Norwalk Door Closer Co. v. Eagle Lock & Screw Co.

• Decision Date: 25 May 1966
• Citation: 220 A.2d 263,153 Conn. 681
• Court: Connecticut Supreme Court
• Parties: NORWALK DOOR CLOSER CO., Inc. v. The EAGLE LOCK AND SCREW COMPANY.

Page 263

220 A.2d 263

153 Conn. 681

NORWALK DOOR CLOSER CO., Inc. v. The EAGLE LOCK AND SCREW COMPANY.

Supreme Court of Connecticut.

May 25, 1966.

Donald Lee Rome, Hartford, with whom, on the brief, was George E. Lodgen, Boston, Mass., for appellant-appellee (plaintiff).

Bruce W. Manternach, Hartford, with whom, on the brief, were Colin C. Tait, Hartford, and Bernard Hoban, Chicago, Ill., for appellee-appellant (defendant).

Before KING, C.J., and MURPHY, ALCORN, SHANNON and HOUSE, JJ.

ALCORN, Associate Justice.

In this action, the plaintiff, hereinafter called Norwalk, is seeking to recover $100,000 as liquidated damages for the breach of a written contract by the defendant, hereinafter called Eagle, and an additional sum for Eagle's failure to deliver goods which had been ordered under the contract. Claims for consequential damages and for loss of profits and good will are no longer in issue. Eagle counterclaimed to recover $63,574.33 for goods delivered to Norwalk. Norwalk does not dispute this indebtedness. The trial court denied recovery of the $100,000 on the ground that it was a penalty, but it awarded damages to Norwalk of $1687.19 for Eagle's failure to deliver goods ordered under the contract. The court found Eagle entitled to recover $63,574.34 on its counterclaim. This admitted indebtedness is, however, incorrectly stated in the judgment to be $61,887.15. Norwalk has appealed from the judgment, and Eagle has filed a cross appeal.

The basic facts may be summarized as follows: Norwalk owned the right to manufacture door closers together with the tools, dies, patterns and other equipment necessary for their manufacture. On June 22, 1956, after extended negotiations, Norwalk entered into a written contract with Eagle wherein Eagle undertook to manufacture door closers exclusively for Norwalk for seven years, using the tools, dies, patterns and other equipment owned and provided by Norwalk. Norwalk retained the right to extend the contract for an additional five years. Eagle assumed the cost of engineering services and equipment necessary for quantity production up to specified amounts. Beyond those amounts Norwalk assumed the expense, which was to be determined and paid on a basis specified in the contract. When the contract was made, Eagle's chief engineer had estimated that the cost of preparing for quantity production would be approximately $78,750. Eagle actually spent $142,812.67, which was a reasonable expenditure for that purpose.

When the contract was made, Sereno L. Mastorgi was Eagle's president and general manager. In paragraph 13 of the contract, Norwalk reserved the option to terminate the agreement on thirty days notice to Eagle in the event that Mastorgi should, for any reason, cease to be Eagle's general manager. In that event, Norwalk agreed to pay Eagle specified amounts in full liquidation of all damages.

Paragraph 14 of the contract presents the principal issue between the parties. That paragraph reads as follows: 'In the event that Eagle shall for any reason desire to terminate this agreement, it shall give not less than ninety (90) days' notice of such intention to terminate unless such notice shall set forth a longer period. Eagle shall in any event complete all orders received by Eagle up to that date which shall be half-way between the date of the sending of said notice and the intended termination date. If Eagle shall liquidate its business, or shall cease to occupy its present plant in Terryville, or if Eagle shall sell its shares of stock to any person, firm, or corporation other than the present holder or holders thereof, or if Eagle shall for any reason, except strike, fire, flood, act of God, or circumstances beyond Eagle's control, cease or be unwilling or unable to manufacture and ship closers as in this agreement provided, then, in any such event, this agreement shall be deemed at the option of Norwalk, breached and terminated by Eagle. If Norwalk shall so elect to treat this agreement as breached and terminated, it shall give ten (10) days' notice in writing to Eagle and, upon the expiration of said ten (10) days, Eagle shall forthwith deliver to Norwalk all of the items and under the terms set forth in paragraph 12 hereof. Eagle shall also pay to Norwalk the sum of $100,000.00, and upon such delivery of items as aforesaid and payment as aforesaid, this agreement and all obligations of the parties hereunder shall cease and determine, except as to obligations or liabilities incurred by either prior to the effective date of termination.'

The parties operated under the contract until September 29, 1960, when Eagle notified Norwalk that the agreement would terminate on December 31, 1960, and that it would complete all orders received from Norwalk prior to November 15, 1960. In October, 1960, Eagle sold all its assets to another corporation. On December 16, 1960, Norwalk notified Eagle of its election to treat the notice of termination as a breach of the contract and demanded the return of all tools and equipment and the payment of $100,000 in accordance with paragraph 14 of the contract. ¹ Between October 31 and November 10, 1960, Norwalk sent orders for a total of 11,000 door closers, part of which were filled by Eagle and for which it billed Norwalk $63,574.37. Norwalk has not paid this bill. Eagle returned to Norwalk all items due it on termination of the contract.

The trial court concluded that paragraph 14 of the contract, calling for payment of $100,000, was not a provision for liquidated damages but was a penalty and consequently was unenforceable. This conclusion is attacked by Norwalk in its appeal. Incidental to this claim is the issue as to pleading and burden of proof.

The complaint did not allege the contract in full or incorporate it by reference. It alleged that paragraph 14 of the contract provided 'that in the event Defendant desired to terminate the agreement for any reason, or if Defendant liquidated its business or ceased to occupy its then plant in Terryville, Connecticut, or if Defendant for any reason ceased or was unwilling or unable to manufacture and ship door closers as provided in said agreement, then, in any such event, at the option of Plaintiff, the said agreement could be deemed by Plaintiff as breached and terminated by Defendant, and Defendant would thereupon be required to pay to Plaintiff the sum of $100,000.00.' Eagle in its answer admits the existence of a contract 'but refers to said contract for a correct statement of the terms thereof.' Eagle did not file a special defense. Norwalk claims that Eagle, because it did not plead penalty as a special defense, failed to raise that issue properly at the trial, and that that failure precluded the court from resting a decision on that ground.

It is settled law that a contract provisions which imposes a penalty for a breach of the contract is contrary to public policy and is invalid, but a contractual provision which fixes liquidated damages for a breach of the contract is enforceable if it satisfies certain conditions. Berger v. Shanahan, 142 Conn. 726, 731, 118 A.2d 311, and cases cited. The conditions which will justify an agreement for liquidated damages are: '(1) The damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract.' Id., 732, 118 A.2d 315.

Under our rules, illegality not apparent on the face of the pleadings, must be specially pleaded. Practice Book § 120. From the allegation in the complaint, it did not appear that a recovery by Norwalk of $100,000 would necessarily be illegal. Consequently, any facts claimed to establish illegality should have been pleaded as a special defense. Personal Finance Co. of New York v. Lyons, 128 Conn. 254, 260, 21 A.2d 652; Davis v. Hemming, 101 Conn. 713, 728, 127 A. 514, 39 A.L.R. 133; see Pothier v. Reid Air Spring Co., 103 Conn. 380, 387, 130 A. 383. That procedure was properly followed in the two most recent cases in which the question of a penalty has been before us. Berger v. Shanahan,...