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Psaros v. Saropoulos

A-4293-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; LIQUIDATED DAMAGES — Although a liquidated damage clause in a commercial contract is presumptively reasonable, where there are no actual damages, granting an award of liquidated damages would constitute a penalty.

Two parties entered into an agreement for the sale of a restaurant business. The agreement contained a fee-shifting provision, entitling the party who substantially prevailed in any litigation arising out of the agreement to counsel fees and investigative costs. The agreement also contained a restrictive covenant which, subject to certain specified exclusions, prohibited the seller from opening another diner or restaurant within ten miles from the premises for a period of twenty years. The clause provided that if the seller violated this restriction, it would pay the buyer a specified liquidated damages amount. Less than five years later, buyer alleged that the seller was operating another restaurant within the ten mile restrictive area. The buyer filed sued to enforce the covenant and sought damages.

The Chancery Division upheld the validity of the restrictive covenant and awarded the buyer compensatory damages for the seller’s contract breach, but denied the buyer’s claim for liquidated damages and for counsel fees. It held that the liquidated damages provision should not be enforced because the evidence at trial indicated that buyer, in fact, suffered no loss. Thus, the Court ruled that awarding liquidated damages for breach of the covenant would be punitive, not compensatory. As to the Court’s denial of counsel fees, it held that the buyer had not obtained a judgment “substantially in his favor” so as to warrant the award of counsel fees. The buyer appealed the lower court’s determination that he was not entitled to liquidated damages or attorney’s fees.

The Appellate Division affirmed the order denying the buyer liquidated damages, but reversed the order denying counsel fees and remanded the matter for further proceedings. Although the Court noted that liquidated damage clauses in commercial contracts are presumptively reasonable, in the instant case, since there were no actual damages, the award would constitute a penalty. It noted that while stipulated damages among commercial entities may provide useful remedies in many cases, they are applicable only when there will be difficulty in assessing damages, not in a situation where the party seeking to enforce the provision sustained no damages. As to the issue of counsel fees, the Court ruled that a plaintiff was considered “prevailing” if it was successful on any significant issue which benefits the party bringing the suit. Since here, the lower court found the seller violated the restrictive covenant and awarded the buyer compensatory damages and investigatory costs, the Court held that the buyer received a judgment substantially in his favor and was entitled to counsel fees. It also noted that the agreement established the same standard to award reasonable investigation expenses as it did the award of counsel fees. Thus, as the lower court found that the buyer met the standard so as to be awarded investigation costs, it was inconsistent for that same court to conclude that the buyer did not meet that standard so as to be entitled to counsel fees. Finally, the Court opined that the buyer’s limited success could be taken into account in establishing the quantum of counsel fees.

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