In the recent case, Resources Technology Corporation v. Congress Development Company, a court invalidated a liquidated damages clause in a contract which allowed a party the option to collect liquidated or actual damages.
Plaintiff, Resource Technology Corporation (“Resource”), entered into a contract (the “Contract”) with Defendant, Congress Development Co. (“Congress”), obligating Resource to build and operate a landfill gas collection system and an associated electrical generating facility at a landfill owned by Congress. Pursuant to the Contract, Resource obtained the exclusive rights to develop the project and sell the electricity generated. As compensation, Resource agreed to pay royalties to Congress equal to 11% of Resource’s gross proceeds from electricity sales.
When Resource missed various construction deadlines, the parties amended the Contract. A liquidated damages provision was added because of Congress’s concern that Resource would continue to delay the project.
The liquidated damages provision provided that if Resource failed to timely begin operation of the plant, Congress could assess and collect from Resource liquidated damages in the amount of $2,500 for each day after the deadline the plant failed to begin operations. If the delay exceeded 90 days, Congress could also elect to terminate the Contract. The termination of the Contract, however, would not limit the parties’ remedies at law or in equity.
Prior to the completion of the project, Resource was forced into bankruptcy by its creditors. As part of the bankruptcy, Resource filed a motion to invalidate the liquidated damages clause. Resource prevailed on its motion and Congress appealed the bankruptcy court’s decision to the district court.
After examining the contractual language, the district court held that the Contract allowed Congress the option of either collecting liquidated damages and terminating the Contract, or seeking the recovery of actual damages. For a liquidated damages clause to be valid, the parties must agree in advance on the amount of damages that would arise from a breach. A liquidated damages clause which provides the option of either liquidated damages or actual damages demonstrates that the parties did not agree in advance on the amount of damages arising from a breach. If the parties had in fact agreed in advance, it would be unnecessary to include an option to collect actual damages. Therefore, the district court prevented Congress from “having its cake and eating it too” by upholding the bankruptcy court’s invalidation of the liquidated damages clause.
If you need assistance in drafting or determining the enforceability of a liquidated damages clause in a contract, please contact us.