Luppino Homes v. Wagner

A-7147-96T5 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: October 27, 1998

CONTRACTS; LIQUIDATED DAMAGES—Even though a seller’s actual loss turned out to be a fraction of the agreed-upon liquidated damages, the agreement was enforced because, viewed at both the time of contract and at the time of breach, the agreed-upon amount was reasonable.

A developer purchased land with the intention of building some single family homes. The contract was made contingent upon “the land being able to be subdivided into 2-family lots.” It also contained a liquidated damages provision. When the developer was persuaded by its engineer that the property could not be subdivided as the developer desired, it requested that the contract of sale be canceled. It did not endeavor to satisfy the subdivision contingency by seeking to obtain subdivision approval. The developer demanded return of the deposit due to the impossibility of satisfying the subdivision contingency. The seller refused, replying that the developer had breached the contract and that property would be re-listed for sale and the developer would be held liable for any resulting loss. Within a few days later, the property was resold for a price that resulted in something between no loss and a loss of less than 20% of what would have been the liquidated damages. The seller argued that the liquidated damages clause should be enforced because the reasonableness of such a position was to be determined as of the time of contract formation or at the time of breach, not after actual damages have been determined. The developer, however, insisted that “a term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty,” and that only “actual” losses can be considered in terms of assessing the reasonableness of the liquidated damages clause.

The Court, after pointing out that this matter involved a commercial transaction, agreed with the seller’s position. It was satisfied that, viewed at the time of contract, or even as of the date of the breach, the “liquidated damages” clause was reasonable and not punitive even though the seller’s actual loss may have been only a fraction of the amount set as liquidated damages. In the Court’s mind, this was particularly true because it was the subsequent successful efforts to secure subdivision approval that enabled the property to be sold at close to the contract price. The Court believed that this success could not have been known either at the time of contract or at the time of breach. In conclusion, the Court stated that the issue of “whether a stipulated damages clause is enforceable is a question of law,” and the developer did not satisfy its burden by presenting enough to demonstrate that the “presumptively reasonable” clause in this case was unenforceable.