Chaffin v. Ramsey

• Decision Date: 21 October 1976
• Citation: 276 Or. 429,555 P.2d 459
• Parties: Claude M. CHAFFIN and Elizabeth Chaffin, Appellants, v. C. P. RAMSEY, Sr., Respondent.
• Court: Oregon Supreme Court

Page 459

555 P.2d 459

276 Or. 429

Claude M. CHAFFIN and Elizabeth Chaffin, Appellants, v. C. P. RAMSEY, Sr., Respondent.

Supreme Court of Oregon, In Banc.

Argued and Submitted June 7, 1976.

Decided Oct. 21, 1976.

Kenneth E. Shetterly, of Hayter, Shetterly, Noble & Weiser, Dallas, argued the cause and filed a brief for appellants.

No appearance contra.

O'CONNELL, Justice.

This is an action brought by the vendors against the vendee to recover damages for breach of a land sale contract. The case was tried to the court without a jury. The court awarded damages in an amount less than that prayed for, and plaintiffs appeal.

On November 19, 1973, the parties signed an instrument entitled 'Purchase Receipt and Agreement of Sale,' by the terms of which defendant agreed to purchase real property consisting of 57 acres of land on which was located a covered horse arena, a four-bedroom house, a two-bedroom house, and a storage barn. The contract also included personal property consisting of a tractor, a baler, a mower and other farm equipment. The total purchaser price was $130,000. Defendant paid $1,000 down and agreed to pay $34,000 on or before January 1, 1974. The balance was due in installments over a period of 12 years. The contract contained a provision making either party liable for ten percent of the sale price in case of breach. Defendant failed to perform and, in April 1974, plaintiffs brought this action to recover ten percent of the sale price or, in the alternative, $15,000, which was alleged to be the actual damages. The trial court awarded plaintiffs damages in the amount of $4,085, representing a loss of rental, and escrow and attorney's fees incurred by plaintiffs.

In denying recovery of ten percent of the sale price, the court explained that the 'liquidated damages clause is unenforceable as not bargained for and not a reasonable forecast of just compensation when actual damages could have been ascertained.'

The trial court's finding has the effect of categorizing the agreement to pay ten percent of the sale price in case of breach as a provision for a 'penalty' rather than as a provision for 'liquidated damages.' was worth $14,000. Norris v. McMechem, construed as one for liquidated damages, the sum provided, at the time of the making of the contract, must seem to bear a reasonable relationship to anticipated damages and the actual damages must be difficult or impossible to ascertain. Medak v. Hekimian, 241 Or. 38, 44, 404 P.2d 203, 206 (1965).

It can be argued that any agreement made between two parties should be given the effect intended by them unless the type of agreement entered into is in its nature likely to be oppressive and unfair because the promisor is not in a position to freely bargain with the promisee. ¹ Where neither party to an agreement has an advantage over the other in pressing for favorable provisions in making the bargain, there would seem to be no moral precept or social consideration which would call are forfeited, account must be taken merely because the damages could be readily ascertained in advance or because the amount of damages fixed by the contract is admittedly greater than the actual damages the parties might possibly suffer. This view would still leave for judicial scrutiny those cases where the promisor is a party to an adhesion contract prepared by the promisee, or where the promisor is a borrower and thus exposed to oppressive exactions, or in other types of cases where the principle of freedom of contract is outweighed by stronger countervailing policy considerations.

If one were to accept the foregoing reasoning, a provision for liquidated damages would be valid even though the damages agreed upon were disproportionate to the probable loss. To our knowledge, no court has carried the principle of freedom of contract that far. ² And it is not necessary for us to take that step in the present case, because in our opinion plaintiff proved that the damages agreed upon bear a reasonable relation to the loss which might have been foreseen at the time of the execution of the contract, and the actual damages would have appeared difficult to ascertain.

In making a forecast of possible damages attendant upon breach, both plaintiffs and defendant could reasonably be expected to take into account the fluctuating value and price of land. From the seller's standpoint, the danger of a fall in the market value of land would be an important factor in predicting his possible loss upon the buyer's default. Correspondingly, a rise in the market value of the land would similarly affect the buyer if the seller could not perform.

The property involved in this case was devoted to an unusual type of use, the purchase of which would probably be of interest to a limited number of persons. It therefore would present a difficult problem of calculating its probable market value, and the loss which would result from a failure to perform the contract. In addition to the possible loss of bargain to either buyer or seller, the parties in the present case could have reasonably contemplated consequential damages as a result of the loss of income from the rental properties which were included in the sale. The trial court found that the loss of lease payments on the horse barn amounted to $3,600 and that the loss of the house rentals amounted to $375.00. The court added to this, $110.00, representing escrow and attorney's fees. Although the actual loss incurred is not the test for judging the validity of the provision for agreed damages, it demonstrates how particular kinds of losses can occur and thus indicates the reasonableness of a prediction that includes the possibility of such losses. Since it is the prediction rather than the actual loss by which the agreed damages are tested, the inquiry in the present case is whether the parties could have reasonably anticipated a longer period during which the property would remain unrented and therefore give rise to loss of rentals greater than that actually suffered in this case. We can find no basis for saying that the parties could not have reasonably expected such a condition to occur.

As we noted in Medak v. Hekimian, 241 Or. 38, 44, 404 P.2d 203, 206 (1965), '(t)he decision of penalty or liquidated damages is one of law for the court * * *.' In our previous cases we have deemed it essential that there be evidence bearing upon the two elements necessary to sustain a provision for liquidated damages, showing (1) that actual damages are difficult to estimate, and (2) that there must be a reasonable relation between the damages agreed upon and the loss which might have been foreseen. There is a division of authority as to whether the plaintiff or the defendant has the burden of proof on this question. In some states the burden is imposed on the plaintiff. ³ In other states the defendant has the burden. ⁴ In Oregon the burden has been placed upon the plaintiff, ⁵ although in the recent case of Wright v. Schutt Construction Co., 262 Or. 619, 629, 500 P.2d 1045, 1050 (1972), the question is treated as still open for decision, the court saying:

'* * * (W)e need not decide in this case whether, in the usual case, the plaintiff may have the burden to offer evidence to sustain such a payment as one of liquidated damages, rather than as a penalty, or whether the defendant may have the contrary burden.'

This willingness to treat the question as open in the face of our previous acceptance of the rule imposing the burden of proof on the plaintiff, is explained in the court's recognition of the shift in attitude toward liquidated damages provisions. Thus we said, in the Wright case:

'* * * (M)uch of the hostility formerly expressed by courts to provisions for liquidated damages has moderated in recent years as the courts have come to recognize that contract provisions for liquidated damages, under proper limitations, can save the time of the courts, as well as of the parties, and also reduce the expense of litigation.' ⁶

If we were to accept this modern view which recognizes that parties should be entitled to freely contract with each other and be bound by their agreements in the absence of proof of oppressive or 'adhesive' circumstances, the burden of proof would fall upon the defendant to show that a liquidated damage provision did not meet the two requirements previously mentioned. ⁷ But it is unnecessary for us to decide at this time whether we should repudiate the rule previously recognized, placing the burden of proof upon the plaintiff, because even if we were to hold that plaintiff has that burden, the evidence which he adduced was sufficient to meet it in this case.

The cause is remanded with directions to enter a judgment for plaintiffs in the amount of $13,000.00.

TONGUE, Justice (dissenting).

The majority holds that the provision of the contract between the parties for 10 percent liquidated damages (or $13,000) was a valid contract provision because plaintiffs offered sufficient evidence to prove that 'the damages agreed upon bear a reasonable relation to the loss which might have been foreseen at the time of the execution of the contract, and the actual damages would have appeared difficult to ascertain.' The majority then goes on to discuss whether plaintiffs should have had the burden to prove that these requirements were satisfied or whether the defendant should have had the burden to prove that they were not satisfied.

1. Plaintiffs had the burden of proof on liquidated damages.

The majority recognizes that under our previous decisions 'the burden has been placed upon the plaintiff,' but seems to advocate the repudiation of those decisions and the adoption of what the majority refers to as 'the modern view' to the contrary, based upon the concept of 'freedom of contract,' although stating that 'it is unnecessary for us to decide (this question) at this time * * *' because plaintiffs offered sufficient evidence...