Appellate Division Refuses to Enforce Liquidated Damages Clause as Unenforceable Penalty

Plaintiff Jennifer Corona entered into a contract with defendant Stryker Golf, LLC to hold her wedding reception at defendant’s catering hall. The contract price for the entire event was $12,012. Plaintiff paid a deposit of $2500 and then an additional $6,891 in 2 installments for a total of $9,391. Six months before the wedding, she cancelled. The defendant refused to refund her monies, citing the contract’s cancellation clause. In Corona v. Stryker Golf, LLC, 2017 N.J. Super. Unpub. LEXIS 690 (App. Div. Mar. 20, 2017), the Court was asked to decide whether the contract’s cancellation clause was a valid liquidated damages clause or an unenforceable penalty.

Under the contract’s cancellation clause, cancellation was not permitted. In addition to forfeiting all deposits, the customer remained responsible for the balance of the contract. When the plaintiff cancelled the contract, the defendant catering hall claimed breach of contract and refused to return the monies paid. The plaintiff conceded that the defendant was entitled to keep the $2500 nonrefundable deposit but argued that the remaining funds should be returned to her.

Based upon well settled case law, the Court distinguished between an enforceable liquidated damages clause and an unenforceable penalty as follows:

Liquidated damages is the sum a party to a contract agrees to pay if he breaks some promise, and which, having been arrived at by a good faith effort to estimate in advance the actual damages that will probably ensue from the breach, is legally recoverable as agreed damages if the breach occurs.

A penalty is the sum a party agrees to pay in the event of a breach, but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach.

Further, the Court noted that a stipulated damage 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.”

In this case, the Court found that the liquidated damages clause was “untethered” to any reasonable basis in determining the actual economic loss the defendant catering hall may have suffered as a result of a cancellation 6 months before the actual event. Coincidentally, the contract identifies the defendant’s cost for food and beverages at $9,680, which was almost the same as the $9,391 that plaintiff paid before the cancellation. Because the defendant no longer had this expense, permitting it to retain the entire $9,391 paid would constitute a windfall and an unenforceable penalty. Hence, the Court ruled that the defendant was required to return all monies but the $2500 deposit.

Tags: Liquidated Damages Clause, penalty