Equitable Lumber Corp. v. IPA Land Development Corp.

• Decision Date: 15 January 1976
• Citation: 344 N.E.2d 391,38 N.Y.2d 516,381 N.Y.S.2d 459
• Parties: , 344 N.E.2d 391, 98 A.L.R.3d 577, 18 UCC Rep.Serv. 273 EQUITABLE LUMBER CORP., Appellant, v. IPA LAND DEVELOPMENT CORP., Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 459

381 N.Y.S.2d 459

38 N.Y.2d 516, 344 N.E.2d 391, 98

A.L.R.3d 577,

18 UCC Rep.Serv. 273

EQUITABLE LUMBER CORP., Appellant, v. IPA LAND DEVELOPMENT CORP., Respondent.

Court of Appeals of New York.

Jan. 15, 1976.

Max Ornstein, Brooklyn, for appellant.

Murray L. Skala and Gabriel Kaszovitz, New York City, for respondent.

GABRIELLI, Judge.

In this case, one of first impression in this court, ¹ the issue presented is the enforceability of a provision in a commercial sales contract which (1) stipulates that the seller may recover the reasonable value of attorney's fees incurred as a result of the buyer's breach and (2) attempts to liquidate such sum at 30% Of the amount recovered by the plaintiff in the event that the buyer's failure to make payments due under the contract requires the services of an attorney for collection.

Plaintiff, a lumber company, entered into a contract with defendant, a builder and developer, in which plaintiff agreed to supply defendant with lumber and building materials required for construction projects on various plots of land in Suffolk County. The agreement, executed by defendant's president, a member of the New York Bar, described the material to be provided and specified the purchase price. On the reverse side of the contract in a section entitled 'TERMS AND CONDITIONS', the following provision was also specified: ²

'If the Buyer breaches this contract and the enforcement thereof, or any provision thereof, or the collection of any monies due thereunder is turned over to an attorney, the Buyer herein agrees to pay, in addition to all of Seller's expenses, a reasonable counsel fee; and in the event the matter turned over is the collection of monies, such reasonable counsel fee is hereby agreed to be Thirty (30%) per cent. The guarantor shall also be liable for such counsel fee and expenses.' (Emphasis in original.)

Defendant took delivery of quantities of lumber and materials which it used in its construction projects. Thereafter, defendant refused to pay for this merchandise, terminated its operations and abandoned its office. Plaintiff instituted suit in the Supreme Court, Kings County, for the recovery of the purchase price of the materials and the attorney's fees stipulated in the contract. Defendant denied liability on the ground that the goods were not of 'merchantable quality'. Upon plaintiff's motion for summary judgment, however, Special Term found that defendant was liable to plaintiff in the amount of $3,936.42, the unpaid purchase price of the goods sold and delivered; and the court held that plaintiff was entitled to recover the reasonable value of attorney's fees as provided in the contract, but declined to enforce the provision designating 30% Of the amount recovered as a reasonable fee. Rather, the court conducted a hearing on the nature and extent of the services performed by plaintiff's attorney and determined that a maximum of 10 hours was required to handle the matter properly. The court then set the reasonable value of attorney's fees at $450 (approximately 11% Of the amount recovered). The Appellate Division modified the award, raising the amount of attorney's fees recoverable by the plaintiff to $750 and, as so modified, affirmed the judgment of Special Term. Plaintiff now appeals to this court claiming that both courts below erred in disregarding the provision liquidating attorney's fees at 30%.

Because the contract in this case is one for the sale of goods, all its provisions are controlled by the rules governing remedies for breach of contract set forth in article 2 of the Uniform Commercial Code (L.1962, ch. 533, eff. Sept. 27, 1964). Generally, attorney's fees are not recoverable as damages inan action for breach of contract under the Uniform Commercial Code or otherwise, unless expressly agreed to by the parties (see Uniform Commercial Code-Sales: Part 7, Remedies, §§ 2- 702----2----725; 13 N.Y.Jur., Damages, § 144). The parties here have expressly agreed that the seller may recover reasonable attorney's fees from the buyer upon the latter's breach. Such variations on the code's damages scheme are permitted by subdivision (1) of section 2--719 which provides, in pertinent part, that:

'Subject to the provisions (of subsections (2) and (3) and) of the preceding section on liquidation limitation of damages,

'(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article'.

It has been recognized that this provision confers upon the parties a 'broad latitude within which to fashion their own remedies for breach of contract' (Wilson Trading Corp. v. David Ferguson, Ltd., 23 N.Y.2d 398, 403, 297 N.Y.S.2d 108, 111, 244 N.E.2d 685, 687). Despite the degree of latitude permitted under subdivision (1) of section 2--719 of the code, article 2 contains express limitations on the ability of the parties to alter its damages rules. Two primary restrictions may be found in sections 2--302 (pertaining to unconscionability) and 2--718 (governing liquidated damages clauses) of the Uniform Commercial Code. ³

Subdivision (1) of section 2--718 of the Uniform Commercial Code provides:

'(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.'

The test adopted by the Uniform Commercial Code is similar to that proposed by authorities prior to the code's enactment (see Restatement, Contracts, § 339; 51 N.Y.Jur. Sales, § 190; 3 Williston, Contracts (rev. ed.), § 779).

The first sentence of subdivision (1) of section 2--718 focuses on the situation of the parties both at the time of contracti and at the time of breach. Thus, a liquidated damages provision will be valid if reasonable with respect to Either (1) the harm which the parties anticipate will result from the breach at the time of contracting or (2) the actual damages suffered by the nondefaulting party at the time of breach (see 1 Hawkland, A Transactional Guide to the Uniform Commercial Code, § 1.280101, pp. 170--172). ⁴ Interestingly, subdivision (1) of section 2--718 does, in some measure, signal a departure from prior law which considered only the anticipated harm at the time of contracting since that section expressly contemplates that a court may examine the 'actual harm' sustained in adjudicating the validity of a liquidated damages provision (see Duesenberg & King, 3A Bender's UCC Service, Sales and Bulk Transfers, § 14.08, pp. 14--62 and 14--64). Thus, decisions which have restricted their analysis of the validity of liquidated damages clauses solely to the anticipated harm at the time of contracting have, to this extent, been abrogated by the Uniform Commercial Code in cases involving transactions in goods. (See, e.g., City of Rye v. Public Serv. Mut. Ins. Co., 34 N.Y.2d 470, 473, 358 N.Y.S.2d 391, 393, 315 N.E.2d 458, 459; Ward v. Hudson Riv. Bldg. Co., 125 N.Y. 230, 235, 26 N.E. 256, 257; 3 Williston, Contracts (rev. ed.), § 783.)

Having satisfied the test set forth in the first part of subdivision (1) of section 2--718, a liquidated damages provision may nonetheless be invalidated under the last sentence of the section if it is so unreasonably large that it serves as a penalty rather than a good faith attempt to pre-estimate damages (see 5 Corbin, Contracts, § 1063; 3 Williston, Contracts (rev. ed.), § 783, pp. 2204--2207; Nu Dimensions Figure Salons v. Becerra,73 Misc.2d 140, 340 N.Y.S.2d 268). Plaintiff may not manipulate the actual amount of damages by entering into any exorbitant fee arrangement with its attorney and, thus, it may be necessary to look beyond the actual fee arrangement between plaintiff and counsel to determine whether that arrangement was reasonable and proportionate to the normal fee chargeable by attorneys in the context of this case (cf. 3 Williston, Contracts (rev. ed.), § 786, pp. 2215--2216; Mechanics'-American Nat. Bank v. Coleman, 8 Cir., 204 F. 24, 29--30).

Our courts have, in the past, refused to enforce a liquidated damages provision which fixed damages grossly disproportiona to the harm actually sustained, or likely to be sustained, by the nonbreaching party (14 N.Y.Jur., Damages, § 162; see e.g., Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 192 N.E. 297; Seidlitz v. Auerbach, 230 N.Y. 167, 129 N.E. 461; Weinstein & Sons v. City of New York, 264 App.Div. 398, 399, 35 N.Y.S.2d 530, 531, affd. 289 N.Y. 741, 46 N.E.2d 351; Parker v. Dairy-men's League Co-operative Assn., 222 App.Div. 341, 346, 226 N.Y.S. 226, 232). In Wirth & Hamid Fair Booking (supra, 265 N.Y. p. 223, 192 N.E. p. 301), this court noted that '(l)iquidated damages constitute the compensation which the parties have agreed must be paid in satisfaction of the loss or injury which will following 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, though the parties have chosen to call it 'liquidated damages,' and is unenforceable.'

Certain lower courts have had occasion to deal specifically with contractual clauses providing for the recovery of attorney's fees ina liquidated amount. Stipulations for the recovery of attorney's fees are commonly found in promissory notes, instruments which are not governed by article 2 of the Uniform Commercial Code. Courts dealing with such provisions have generally examined the reasonableness of the fee in deciding whether they should be enforced (see, e.g., General Lbr. Corp. v. Landa, 13 A.D.2d 804, 216 N.Y.S.2d 33 (20% Fee valid); Franklin Nat. Bank v. Wall St....