Hanrahan v. Audubon Builders, Inc.

• Decision Date: 16 September 1992
• Citation: 418 Pa.Super. 497,614 A.2d 748
• Parties: Frank HANRAHAN and Marie Hanrahan, his wife, Appellees, v. AUDUBON BUILDERS, INC. and James Brink and Audubon Brink, his wife, individually, Appellants.
• Court: Pennsylvania Superior Court

Page 748

614 A.2d 748

418 Pa.Super. 497

Frank HANRAHAN and Marie Hanrahan, his wife, Appellees, v. AUDUBON BUILDERS, INC. and James Brink and Audubon Brink his wife, individually, Appellants.

Superior Court of Pennsylvania.

Argued June 16, 1992.

Filed Sept. 16, 1992.

Elizabeth A. Erickson, Milford, for appellants.

Charles F. Lieberman, Dist. Atty., Milford, for appellees.

Before ROWLEY, President Judge, and HUDOCK and BROSKY, JJ.

HUDOCK, Judge.

Audubon Builders, Inc., and both James and Audubon Brink, as individuals, (Appellants) appeal from an order of the Court of Common Pleas directing them to pay an amount of $150 per day for each day from February 15, 1988 to December 22, 1988 in liquidated damages resulting from delays in completion of a construction project at the home of Frank and Marie Hanrahan (Appellees). We vacate and remand in part and affirm in part.

The facts and procedural history may be summarized as follows: On November 21, 1987, Appellant James Brink, as president of Appellant Audubon Builders, Inc., entered into a contract for the building of an addition to the home of Appellees. The addition was to be constructed so that Appellee Marie Hanrahan's mother could reside there. The contract price was $37,500. The contract was signed with an addendum in Appellant James Brink's handwriting which stated "all work to be completed by 2-15-88 or contractor agrees to $150/day compensation." The initials "J.L.B." followed the addendum. The contract also stipulated that any changes or modifications to the terms of the contract must be in writing and executed by both parties. The construction work began in December of 1987 and continued sporadically through September of 1988. The project was ultimately completed on December 22, 1988.

Appellees filed a complaint on January 17, 1990, alleging that, despite their demands, certain work had not been completed in a proper and workmanlike manner by Appellants. As a result of the alleged failure of Appellants to complete the contract, Appellees averred that they had expended or will expend at least the sum of $5,561.05. Additionally, Appellees alleged that, as "a direct result of [Appellants'] failure to complete the contract, [Appellees] are entitled to compensation in the amount of $150.00 per day since that time[.]" Complaint at Paragraph 10. Appellants filed an answer, counterclaim and new matter on March 13, 1990. In their counterclaim and new matter, Appellants alleged that Appellees continued to owe payment for extra work performed on their house in addition to the final payment due under the contract. The parties went to trial on May 13, 1991. On August 13, 1991, the trial court filed an opinion finding in favor of Appellees and awarding them $150 a day in liquidated damages from February 15, 1988, through December 22, 1988. The trial court also found in favor of Appellees and against Appellants on the latter's counterclaim. Thereafter, judgment was entered in favor of Appellees in the amount of $46,650 (representing 311 days at $150 per day).

Appellants raise the following issues on appeal:

1. When a construction project is delayed for reasons clearly beyond the control of Contractor, must those delays be excluded from the time period for calculating delay damages?

2. When a construction project is completed by the Contractor, does the award of delay damages in excess of the total amount of the contract represent punitive damages or forfeiture?

3. Did the Lower Court improperly pierce the corporate veil when there was no evidence of loss to the corporation by commingling of funds or other improper corporate action?

4. Did the Lower Court improperly dismiss Defendants [sic] Counterclaim since Plaintiffs admitted that the extra work was properly performed by Defendants?

Appellants' Brief at p. 3.

The first two issues raised by Appellants will be addressed together. Appellants argue that the trial court erred in granting an award of damages that exceeded the original contract amount and that the award did not reflect any consideration for the delays beyond Appellants' control. We agree. Although Appellants fail to cite any cases from this jurisdiction in support of their claims, Appellees, pursuant to Rule 3.3(a)(3) of the Pennsylvania Rules Of Professional Conduct, ^{1 1} commendably bring to this Court's attention our recent decision in Holt's Cigar Company v. 222 Liberty Associates, 404 Pa.Super. 578, 591 A.2d 743 (1991). In Holt's Cigar, an owner of a building began renovations. The renovations inconvenienced the business transactions of a commercial tenant. At one point in the renovations, the owner stipulated in a contract with the tenant that if the renovations caused him to close the doors to his business, then the owner would pay liquidated damages in the amount of $500 per day. Subsequently, Holt's Cigar brought suit to recover under this liquidated damages clause, as well as for lost profits. Sitting in equity, the trial court, after making its findings, awarded Holt's Cigar $22,000 under the liquidated damages clause (representing 44 days at the per diem rate of $500 a day), and $53,716 in lost profits.

On appeal, this Court first discussed the purposes of a liquidated damages clause and the distinction between such a clause and a penalty:

Nearly a century ago our supreme court quite aptly articulated the policy against the enforcement of penalties in actions ex contractu:

[W]here the breach of agreement admits of compensation, the recovery may be limited to the loss actually sustained, notwithstanding a stipulation for a penalty. [This rule] is founded upon the principle that one party should not be allowed to profit by the default of the other, and that compensation and not forfeiture is the equitable rule.

Kunkel & Jordan v. Wherry, 189 Pa. 198, 201, 42 A. 112 (1899) (emphasis added). Hence, the rule of validity of a liquidated damages stipulation was held to comport with the general and overarching principle of contract remedies--compensation for damages sustained. See, e.g., Kothe v. R.C. Taylor Trust, 280 U.S. 224, 50 S.Ct. 142, 74 L.Ed. 382 (1930) (agreements to pay a fixed sum without any reasonable relation to probable damages for breach "tends to negative any notion that the parties really meant to provide a measure of compensation"); see also Keck v. Bieber, 148 Pa. 645, 646, 24 A. 170 (1892); see generally Restatement (Second) of Contracts, § 356 comment a. (noting centrality of the principle of compensation). Where a stipulated damages clause is intended as a form of punishment with the purpose, in terrorem, to secure compliance, the principles of compensation are subordinated and the provision must fail as an unenforceable penalty. See In re Plywood Company of Pennsylvania, 425 F.2d 151, 155 (3d Cir.1970) ("A penalty is said to be fixed not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach.").

To assist in making this distinction, our courts have employed certain rules of construction that are commonly thought to provide the best indication of the parties' intent.

The question [of whether stipulation is a penalty or a valid liquidated damages provision] ... is to be determined by the intention of the parties, drawn from the words of the whole contract, examined in the light of its subject-matter and its surroundings; and in this examination we must consider the relation which the sum stipulated bears to the extent of the injury which may be caused by the several breaches provided against, the ease or difficulty of measuring a breach in damages, and such other matters as are legally or necessarily inherent in the transaction.

Commonwealth v. Musser Forests, Inc., 394 Pa. 205, 146 A.2d 714, 717 (1959) (citing March v. Allabough, 103 Pa. 335, 341 (1883)); see also Holmes Electric Protective Co. v. Goldstein, 147 Pa.Super. 506, 24 A.2d 161, 165 (1942). This court also has cited with approval section 339 of the Restatement (First) of Contracts:

(1) An Agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for breach, unless

(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and (b) the harm that is caused by the breach is incapable or very difficult of accurate estimation.

See, e.g., Harris v. Dawson, 239 Pa.Super. 316, 360 A.2d 706 (1976) (citing with approval § 399 [sic] ); Kraft v. Michael 166 Pa.Super. 57, 70 A.2d 424 (1950) (same).

Holt's Cigar Company v. 222 Liberty Associates, at 586-88, 591 A.2d at 747-48.

In Holt's Cigar, this Court noted that there was no evidence that the chancellor below considered whether the per diem stipulation chosen was a pre-estimate of actual damages anticipated for delayed repairs and if the stipulation was chosen due to the difficulties in proving with certainty the precise extent of actual damages caused by the breach. This Court noted the importance of such considerations by the trial court:

We feel that it is incumbent on the trial judge to address these mixed factual and legal questions in the first instance prior to awarding liquidated damages lest we forget that compensation, not punishment, is the guiding rule. See Keck v. Bieber, 148 Pa. 645, 646, 24 A. 170 (1892) ("where [damages are stipulated to in advance] the court will always look into the question whether this is really liquidated damages or only a penalty, the presumption being that it is the latter"); see also Holmes Electric Protective Co. v. Goldstein, 147 Pa.Super. 506, 24 A.2d 161, 165 (1942) (same). While the final determination of whether a stipulated sum is for liquidated damages or a penalty is one of law for the court to decide, see Laughlin v. Baltalden, Inc., 191 Pa.Super. 611, 159 A.2d 26, 29 (1960), it should be remembered that the pleadings and evidence reduced to...