DJ Mfg. Corp. v. U.S.

• Decision Date: 12 June 1996
• Docket Number: No. 95-5128,95-5128
• Citation: 86 F.3d 1130
• Parties: DJ MANUFACTURING CORPORATION, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1130

86 F.3d 1130

DJ MANUFACTURING CORPORATION, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

No. 95-5128.

United States Court of Appeals, Federal Circuit.

June 12, 1996.

Rehearing Denied; Suggestion for Rehearing In Banc Declined

Aug. 19, 1996.

Marc Lamer, Kostos and Lamer, P.C., Philadelphia, Pennsylvania, argued for plaintiff-appellant.

John C. Erickson III, Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, Washington, D.C., argued for defendant-appellee. With him on the brief were Frank W. Hunger, Assistant Attorney General, David M. Cohen, Director, and Sharon Y. Eubanks, Deputy Director.

Before CLEVENGER, Circuit Judge, NIES, Senior Circuit Judge, and BRYSON, Circuit Judge.

BRYSON, Circuit Judge.

DJ Manufacturing Corporation (DJ) appeals from a decision of the United States Court of Federal Claims granting summary judgment to the government. DJ argued that the liquidated damages clause in the contract between the parties was unenforceable as a penalty. The trial court rejected that argument, DJ Mfg. Corp. v. United States, 33 Fed. Cl. 357 (Fed.Cl.1995), as do we.

I

In January 1991, the government solicited an offer from DJ for 283,695 combat field packs to support troops who were then participating in Operation Desert Storm. The solicitation documents set forth a delivery schedule, sought accelerated delivery if possible, and provided for liquidated damages for late delivery. The parties negotiated a contract, which became effective on February 14, 1991. Like the underlying solicitation documents, the contract provided that, for each article delivered after the date fixed in the contract, liquidated damages would be assessed at 1/15 of one percent of the contract price for each day of delay.

DJ missed several delivery deadlines. In accordance with the liquidated damages clause, the government withheld payment in the amount of $663,266.92, a reduction of about 8 percent of the total contract price of $8,493,828.

DJ filed suit in the Court of Federal Claims to recover the withheld amount, contending that the liquidated damages clause constituted an unenforceable penalty. The government moved for summary judgment. In support of its motion, the government submitted a declaration by an Army logistics management specialist, who stated that possession of the field packs was essential to the troops' combat readiness. In addition, the government submitted a declaration from the contracting officer, who stated that all contracts for items to be used in Operation Desert Shield/Desert Storm contained liquidated damages clauses for late delivery because of the need to get war items to the soldiers quickly.

In response to the government's motion, DJ produced an affidavit of its president, who stated that the rate set forth in the liquidated damages clause "does not seem related to any specific need with respect to the item in question or the time-frame, but, rather, seems to be a fairly standard rate used in many solicitations for many different items." The affidavit listed several other government contracts and solicitations that allegedly contained clauses setting liquidated damages at the same rate. DJ argued that there was therefore a disputed issue of material fact as to whether the contracting officer had "used a standard rate, historically employed by [the agency]" and had made "no attempt to forecast just compensation."

The Court of Federal Claims granted the government's motion. At the outset, the court held that DJ bore the burden of establishing that the liquidated damages clause was unenforceable, and that in order to avoid summary judgment DJ had to point to evidence raising a triable question of fact with respect to that issue. The court then recited the rule that a liquidated damages clause is enforceable if the harm that would be caused by a breach is difficult to estimate and the amount or rate fixed as liquidated damages is a reasonable forecast of the loss that may be caused by the breach.

As to the first element, the court characterized this case as presenting "a paradigmatic example of a situation where accurate estimation of the damages resulting from delays in delivery is difficult, if not impossible." As to the second element, the court rejected DJ's argument that in order to determine the reasonableness of the liquidated damages, it was necessary to inquire into the process that the contracting officer followed in reaching the amount that was inserted into the contract. The inquiry, the court explained, is an objective one. "The proper inquiry focuses on whether the amount itself is a reasonable forecast, not whether, as [DJ] seems to suggest, the individual responsible for proposing the rate engaged in a reasonable attempt to forecast damages." Because DJ failed to offer any evidence that the liquidated damages rate agreed upon in the contract was "greater than that which the government could reasonably suffer as a result of the delayed delivery of the field packs," the court granted the government's motion and ordered DJ's complaint to be dismissed.

II

By fixing in advance the amount to be paid in the event of a breach, liquidated damages clauses save the time and expense of litigating the issue of damages. Such clauses "serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable," Priebe & Sons v. United States, 332 U.S. 407, 411, 68 S.Ct. 123, 126, 92 L.Ed. 32 (1947), which is often the case when there is a delay in the completion of a contract for the government. Id.; United States v. Bethlehem Steel Co., 205 U.S. 105, 120, 27 S.Ct. 450, 455-56, 51 L.Ed. 731 (1907); Jennie-O Foods, Inc. v. United States, 580 F.2d 400, 413, 217 Ct.Cl. 314 (1978) ("Costs to the public convenience and the temporary thwarting of the public goals ... are hard to measure with precision.").

When damages are uncertain or difficult to measure, a liquidated damages clause will be enforced as long as "the amount stipulated for is not so extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention or oppression." Wise v. United States, 249 U.S. 361, 365, 39 S.Ct. 303, 304, 63 L.Ed. 647 (1919); see United States v. Bethlehem Steel Co., 205 U.S. at 121, 27 S.Ct. at 456 ("The amount is not so extraordinarily disproportionate to the damage which might result from the [breach], as to show that the parties must have intended a penalty and could not have meant liquidated damages."). With that narrow exception, "[t]here is no sound reason why persons competent and free to contract may not agree upon this subject as fully as upon any other, or why their agreement, when fairly and understandingly entered into with a view to just compensation for the anticipated loss, should not be enforced." Wise v. United States, 249 U.S. at 365, 39 S.Ct. at 304; see also Sun Printing & Publishing Ass'n v. Moore, 183 U.S. 642, 674, 22 S.Ct. 240, 253 46 L.Ed. 366 (1902) (except where "the sum fixed is greatly disproportionate to the presumed actual damages," a court "has no right to erroneously construe the intention of the parties, when clearly expressed, in the endeavor to make better contracts for them than they have made for themselves").

A party challenging a liquidated damages clause bears the burden of proving the clause unenforceable. See Jennie-O Foods, Inc. v. United States, 580 F.2d at 414; Farmers Export Co. v. M/V Georgis Prois, Etc.. 799 F.2d 159, 162 (5th Cir.1986). That burden is an exacting one, because when damages are uncertain or hard to measure, it naturally follows that it is difficult to conclude that a particular liquidated damages amount or rate is an unreasonable projection of what those damages might be. See Restatement (Second) of Contracts § 356 cmt. b (1981) ("The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty ... the easier it is to show that the amount fixed is reasonable."); 5 Samuel Williston, A Treatise on the Law of Contracts § 783 (W. Jaeger ed. 1961).

While some state courts are hostile to liquidated damages clauses, federal law "does not look with disfavor upon 'liquidated damages' provisions in contracts." Priebe & Sons, Inc. v. United States, 332 U.S. at 411, 68 S.Ct. at 126. The few federal cases in which liquidated damages clauses have been struck down provide some indication of how rare it is for a federal court to refuse to enforce the parties' bargain on this issue. For example, in Priebe & Sons, Inc. v. United States, the Supreme Court struck down a liquidated damages clause when it was "certain when the contract was made" that the breach in question "plainly would not occasion damage." 332 U.S. at 413, 68 S.Ct. at 126. The contract in Priebe contained two liquidated damages clauses: one for delay in the delivery of eggs and a second for failure to have the eggs inspected and ready for delivery by a specific time prior to the delivery date. The contractor was late in meeting the inspection requirement, but delivered the eggs on time. Thus, only the second liquidated damages clause was at issue in the case. As the Court viewed that clause, a delay in inspection that did not result in a delay in delivery could not cause any loss to the government. At the same time, however, the Court stated that if the breach had involved "failure to get prompt performance when delivery was due," the Court would have had "no doubt of the validity of the provision for 'liquidated damages' when applied under those circumstances." Id. at 412, 68 S.Ct. at 126.

Another case, equally unusual, involved a liquidated damages clause in a lease. In that case, Kothe v. R.C. Taylor Trust, 280 U.S. 224, 50 S.Ct. 142, 74 L.Ed. 382 (1930), the lessee agreed that the filing of a petition for bankruptcy against him would be deemed a...