it is a liquidated damages provision that provides for damages in the amount of the buyer's deposit. The contract required a $1000 deposit on signing and a $24,000 deposit ten days after submission of the building documents by Gabriel. Consequently, Paragraph 25 limited Gabriel's damages to $25,000.
In fact, the Sugarmans never paid the $24,000, and we held that they were not required to do so because Gabriel had already breached the contract.
As to the buyer, Paragraph 25 is an election of remedies clause, in that the buyer has three options in the event of a breach: extension of the closing date, a suit for specific performance, or the return of the deposit. With respect to the damages option, it is a liquidated damages clause because it limits the buyer's damages to the return of the deposit, with a provision for the recovery of some incidental expenses. The question then becomes, as we said in our earlier opinion, "whether [Paragraph 25] is invalid as a matter of law or public policy, either on its face or as applied here." Ibid.
The rules of contractual interpretation are well established. The role of the court is to give "juristic effect" to the intention of the parties as expressed in the contract. George M. Brewster & Son, Inc. v. Catalytic Constr. Co., 17 N.J. 20, 27-28 (1954); see also Domanske v. Rapid-Am. Corp., 330 N.J. Super. 241, 246 (App. Div. 2000). If a contract is unambiguous, it must generally be enforced as written. Schenck v. HJI Assocs., 295 N.J. Super. 445, 450 (App. Div. 1996) (citing U.S. Pipe & Foundry Co. v. Am. Arbitration Ass'n., 67 N.J. Super. 384, 393 (App. Div. 1961)), certif. denied, 149 N.J. 35 (1997). A court will not make a better contract than the one created by the parties. McMahon v. City of Newark, 195 N.J. 526, 545-46 (2008).
A liquidated damages provision may be an appropriate mechanism to remedy a breach of contract where the actual damages flowing from the breach are difficult to measure. Wasserman's Inc. v. Twp. of Middletown, 137 N.J. 238, 248-50 (1994). Such a clause "'must constitute a reasonable forecast of the provable injury resulting from breach; otherwise the clause will be unenforceable as a penalty and the non-breaching party will be limited to conventional damage measures.'" Id. at 249 (quoting Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Colum. L. Rev. 554, 554 (1977)). "The amount fixed is unreasonable if it serves not as a pre-estimate of probable actual damages, but rather as 'punishment,' . . . grossly disproportionate to the actual harm sustained." CSFB 2001-CP-4 Princeton Park Corporate Ctr., LLC v. SB Rental I, LLC, 410 N.J. Super. 114, 121 (App. Div. 2009) (quoting Westmount Country Club v. Kameny, 82 N.J. Super. 200, 205 (App. Div. 1964)).
The court will not enforce liquidated damages provisions if they place an unfair penalty on the party that has breached the contract. In Wasserman's, supra, 137 N.J. at 252, the Supreme Court set forth various factors for evaluating whether a liquidated damages provision is enforceable. "Treating reasonableness 'as the touchstone,' [the Court] noted that the difficulty in assessing damages, intention of the parties, the actual damages sustained, and the bargaining power of the parties all affect the validity of a stipulated damages clause." Metlife Capital Fin. Corp. v. Washington Ave. Assocs., L.P., 159 N.J. 484, 495 (1999) (quoting Wasserman's, supra, 137 N.J. at 252).
This is the unusual case in which the argument is that the liquidated damages amount is said to be too low, rather than too high. We addressed that issue in our earlier opinion.
A low damage provision has also been the subject of discussion and is addressed in comment "a" to the Restatement (Second) of Contracts § 356, which notes that "[a] term
that fixes an unreasonably small amount as damages may be unenforceable as unconscionable." Other states have addressed this issue with differing views. Cf., e.g., Mahoney v. Tingley, 529 P.2d 1068, 1071 (Wash. 1975) ("[e]xcept where extraordinary circumstances are involved such as fraud or serious overreaching by the purchaser, a seller who chooses to utilize the device of liquidated damages in an earnest money agreement, with its attendant features of certainty and reliance upon the limitation, cannot avoid the effect of that agreement[.]"); Roscoe-Gill v. Newman, 937 P.2d 673 (Ariz. Ct. App. 1996) (agreeing with Mahoney); Hawkins v. Foster, 897 S.W.2d 80, 85-86 (Mo. Ct. App. 1995) (upholding the trial court's award of $37,000 in damages in the face of a $1000 liquidated damages provision, agreeing with the plaintiffs that such liquidated damages were "unreasonable as a forecast of probable damages and disproportionate to the amount of damages which would probably result from defendant's breach and that the provision is unconscionable[.]"); Varner v. B.L. Lanier Fruit Co., 370 So.2d 61 (Fla. Dist. Ct. App. 1979) (reversing a judgment limited to liquidated damages, finding that the party "would be entitled to a further recovery if he can prove the unconscionability of the liquidated damages clause[.]").
[Sugarman, supra, No. A-0386-10 (slip op. at 47-48).]
Finally, our courts have also held, at least in a setting involving two commercial parties to a contract, that a liquidated damages provision is deemed "presumptively reasonable." Wasserman's, supra, 137 N.J. at 252. A litigant "challenging such a clause should bear the burden of proving its unreasonableness." Ibid. Such a presumption is justified in the business-to-business setting because "[i]n commercial transactions between parties with comparable bargaining power, [liquidated] damage provisions can provide a useful and efficient remedy." Id. at 253; see also Metlife Capital, supra, 159 N.J. at 496 ("[L]iquidated damages provisions in a commercial contract between sophisticated parties are presumptively reasonable and the party challenging the clause bears the burden of proving its unreasonableness.").
Starting with the last point first, our earlier opinion characterized Gabriel as "an experienced home building company" and Sugarman as a real estate attorney in Pennsylvania, who was actively involved in the negotiation of the contract. There is nothing in the record to suggest that they had unequal bargaining power in the context of a contract for the purchase of a building lot and construction of a custom-built home for a total price of $2,494,900. Consequently, we presume that Paragraph 25 is reasonable and the Sugarmans bear the burden of demonstrating otherwise.
In addition, although the contract has the appearance of a form created by the Ocean County Board of Realtors, towards the top of the first page it states that it "was prepared by Steven L. Sugarman & Associates." The fax sheet forwarding the signed contract is on that law firm's stationary, which shows a New Jersey office. It also lists an attorney, but not Sugarman, as a member of the New Jersey Bar.
In addition, we must view the buyer's remedy provision in Paragraph 25 as a whole, rather than considering the money damages section in isolation. As we have already noted, as it relates to the buyer, Paragraph 25 is a hybrid that includes first a choice of remedies and then a liquidated damages provision applicable to only one of the three choices. We see nothing inherently unreasonable about the buyer's remedies provision on its face. It gives the buyer the choice of allowing the seller extra time to complete the transaction, seeking to compel compliance with the requirements of the contract, or terminating the contract and receiving the return of the deposit. We do not find those choices inherently punitive, particularly given the right to seek specific performance.
Even looking at the provision as applied in this case, we see no unreasonableness. The trial judge determined, and we agreed in our earlier opinion, that Gabriel had breached the contract fairly soon after it was signed. In fact, we determined that his early breach was sufficiently serious to excuse the Sugarmans' failure to deposit the additional $24,000 required by the contract. The contract was signed in October 2004, and by November Sugarman was threatening suit to enforce his and his wife's rights under the contract. Following further, fruitless negotiations over the course of ten months, the Sugarmans filed their complaint for specific performance in September 2005. After Gabriel moved for partial summary judgment on that issue in November 2006, the Sugarmans chose to withdraw the claim rather than defend the motion. They then pursued their claim for damages, on notice that their claim could be limited by the provisions of Paragraph 25.
We cannot discern from the record why the Sugarmans chose not to pursue specific performance.
As a practical matter, in November 2004, when they correctly concluded that Gabriel had breached the contract, the Sugarmans had at least two viable options. They could have terminated the contract and received their partial deposit back or they could have sought specific performance. That choice does not strike us as unreasonable or violative of any public policy, given the nature of the contract and the parties' relatively equal bargaining positions, as well as Sugarman's active involvement in drafting the contract. At that point, the contract was little more than a month old. The limitation of damage at that point to the return of the deposit was not in any way punitive or an unreasonable estimation of damages. Although not briefed by the parties, it is not clear to us that the Sugarmans would not have been entitled to specific performance, at least with respect to the purchase of the building lot and perhaps to the extent of requiring Gabriel to comply with his obligation to build the Olivieri plans. After they filed suit, they waived their right to pursue that issue in the trial court and, consequently, on appeal.
They could also have extended the completion date, which as a practical matter is what they chose to do by continuing negotiations after the November 12, 2004 deadline.
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For these reasons, we disagree with the remand judge as a matter of law and find that Paragraph 25 was not an unenforceable liquidated damages provision violative of public policy. While we do not condone Gabriel's actions, we cannot conclude that the contractual provision at issue amounted to "punishment" of the Sugarmans. CSFB 2001-CP-4, supra, 410 N.J. Super. at 121 (citation and internal quotations omitted). To hold otherwise under the circumstances of the case would make a better contract for the Sugarmans than they made for themselves. McMahon, supra, 195 N.J. at 545-46.
Consequently, we reverse the order on appeal and remand to the Law Division for entry of an order awarding the Sugarmans $1000 in damages, plus interest and costs.
Reversed.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION