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					                        DAMAGE CLAUSES FOR A DEFAULT
                       LIQUIDATED DAMAGES OR PENALTY

“If you repudiate this contract, breach any provision, or don’t make a payment
within XX days of your due date, we can require you to pay the entire balance of
what you still owe.” Language from a consumer contract.

The above liquidated-damages clause is typical of what Karate and Health-Sports
Clubs place in their contracts. What is the Virginia law regarding damages clauses in
the contract?

For purposes of this treatise, we will presume that there is a written contract
between the school, the defendant who is the student and that there is a damage
clause in the contract.

Issues Considered
   • What are damages, liquidated damages and mitigated damages?
   • Is there a jury instruction regarding mitigated damages?
   • When is a so-called liquidated damages provision actually a penalty and
     therefore unenforceable?
   • What are the burdens of proof for the plaintiff and the defendant in a
     contract where there is a liquidated-damages clause?
   • How does the Virginia Consumer Protection Act address liquidated damages?

Definitions
Damages are composed of lost profits and expenses. i The plaintiff must prove more
than mere speculation and conjecture as the amount of profit that would have been
realized, absent the breach. ii

Liquidated damages are described as “…a specific sum of money [that] has been
expressly stipulated by the parties to a bond or other contract as the amount of
damages to be recovered by either party for a breach of the agreement by the
other.” iii

Parties to a contract can enter into a provision for a specific sum of money to be
paid by the breaching party to the non-breaching party in the event of a default.

Virginia law permits a party that enters into a contract containing a liquidated
damages clause to litigate the validity of that clause. iv See the burden of proof
below.

Mitigation of Damages “A reduction of the amount of damages, …” v




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Penalty is a stipulated sum payable on breach of contract, irrespective of the
damages sustained, as a punishment for default. It operates as in terrorem of the
offending party rather than as a measure of compensation for breach. vi

Criteria for Contesting a Liquidated Damages Clause
What are the criteria for contesting a provision for liquidated damages? vii

   •   Where the actual damages contemplated at the time the contract is made
       were certain or not difficult to determine.
                                           or
   •   The amount agreed upon is disproportionate to the probable loss.

Burden of Proof
The plaintiff has the burden of proof by a preponderance of the evidence that a
breach of contract occurred and that compensable damages were sustained. viii

Mitigation of damages is an affirmative defense, and its burden is entirely on the
contract breaker. ix

If the defendant is contesting the liquidated-damages provision, she/he bears the
burden of proof. She/he is entitled to conduct discovery and to present relevant
evidence that the damages resulting for breach of the contract are susceptible of
definite measurement or that the stipulated damages are grossly in excess of the
actual damages suffered by the plaintiff. x

Jury Instruction
Instruction No. 9.020 Duty to Mitigate Damages

       The plaintiff has a duty to minimize his damages. If you find that the plaintiff
       did not act reasonably to minimize his damages and as a result, they
       increased, then he cannot recover the amount by which they increased.

Virginia Consumer Protection Act
Va. Code § 59.1-200 Prohibited practices

  A. The following fraudulent acts or practices committed by a supplier in
connection with a consumer transaction are hereby declared unlawful:

13. Using in any contract or lease any liquidated damage clause, penalty clause, or
waiver of defense, or attempting to collect any liquidated damages or penalties
under any clause, waiver, damages, or penalties which are void or unenforceable
under any otherwise applicable laws of this Commonwealth, or under federal
statutes or regulations.




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Va. Code § 59.1-204 Individual action for damages or penalty

  A. Any person who suffers loss as the result of a violation of this chapter shall be
entitled to initiate an action to recover actual damages, or $500, whichever is
greater. If the trier of fact finds that the violation was willful, it may increase
damages to an amount not exceeding three times the actual damages sustained, or
$1,000, whichever is greater.

§ 59.1-207 Unintentional violations

In any case arising under this chapter, no liability shall be imposed upon a supplier
who shows by a preponderance of the evidence that (i) the act or practice alleged
to be in violation of § 59.1-200 was an act or practice of the manufacturer or
distributor to the supplier over which the supplier had no control or (ii) the alleged
violation resulted from a bona fide error notwithstanding the maintenance of
procedures reasonably adopted to avoid a violation; however, nothing in this section
shall prevent the court from ordering restitution and payment of reasonable
attorney's fees and court costs pursuant to § 59.1-204 B to individuals aggrieved as
a result of an unintentional violation of this chapter.

B. Notwithstanding any other provision of law to the contrary, in addition to any
damages awarded, such person also may be awarded reasonable attorney's fees
and court costs.

Help in Determining if a Clause is Liquidated Damages or a Penalty
A 1908 Virginia Supreme Court xi case refers to a 1857 New York Court of Appeals
case that sets forth rules to assist in making the distinction between liquidated
damages and a penalty. Some of these rules are:

   •   the language of the agreement is not conclusive and there are other parts of
       the agreement that give reason to doubt the intention of the parties;
   •   the word penalty is used; and
   •   the sum stipulated to be paid in the event of a breach is greater than a sum,
       which is certain in amount, and would have been paid had there been no
       breach.

In a recent City of Winchester Circuit Court case xii , the issue of the validity of a
liquidated damages provision regarding the sale of replacement windows to a
consumer was addressed. The test proposed by the Court first considers:

   1. Is the amount set forth in the damages clause reasonable to the extent that
      it approximates the actual loss that has resulted for the particular breach,
      even though it may not approximate the loss that might have been
      anticipated under other possible breaches.


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   2. Furthermore, is the amount of the damages in the clause reasonable to the
      extent that it approximates the loss anticipated at the time of the making of
      the contract, even though it may not approximate the actual loss.

The Court set forth a number of factual questions regarding the facts of that case
that may prove instructive in a school-type case. They are:

   •   were the windows unique and custom made or were they standard sizes
       simply retrieved from inventory?;
   •   if custom made, what was the costs of production? and;
   •   what was the amount of the plaintiff’s overhead?

Review of the Contract
Is the liquidated-damages provision for the sole benefit of the plaintiff? If so, West
Virginia strictly construes it against the plaintiff whose benefit such a provision was
incorporated in the instrument. xiii

Also, the fact that the contract was pre-printed provides little opportunity for the
defendant to negotiate the provisions of the contract including the liquidated-
damages provision. xiv

What is the time-length of the contract? If it is one year then the plaintiff may be a
position to argue that actual damages contemplated at the time the contract is
made were not certain or difficult to determine. However, if the contract is for two
years or more, then it is far more difficult to show why the plaintiff does not have
the burden to show mitigation of damages.

Does the liquidated-damages provision call for a 100 per cent damages? If so, then
it would be very difficult to meet the test (even if the contract is only for one year)
that the amount agreed upon is proportionate to the probable loss.

Suggested Information for the Grounds of Defense

                                      Answer

                                Grounds of Defense
Plaintiff has failed to mitigate her/his damages as is required pursuant to Virginia
law.

The contract was pre-printed thus offering the defendant little or no chance to
negotiate the terms of the damages claim by the plaintiff.

The damages provision in the contract is a penalty xv because the actual damages


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contemplated at the time the contract was made were certain or not difficult to
determine or the amount agreed upon is disproportionate to the probable loss.

This was a sale of services by the plaintiff, a “supplier,” to the defendant for
personal, family or household use and was a consumer transaction pursuant to
the Virginia Consumer Protection Act Va. Code § 59.1-198.

The plaintiff committed fraudulent acts or practices in violation of the Virginia
Consumer Protection Act, Va. Code § 59.1-200 (13) by attempting to collect
damages pursuant to a penalty clause in the contract that is unenforceable under
the laws of the Commonwealth.

Pursuant to the Virginia Consumer Protection Act, the defendant is entitled to
reasonable attorney's fees and court costs.


Suggested Questions of the Plaintiff at Trial
  1. When did the alleged breach of the contract occur?
  2. Was the plaintiff damaged by the alleged breach?
  3. What action(s) did you take after the alleged breach?
  4. How many students are in each class?
  5. How many students were in the defendant’s class?
  6. How many students did not compete the first year?
  7. How many students did not complete the second year?
  8. What efforts did you take to find a replacement for the defendant during the
     first year?
  9. What efforts did you take to find a replacement for the defendant during the
     second year?

Laurence E. Fann lfann@lsnv.org and Buz Brinig jbrinig@lsnv.org, July 2005,
amended November 22, 2005.
i
  TechDyn Sys. Corp. v. Whittaker Corp., 245 Va. 291, 427 S.E. 2d 334 (1993)
ii
    Goldstein v. Kaestner, 243 Va. 169, 173, 413 S.E. 2d 347, 349 (1992)
iii
    Black’s Law Dictionary, Fourth Edition (1951)
iv
    O’Brian v. Langley School, 256 Va. 547, 507 S.E. 2d 363 (1998)
v
    Black’s Law Dictionary, Fourth Edition (1951)
vi
    15 AM. JUR. Damages § 241 (1938)
vii
     Taylor v. Sanders, 233 Va. 73, 75, 353 S.E. 2d 745, 746 (1987)
viii
     Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 562 (1966)
ix
    Margaret A. Paddock v. Leslie I. Mason, 187 Va. 809, 48 S.E. 2d 199 (1948)
x
    O’Brian v. Langley School, 256 Va. 547, 507 S.E. 2d 363 (1998)
xi
    Colonna Dry Dock Company v. Colonna, 108 Va. 230, 61 S.E. 770 (1908) refers to Bagley v. Peddie and
another, 16 N.Y. 469 (1857)
xii
     Ameritech Construction Corp. v. William F. Cummings, III, 66 Va. Cir. 328 (2005)
xiii
     Provisions of a contract, effecting a forfeiture or exacting a penalty are strictly construed against the party
for whose benefit they were incorporated in the instrument. Fraley v. Family Dollar Stores of Marlington, W.
Va., Inc., 188 W. Va. 35, 422 S.E.2d 512 (1992).


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xiv
    Carpenter v. Gate City, 185 Va. 734, 40 S.E. 2d 286 (1946)
xv
   But, if the effort, risk, sacrifice, or expense which the person wronged must incur in order to avoid or
minimize a loss or injury is such that under all the circumstances a reasonable man might well decline to incur
it, a failure to do so imposes no disability against recovering full damages. Stohlman v. S & B Ltd. Partnership,
249 Va. 251, 454 S.E.2d 923 (1995)




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