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Riad Development Company, LLC v. Ringel

A-6500-06T1 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; LIQUIDATED DAMAGES — A contract that provides for acceleration of a remaining debt and forfeiture of a fixed sum, each as part of a liquidated damages provision, will be upheld if the calculated amount was reasonably related to the anticipated actual costs incurred by the party entitled to collect such damages.

A shopping mall owner entered into an agreement to sell it. Before closing, the buyer negotiated a $1,000,000 reduction in the contract price in return for its agreeing to pay monies to the seller to be used to fund the premiums on a life insurance policy. The premiums were $100,000 per year for ten years with a repayment provision in the event certain conditions were met. The written agreement stated that if the buyer failed to pay the premiums when due, $1,000,000 would immediately become payable to the seller at 18 percent interest, and the buyer’s right to repayment would terminate. One of the principals of the buyer guaranteed payment of the premiums. Prior to closing, the parties also agreed that the purchase price would be reduced by another $250,000 in return for the buyers agreeing to deliver a replacement life insurance policy (and paying the additional premium therefor) increasing the originally agreed-upon death benefit by $500,000. This policy was to be delivered within sixty days after closing. The buyer then purchased the mall. When the buyer defaulted in the payment of the insurance premiums, the seller sent a letter to the guarantor seeking payment of the premium amount. When the guarantor failed to pay, the seller sought to accelerate the payments as provided by the agreement. Neither the buyer nor the guarantor made the accelerated payment. They also failed to deliver an insurance policy providing for the increased death benefit. The seller made the remaining premium payments for the original policy in order to maintain the policy. The seller then sued for breach of contract.

The lower court found the buyer’s contractual breach undisputed. It also held that the liquidated damages clause was valid because it was between sophisticated, counseled businessmen who set a reasonable estimate, at the time of entering into the contract, as to the damages that would be incurred in the event of default. Thus, the lower court granted the seller’s summary judgment motion and awarded damages, plus interest. The buyer appealed.

The Appellate Division affirmed, declining to consider numerous issues because the buyer chose not to present such matters to the lower court when it had an opportunity to do so. It noted that the insurance agreement and the guaranty were signed on the same day, which, the Court felt, supported the view that the insurance agreement did not revoke the guaranty. The Court ruled that the insurance agreement incorporated an agreement that contained an express provision wherein the buyer’s principal would personally guaranty the obligations under the insurance contract. Thus, the Court held that it was clear that it was the intent of the parties that the guaranty cover the buyer’s contractual obligations with respect to the insurance agreement. It upheld the lower court’s finding that the liquidation damages provision in the insurance contract was enforceable. The Court agreed with the lower court that the clause calling for the acceleration and forfeiture of $1,000,000 (which caused the seller to reduce the purchase price of the mall by the actual cost of funding such a policy) was reasonably related to the anticipated or actual costs incurred by the seller. The Court also held that the clause was reasonable because it resulted from negotiations by sophisticated commercial parties who were represented by competent counsel.

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