New York Law Review

Tag: Truck Rent-A-Center

  • Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977): Enforceability of Liquidated Damages Clauses

    Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977)

    A liquidated damages clause is enforceable if the amount stipulated is a reasonable estimate of probable loss and the actual loss is difficult to determine precisely; however, it is an unenforceable penalty if the amount is grossly disproportionate to the actual damages.

    Summary

    Truck Rent-A-Center sued Puritan Farms for breach of a truck lease agreement, seeking liquidated damages as specified in the contract. Puritan argued the liquidated damages clause was an unenforceable penalty. The New York Court of Appeals held the clause was enforceable because the stipulated amount was a reasonable estimate of the probable loss, considering the uncertainty of re-renting specialized vehicles and other factors. The court emphasized that the agreement should be interpreted as of the date of its making, and the clause was not unconscionable.

    Facts

    Puritan Farms leased 25 milk delivery trucks from Truck Rent-A-Center for seven years. The lease agreement included a provision (Article 16) stipulating that if Puritan breached the lease, it would owe Truck Rent-A-Center all remaining rents, less 50% as the “re-rental value” of the trucks. Puritan terminated the lease after nearly three years, claiming Truck Rent-A-Center failed to maintain the trucks. Truck Rent-A-Center sued for liquidated damages. The trucks were returned to Truck Rent-A-Center, and most remained there.

    Procedural History

    The trial court found Puritan breached the lease and the liquidated damages clause was reasonable, awarding Truck Rent-A-Center half of the remaining rents. The Appellate Division affirmed. Puritan appealed to the New York Court of Appeals.

    Issue(s)

    Whether the liquidated damages provision in the truck lease agreement is an enforceable liquidated damages clause, or an unenforceable penalty.

    Holding

    Yes, because the amount stipulated by the parties as damages bears a reasonable relation to the amount of probable actual harm and is not a penalty.

    Court’s Reasoning

    The court stated, “A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.” The court emphasized that if the fixed amount is grossly disproportionate to the probable loss, it constitutes a penalty and will not be enforced. Looking forward from the date of the lease, the parties could reasonably conclude that there might not be an actual market for the sale or re-rental of these specialized vehicles in the event of the lessee’s breach. It was permissible for the parties to agree that the re-rental or sale value of the vehicles would be 50% of the weekly rental. The court also noted that “there is no indication of any disparity of bargaining power or of unconscionability.” The court dismissed Puritan’s argument that the option to purchase the trucks negated the liquidated damages clause, because Puritan chose not to exercise that option and instead breached the lease. The court reasoned that the liquidated damages provision related reasonably to potential harm that was difficult to estimate and did not constitute a disguised penalty.

  • Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977): Enforceability of Liquidated Damages for Attorney’s Fees in Sales Contracts

    Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977)

    Under the Uniform Commercial Code, a liquidated damages provision for attorney’s fees in a sales contract is enforceable if it reasonably relates to either the anticipated or actual harm caused by the breach, and it is not so unreasonably large as to be a penalty.

    Summary

    Truck Rent-A-Center sued Puritan Farms for breach of contract, seeking to enforce a clause stipulating that Puritan Farms would pay 30% of the recovery amount as attorney’s fees. The trial court found Puritan Farms liable but deemed the 30% fee excessive, awarding a lesser amount. The appellate court modified the award, increasing attorney’s fees. The New York Court of Appeals reversed and remanded, holding that the liquidated damages provision for attorney’s fees could be enforceable if reasonable in relation to either anticipated or actual harm, and not a penalty. The court emphasized that the fee should be related to the normal contingent fee charged by attorneys in similar collection cases and must not be unreasonably large.

    Facts

    Truck Rent-A-Center (plaintiff) contracted to supply lumber and building materials to Puritan Farms 2nd, Inc. (defendant), a builder. The contract included a clause requiring the buyer (Puritan Farms) to pay a “reasonable counsel fee” of 30% of the recovery if the seller (Truck Rent-A-Center) had to turn the matter over to an attorney for collection. Puritan Farms took delivery of the materials but then refused to pay, ceasing operations and abandoning its office. Truck Rent-A-Center sued to recover the purchase price and the stipulated attorney’s fees.

    Procedural History

    Truck Rent-A-Center sued in the Supreme Court, Kings County. The Supreme Court granted summary judgment for Truck Rent-A-Center for the unpaid purchase price, but declined to enforce the 30% attorney’s fees provision, awarding a lesser amount after a hearing. The Appellate Division modified the judgment, raising the attorney’s fees. Truck Rent-A-Center appealed to the New York Court of Appeals.

    Issue(s)

    Whether a liquidated damages provision in a commercial sales contract, stipulating that the breaching buyer will pay the seller’s attorney’s fees calculated at 30% of the recovery amount, is enforceable under the Uniform Commercial Code.

    Holding

    No, not necessarily. The 30% fee is not automatically enforceable. The case was reversed and remitted because the court must determine (1) if the 30% fee was reasonable in light of anticipated damages, related to the normal fee an attorney would charge for collection, or (2) if the fee corresponded to the actual fee arrangement between Truck Rent-A-Center and its attorney, and even if so, whether the amount stipulated was unreasonably large or disproportionate to the likely damages, making it a penalty.

    Court’s Reasoning

    The Court of Appeals reasoned that under UCC § 2-719(1), parties can agree to remedies beyond those in the UCC. However, this is limited by UCC § 2-718(1) regarding liquidated damages and UCC § 2-302 on unconscionability. UCC § 2-718(1) allows liquidated damages if the amount is reasonable in light of the anticipated or actual harm and the difficulty of proving loss, but invalidates terms fixing unreasonably large damages as a penalty. The court noted that the UCC allows courts to consider actual harm at the time of the breach, a departure from prior law that focused solely on anticipated harm at the time of contracting. The court emphasized that even if the liquidated damages provision is reasonable under the “anticipated or actual harm” test, it still cannot be so unreasonably large as to be a penalty. It stated, “liquidated damages constitute the compensation which, the parties have agreed, must be paid in satisfaction of the loss or injury which will follow from a breach of contract. They must bear reasonable proportion to the actual loss… Otherwise an agreement to pay a fixed sum upon a breach of contract, is an agreement to pay a penalty”. The court also considered whether the fee arrangement was unconscionable under UCC § 2-302, but found no evidence of disparity in bargaining power or oppressive practices in this commercial transaction. The court remanded the case to determine whether the 30% fee was reasonable in light of anticipated damages or corresponded to the actual fee arrangement and, if so, whether it was unreasonably large as to be a penalty.