New York Law Review

Tag: UCC 2-718

  • 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.