In Energy Plus Consulting LLC v. Illinois Fuel Company LLC and Appalachian Fuels LLC, a court held that a contract provision requiring the payment of $720,000 was a penalty clause and, thus, unenforceable.
In April 2001, Washington County (the “County”) entered into a contract with the plaintiff, Energy Plus Consulting LLC (“Energy Plus”), which granted Energy Plus the exclusive right to contract with third parties to develop a coal reserve given to it by Exxon Corp. for an 18-month period.
In August 2001, Energy Plus entered into an agreement with defendants, Illinois Fuel Company LLC and Appalachian Fuels LLC (“Defendants”), which provided that Energy Plus would introduce Defendants to the County as potential candidates interested in exploring the reserve. In return, upon execution of an option contract with the County granting Defendants an exclusive right to explore the reserve, Defendants agreed to pay Energy Plus $100,000.
The agreement also contained a provision requiring Defendants to pay $720,000 to Energy Plus on the occurrence of the first of either: (1) the expiration of 90 days from the date of the execution of the option unless Defendants had released the option; or (2) the execution of a mining lease. The agreement also provided that if the Defendants executed a mining lease with the County, the Defendants would also pay Energy Plus $720,000 on the date of the execution of such lease for the next four years.
After the execution of the agreement between Energy Plus and Defendants, Defendants entered into an option contract with the County which granted Defendants the exclusive right to explore and lease the coal reserve. After the execution of the option contract with the County, Defendants paid $100,000 to Energy Plus pursuant to the terms of the parties’ agreement. Then on November 15, 2001, four days after the 90-day deadline in the agreement passed, Energy Plus and Defendants amended the agreement to extend the deadline until December 31, 2001, after Defendants agreed to pay an additional $50,000 for the extension.
On January 4, 2002, Defendants advised the County that they would not exercise the option and informed Energy Plus of their decision. In response, Energy Plus requested that Defendants pay $720,000 pursuant to the amendment’s provision requiring the payment if Defendants did not release the option before December 31, 2001. When Defendants refused to pay the $720,000, Energy Plus filed suit.
The court held that the clause in the contract requiring the payment of $720,000 was an unenforceable penalty rather than a valid liquidated damages clause. The court noted that a liquidated damages clause is valid and enforceable when the actual damages from the breach are difficult to measure at the time the contract was executed and the specified amount of damages is reasonable in light of the anticipated or actual loss caused by the breach. Since the $720,000 payment did not “bear a nexus to the gravity of the breach,” the court held that the payment was an unenforceable penalty.
If you have questions regarding whether a contract provision requires the payment of an unenforceable penalty, please contact a member of the firm.