Holloway Auto. Grp. v. Lucic

• Decision Date: 14 December 2011
• Docket Number: No. 2010–563.,2010–563.
• Citation: 35 A.3d 577,163 N.H. 6
• Court: New Hampshire Supreme Court
• Parties: HOLLOWAY AUTOMOTIVE GROUP d/b/a Holloway Motor Cars of Manchester v. Goran LUCIC and another.

163 N.H. 6

35 A.3d 577

HOLLOWAY AUTOMOTIVE GROUP d/b/a Holloway Motor Cars of Manchester

v.Goran LUCIC and another.

No. 2010–563.

Supreme Court of New Hampshire.

Argued: Sept. 15, 2011.Opinion Issued: Dec. 14, 2011.

Coughlin, Rainboth, Murphy & Lown, P.A., of Portsmouth (Bradley M. Lown on the brief and orally), for the plaintiff.

Sherman Law, PLLC, of Portsmouth (John P. Sherman on the brief and orally), for the defendants.

DALIANIS, C.J.

The defendants, Sedo, Inc. (the corporation) and its founder, president and sole shareholder, Goran Lucic, appeal an order of the Manchester District Court ( DeVries, J.) ruling that both the corporation and Lucic are liable to the plaintiff, Holloway Automotive Group d/b/a Holloway Motor Cars of Manchester (Holloway), for breach of contract. We affirm the trial court's enforcement of a liquidated damages provision in the parties' contract, but conclude that the district court lacked equitable jurisdiction to pierce the corporate veil. Therefore, we vacate the award against Lucic as well as the award of attorney's fees, and remand.

I. Background

The trial court could have found the following facts. Holloway is an authorized dealer of Mercedes–Benz North America (Mercedes–Benz). Mercedes–Benz prohibits Holloway “from exporting new Mercedes–Benz vehicles outside the exclusive sales territory of North America” and “assess[es] charges against [Holloway] for each new Mercedes–Benz vehicle it sells or leases which is exported from North America within one (1) year.” Thus, export of a vehicle that Holloway sells, even when Holloway neither knows of nor consents to the export, subjects Holloway to certain penalties and fees. Holloway requires customers to enter into a no-export agreement to minimize Holloway's export-penalty exposure.

In May 2008, Lucic, on behalf of the corporation, paid $99,000 for two Holloway vehicles and signed two identical agreements promising “not [to] export the [v]ehicles[s] outside North America ... for a period of one (1) year.” Each agreement also provided that if the vehicle was exported within a year, “regardless of whether the [corporation] or any other party actually cause[d] the export of the [v]ehicle,” the corporation would pay Holloway $7,500 as liquidated damages. In the event of a breach, each agreement made the corporation liable for the reasonable attorney's fees Holloway incurred to enforce it. Lucic assured Holloway that he had no interest in exporting because he planned to lend the vehicles to contractors working for him on a Massachusetts consulting project. Satisfied with these assurances, Holloway delivered the vehicles.

Less than two weeks later, both vehicles were exported. As a result, Holloway sued the corporation and Lucic, individually as its alter ego, seeking $7,500 liquidated damages plus attorney's fees for each vehicle. The defendants argued that the liquidated damages clause was unenforceable because the only penalty Mercedes–Benz actually assessed against Holloway was a $300 per vehicle administrative fee. This fee, the defendants contended, was grossly disproportionate to the $7,500 per-vehicle liquidated sum, making the damages provision an unenforceable penalty.

Holloway presented evidence that its contractual relationship with Mercedes–Benz required it to pay a commission if a foreign dealer discovered the exported vehicles in its sales territory. Although, at the time of trial, no foreign dealer had sought to collect any commission, the dealers had the right to do so at any time. The defendants did not introduce evidence concerning the amount of Holloway's potential liability under the commission provision or the likelihood that Holloway would have to pay a foreign dealer.

The district court found that the corporation had breached the no-export agreements and enforced the liquidated damages provisions; it also pierced the corporate veil to hold Lucic personally liable for the breaches. The defendants contend that the district court erred in finding that: (1) the liquidated damages provisions of the agreements are enforceable; (2) it had jurisdiction to pierce the corporate veil; and (3) an award of attorney's fees to Holloway was proper.

II. Liquidated Damages

Each liquidated damages clause at issue states:

THE PARTIES AGREE THAT IT WOULD BE IMPRACTICAL OR DIFFICULT TO FIX THE ACTUAL DAMAGES TO [HOLLOWAY] IF THE VEHICLE IS EXPORTED OUT OF NORTH AMERICA. THEREFORE, IF THE VEHICLE IS EXPORTED OUTSIDE NORTH AMERICA WITHIN ONE[ ]YEAR OF THE DATE OF THIS AGREEMENT, THE UNDERSIGNED SHALL BE OBLIGATED TO PAY [HOLLOWAY] THE SUM OF SEVEN THOUSAND FIVE HUNDRED DOLLARS ($7,500.00) AS LIQUIDATED DAMAGES

....

(Emphasis omitted.) The defendants argue that this provision is an unenforceable penalty because Holloway suffered only de minimis damages as a result of the breach.

“The central objective behind the system of contract remedies is compensatory, not punitive.” Restatement (Second) of Contracts § 356 comment a at 157 (1981). As a result, liquidated damages so disproportionate to the actual damage a breach will likely cause that they “coerce performance of the underlying agreement by penalizing non-performance and making a breach prohibitively and unreasonably costly” are void. 24 R. Lord, Williston on Contracts § 65:1, at 223 (4th ed. 2002). On the other hand, because “the possibility of a damage award ... by its nature ... induce[s] performance,” the mere fact that a liquidated damages provision encourages a party to perform, rather than to breach, does not make it a penalty. Id. at 231.

Three criteria distinguish a valid liquidated damages clause from an unenforceable penalty. In a valid clause: (1) the damages anticipated as a result of the breach are uncertain in amount or difficult to prove; (2) the parties intended to liquidate damages in advance; and (3) the amount agreed upon is reasonable and not greatly disproportionate to the presumable loss or injury. Orr v. Goodwin, 157 N.H. 511, 514, 953 A.2d 1190 (2008). Here, the parties agree that the liquidated damages provision meets the first two criteria; thus, we limit our analysis to the third criterion-the reasonableness of the agreed amount.

We employ a two-part test to determine whether a liquidated sum is reasonable. First, we assess whether the amount “was a reasonable estimate of difficult-to-ascertain damages at the time the parties agreed to it.” Shallow Brook Assoc's v. Dube, 135 N.H. 40, 48, 599 A.2d 132 (1991) (quotation omitted). Next, we ask whether actual damages are “easily ascertainable” after a breach. See id. at 49, 599 A.2d 132 (quotation omitted). “[I]f the actual damages turn out to be easily ascertainable, we must then consider whether the stipulated sum is unreasonable and grossly disproportionate to the actual damages from a breach.” Orr, 157 N.H. at 515, 953 A.2d 1190. If the stipulated sum is grossly disproportionate to easily ascertainable, actual damages, the provision is an unenforceable penalty, and the aggrieved party will be awarded no more than the actual damages. Id.

The defendants, as the parties alleging that the liquidated amount is unreasonable, bear the burden of proof. Id. On appeal, we determine whether a reasonable person could have arrived at the same determination as the trial court, based upon the evidence, and we will not upset the trial court's finding as long as it is substantiated by the record and is not erroneous as a matter of law. Id.

Because there is no argument to the contrary, we conclude that the liquidated sum here was a reasonable estimate at the time the parties executed the agreements and proceed to the next step, which is a “retrospective appraisal” to determine whether the parties' initial expectations conform to reality after the breach. Id. at 515–16, 953 A.2d 1190. Holloway's only out-of-pocket damages to date are a $300 per vehicle administrative fee that Mercedes–Benz assessed. Holloway argues, however, that it faces “ongoing[,] potential damages” as a result of the defendants' breach and that these potential damages make its actual damages difficult to ascertain.

We agree that the possibility of speculative, future damages rendered Holloway's actual damages difficult to ascertain. Parties employ liquidated damages clauses “to avoid later controversy over the amount of actual damages resulting from a breach” when “damages are speculative or difficult to ascertain.” Ladco Properties XVII v. Jefferson–Pilot Life Ins., 531 F.3d 718, 720 (8th Cir.2008). Our retrospective appraisal simply acknowledges that, although pre-breach damages may have been speculative, occasionally the damages after a breach are certain. See Orr, 157 N.H. at 515, 953 A.2d 1190. In such a case, enforcing a clause that, in reality, is clearly and grossly disproportionate to the actual loss effectively penalizes the party in breach.

As a result, only “easily ascertainable” damages, meaning damages that are no longer speculative at the time of trial, trigger the retrospective appraisal. If, at the time of trial, damages remain speculative or difficult to ascertain, “the estimate of the court or jury may not accord with the principle of compensation any more than does the advance estimate of the parties.” Restatement (Second) of Contracts, supra § 356 comment b at 158. When faced with the very uncertainty the parties initially sought to avoid, a court should fix damages at the figure to which the parties initially agreed and enforce the liquidated amount.

The...