Caincare, Inc. v. Ellison

• Decision Date: 15 March 2005
• Docket Number: No. A04A1650.,A04A1650.
• Citation: 272 Ga. App. 190,612 S.E.2d 47
• Parties: CAINCARE, INC. et al. v. ELLISON et al.
• Court: Georgia Court of Appeals

612 S.E.2d 47

272 Ga. App. 190

CAINCARE, INC. et al. v. ELLISON et al.

No. A04A1650.

Court of Appeals of Georgia.

March 15, 2005.

COPYRIGHT MATERIAL OMITTED

John Longino, Ellijay, for Appellants.

Rickie Brown, Dalton, for Appellees.

ADAMS, Judge.

This case concerns whether a liquidated damage clause contained in a sales agreement between Caincare, Inc. and Discount Drug of Dalton, Ga., Inc. is a reasonable estimate of damages or an unenforceable penalty.

On January 1, 2002, Discount Drug entered into an agreement to sell its Valu-Rite pharmacy to Caincare. Pursuant to the agreement, Caincare was required to extinguish all vestiges of the Valu-Rite name from its business, and it did so with a single exception: "Valu-Rite" still appeared in small print at the top of faxes sent out by Caincare, even though Caincare was using its new name, Family Pharmacy, in all other respects. Discount Drug claimed that use of the Valu-Rite name on the faxes violated the following provision of the sales agreement:

Upon execution of this agreement, the Purchaser and Purchaser's successors or assigns, must develop a business name and logo completely independent of and in no way associated with the name Valu-Rite. Expressly, the Purchaser, and Purchaser's successors or assigns, shall not use the words "value," "valu," or any derivative thereof which may sound similar to the word "value," including but not limited to the substitution of a different letter at the beginning of the word "value," as the name of the Purchaser's new business.... This new and independent name and logo should replace any and all mention of the name Valu-rite. Not only should the name and logo of Valu-rite be removed from the interior and exterior of the building, all trace of the Valu-rite name and logo should be removed from any and all tangible items. These items include, but are not limited to [sic] signs, shopping bags, cash register receipts, and signs located in the store.

The agreement explicitly gave Caincare six months to complete the name change. Indeed, the owner of Discount Drug testified that Caincare would not be liable for any use of the Valu-Rite name until July 1, six months after the sales agreement was signed. If the name change was not completed within six months, the liquidated damages clause would be triggered. The clause provides for payment of $10,000 in damages for the first violation and an additional $100 for each day Caincare continues to use the name thereafter.

Discount Drug purchased the fax machine in question. An employee of Discount Drug programmed the Valu-Rite name into the fax machine. Neither Discount Drug nor Caincare realized the Valu-Rite name was appearing on the fax header until August 26, 2002, roughly eight months after the sales agreement was signed. Discount Drug notified Caincare about misuse of the Valu-Rite name. After being informed, Caincare promptly corrected the problem. Yet Discount Drug discovered a stack of faxes sent to it between July 1 and August 26 bearing the Valu-Rite name.

There were apparently other disagreements between the parties, and Caincare sued Discount Drug for breach of contract, fraud, conversion, and violations of the Georgia RICO statute. Discount Drug counterclaimed for breach of contract alleging that Caincare continued to use the Valu-Rite name in violation of the sales agreement. Caincare moved for a directed verdict at the close of the evidence and argued that the liquidated damage provision was an unenforceable penalty. The court denied the motion. The jury then rejected all of Caincare's claims and found in favor of Discount Drug on the counterclaim. The jury awarded Discount Drug $15,700 for misuse of the Valu-Rite name and $35,000 in attorney fees.

1. Caincare first contends that the trial court erred by denying its motion for directed verdict regarding the enforceability of the liquidated damage clause. Resolution of these cases can be tricky.¹ The Supreme Court has held that a liquidated damages clause is enforceable if (1) the injury caused by the breach of the contract is difficult or impossible to accurately estimate; (2) the parties intended to provide for damages rather than a penalty; and (3) the sum stipulated upon by the parties is a reasonable pre-estimate of the probable loss. Southeastern Land Fund v. Real Estate World, 237 Ga. 227, 230, 227 S.E.2d 340 (1976), cited by Swan Kang, Inc. v. Kang, 243 Ga.App. 684, 686(1), 534 S.E.2d 145 (2000); Joyce's Submarine Sandwiches v. California, etc., Pub. Employees' Retirement System, 195 Ga.App. 748, 749-750(2), 395 S.E.2d 257 (1990).

At trial, the party who defaults on the contract has the burden of proving the liquidated damages clause is an unenforceable penalty. Liberty Life Ins. Co. v. Thomas B. Hartley Constr. Co., 258 Ga. 808, 809, 375 S.E.2d 222 (1989). A defaulting party can carry this burden by proving any of the three factors is lacking. Daniels v. Johnson, 191 Ga.App. 70, 381 S.E.2d 87 (1989). "The enforceability of a liquidated damages provision in a contract is a question of law for the court which necessarily requires the resolution of questions of fact." (Punctuation omitted.) Maz Medics v. Satellite Advertising Systems, 194 Ga.App. 583, 391 S.E.2d 446 (1990), citing Liberty Life, 258 Ga. at 809, 375 S.E.2d 222.²

Caincare cannot prevail under the first two prongs of the test. Caincare fails under the first prong because neither party argued at trial or on appeal that it would be easy to estimate damages resulting from misuse of the Valu-Rite name. Caincare fails under the second prong because the sales agreement explicitly states the $10,000 sum and "additional charge" of $100 per day represent "liquidated damages." This contractual language is indicative of the parties' intent for the damages to be liquidated. See Liberty Life, 258 Ga. at 809, 375 S.E.2d 222. See also Oran v. Canada Life Assurance Co., 194 Ga.App. 518, 520(2), 390 S.E.2d 879 (1990).

The third prong of the test inquires whether the liquidated damage amount is a reasonable pre-estimate of the probable loss. Southeastern, 237 Ga. at 230, 227 S.E.2d 340. The following review of a sample of cases reveals that the touchstone question is whether the parties employed a reasonable method under the circumstances to arrive at a sum that reasonably approximates the probable loss of the defaulting party. Deterrence should not factor into the equation. "Where a designated sum is inserted into a contract for the purpose of deterring one or both of the parties from breaching it, it is a penalty." (Citations and punctuation omitted.) Daniels, 191 Ga.App. at 71, 381 S.E.2d 87.

When a business defaulted on a lease for telephone equipment, this Court held that a liquidated sum was unreasonable because it allowed the lessor to recover the present value of all future rents and retain proceeds from a sale of the repossessed equipment. Carter v. Tokai Financial Svcs., 231 Ga.App. 755, 758-759(2), 500 S.E.2d 638 (1998). The liquidated damages placed the lessor in a far better position than it would have been if the contract had never been breached. Id. See also Peterson v. P.C. Towers, L.P., 206 Ga.App. 591, 593-594, 426 S.E.2d 243 (1992) (while reduction of accelerated rent payments to present value tends to establish reasonableness, it is unreasonable for a lessor to gain possession of the premises plus a lump sum award of future rent without taking into account either the future rental value of the property or the probability the property will be leased again).

In a case dealing with the breach of an employment contract, this Court held the amount of liquidated damages was unreasonable because the parties made no effort to estimate the probable loss. Physician Specialists in Anesthesia v. MacNeill, 246 Ga.App. 398, 539 S.E.2d 216 (2000). Instead of attempting to estimate the probable loss, the doctor and his employer had referenced the doctor's deferred compensation package to determine the amount of liquidated damages. Id. at 400-402(1), 539 S.E.2d 216.

In a case dealing with the breach of a commercial property lease, we upheld liquidated damages as reasonable even though the defaulting party was responsible for paying a fee for every day it breached the contract. Joyce's Submarine Sandwiches, 195 Ga.App. at 749-750(2), 395 S.E.2d 257. The leasing agreement required the tenant to pay $2,166 in monthly rent and an additional percentage rent based on the tenant's gross annual sales.³ When the tenant defaulted, the liquidated damages clause was triggered, requiring payment of the minimum rent, additional percentage rent, and $50 for each day the premises remained vacant. Id. The court upheld the $50 per day provision as a reasonable estimate of what the landlord would likely lose as a result of a decline in the property value of the shopping center and a decrease in the total amount of percentage rents collected from tenants. Id.

In a case involving the breach of a real estate sales contract, the Supreme Court has ruled the payment of $37,000 earnest money, which represented ten percent of the purchase price, was a reasonable liquidation of damages. Liberty Life, 258 Ga. at 809, 375 S.E.2d 222. Based on that opinion, this Court has ruled the payment of $20,000 earnest money, which represented two percent of the purchase price, was reasonable. Swan Kang, 243 Ga.App. at 686(1), 534 S.E.2d 145.

In the present case, Caincare has shown as a matter of law that the liquidated damage amount is not a reasonable estimate of the probable loss caused by the breach. First, the liquidated damages provision entitled Discount Drug to $10,000 on the first day Caincare breached the contract, even though the owner...