446 Mass. 422 | Mass. | 2006
This lawsuit, here on cross appeals, arises out of a default on a lease agreement entered into between the plaintiff, TAL Financial Corporation (TAL), and Onward Technologies, Inc. (Onward), the predecessor in interest of the defendant, CSC Consulting, Inc. (CSC). Following a bench trial, a judge in the Superior Court (1) awarded TAL $9,471 in contract damages;
We summarize the judge’s findings, supplemented by us from undisputed testimony and documentary exhibits at trial. TAL is a boutique finance company, located in Framingham, that specializes in extending credit to small companies through equipment leasing. TAL’s president and sole shareholder is Howard D. Siegel. CSC is a company with headquarters in Waltham that provides information technology consulting services for businesses.
On July 28, 1997, TAL and Onward entered into an agreement for the lease of computer hardware, telephone equipment, software, and office furniture needed by Onward to start its business. The agreement consisted of a master lease and the first of what would be a series of three schedules incorporating the terms of the master lease. The first schedule (schedule one) identified computer hardware, telephone equipment, and software licensed to Onward, and provided for monthly payments from Onward to TAL of $1,692.55, including taxes, for
The master lease provided that each schedule would begin as of the first day of the month following Onward’s acceptance of the leased equipment and end as of the last day of the calendar month in which the schedule was executed. Thus, schedule one began on August 1, 1997, and was to end July 31, 2000; schedule two began on October 1, 1997, and was to end September 30, 2000; and schedule three began on February 1, 1998, and was to end on January 31, 2001. The schedules provided for TAL to receive a total of $179,862.12 over thirty-six months. At the time each schedule was executed, Onward paid TAL in advance the first, thirty-fifth, and thirty-sixth payments due.
TAL paid a total of $140,433.62 for all of the items listed in the schedules, including $76,590.15 for computer hardware and telephone equipment, $33,305.40 for used furniture, and $30,538.07 for software.
The following provisions of the master lease are relevant for our purposes. Section 6 of the master lease provides: “Unless ninety (90) days prior written notice of termination is given by either party to the other, the Lease Term shall be automatically extended for successive annual periods and payments for
On or about March 31, 1998, CSC acquired the stock of Onward, which merged into CSC on or about April 5, 1999, thereby assuming the legal and financial obligations of Onward under the master lease and schedules. After the merger and acquisition, CSC continued to make monthly payments set forth in the schedules. On or about August, 1999, Onward’s employees moved from Natick to CSC’s Waltham offices. Either before or during the move, CSC discarded most of the equipment and furniture covered by the master lease. CSC also misplaced the lease documents.
At various times during 2000, CSC representatives requested Siegel to provide a copy of the master lease, an inventory of what the lease covered, and the amount that would settle the
On March 19, 2001, an office manager for CSC sent Siegel a letter stating in part: “It is our intent to pay the balance of this account in full. Please send me the necessary information and history on this account so this matter can be resolved.” During March or April, CSC’s assistant comptroller informed Siegel in a telephone conversation that CSC wished to make a final payment to satisfy its remaining obligations under the lease. In response, Siegel provided CSC with a “payoff” schedule that indicated an amount of $66,056.80 still owed by CSC under the lease.
In August, 2001, TAL at last provided a copy of the master lease and schedules to CSC. In a letter dated September 12, 2001, TAL’s vice-president of finance, Amy Wersted, advised CSC that it was in default and the “amount of the receivable remaining over the balance of the lease term of all equipment leases is now immediately due and payable, including late charges.” Wersted stated in the letter that TAL expected “payment of $73,323.06[
The case proceeded to trial on TAL’s claim that CSC’s failure to terminate, in writing, the leases under schedule one and two, within ninety days of July 31, 2001, and September 30, 2001, respectively, operated automatically to renew those schedules for twelve additional months, and that CSC’s failure to return any of the leased items constituted a default entitling TAL to liquidated damages in the amount of eighteen per cent of its acquisition costs. In sum, TAL claimed damages in the amount of $112,156 (the remaining rental payments it claimed were due on a sixty-month lease, plus late charges, plus liquidated damages). CSC asserted at trial that the requisite notice to terminate was given in March, 2001, and that Siegel’s persistent refusal to provide a copy of the master lease and schedules, and repeated submission of erroneous amounts due under the lease, constituted a breach of the covenant of good faith and fair dealing operating as a complete defense to TAL’s suit for money owed. Also contested at trial was whether the liquidated damages provision in the master lease calling for eighteen per cent of TAL’s acquisition costs was enforceable as a reasonable estimate of actual damages under principles set forth in Kelly v. Marx, 428 Mass. 877, 880 (1999), or void as an unconscionable penalty.
The judge concluded that, “[wjhile the issue is a close one,” CSC had not demonstrated with credible evidence that Siegel’s lack of cooperation constituted a breach of good faith and fair dealing.
1. TAL’s assertion that the damage award was incorrectly calculated appears based, in part, on a fundamental confusion over the judge’s findings on several points disputed by the parties at trial. We accept the judge’s findings, which are supported by credible evidence in the record, and now clarify them. The judge determined that TAL had actual notice by the spring of 2001 of CSC’s intention to terminate the lease. Because the lease expressly required that notice of termination be in writing, however, it was not until CSC made its intention clear, in its letter dated October 12, that its notice of default became effective. In different circumstances, presumably, CSC’s failure to cancel the lease in writing prior to ninety days before their respective termination dates, would automatically have extended schedules one and two to run for another twelve months. The judge found, however, that TAL’s September 12 letter advising CSC that it was in default, and demanding the return of all leased equipment, waived its right to claim that the schedules extended beyond forty-eight months. We agree. TAL clearly signaled its intention to treat the schedules under the lease as terminated and seek damages against CSC and, as matter of law, cannot now seek to have them enforced for additional twelve-month terms. See Buster v. George W. Moore, Inc., 438 Mass. 635, 655-656 (2003); Coggins v. New England Patriots Football Club, Inc., 397 Mass. 525, 539 (1986); Dalton v. American Ammonia Co., 236 Mass. 105, 107 (1920).
CSC has submitted a document summarizing all payments
2. The judge determined that the liquidated damages provision calling for the present value of all future rent, plus eighteen per cent of the acquisition costs of all the items listed in the schedules, was an unreasonable estimate of any actual damage that could have been anticipated at the time the schedules were executed and, therefore, unenforceable. The judge’s reasoning incorporated her findings that (a) the majority of items to be leased were not yet identified at the time the parties agreed to the provision in the master lease
Neither this court, nor the Appeals Court, has had occasion to address this question. The United States Court of Appeals for the First Circuit recognized this gap in Honey Dew Assocs., Inc. v. M & K Food Corp., 241 F.3d 23, 27 (1st Cir. 2001), and concluded that if this court were to decide the issue, “it would assign the burden of proving the unenforceability of a liquidated damages clause to the party raising that defense.” Id. We concur in this conclusion and add a few observations.
Under freedom of contract principles, generally, parties are held to the express terms of their contract, and the burden of proof is on the party seeking to invalidate an express term. The burden of proof regarding the enforceability of a liquidated damages clause, therefore, should rest squarely on the party seeking to set it aside. See Town Planning & Eng’g Assocs., Inc. v. Amesbury Specialty Co., 369 Mass. 737, 744 (1976); Hastings Assocs., Inc. v. Local 369 Bldg. Fund, Inc., 42 Mass. App. Ct. 162, 173 (1997). Any reasonable doubt as to whether a provision constitutes a penalty or a legitimate liquidated damages clause should be resolved in favor of the aggrieved party. We thus join the majority of courts in other States that have considered the question. See, e.g., Chisholm v. Reitler, 143 Colo. 288 (1960); Clampitt v. A.M.R. Corp., 109 Idaho 145, 149 (1985); Pav-Saver Corp. v. Vasso Corp., 143 Ill. App. 3d 1013, 1019 (1986); Rodriguez v. Learjet Inc., 24 Kan. App. 2d 461, 464-465 (1997); Shallow Brook Assocs. v. Dube, 135 N.H. 40, 50 (1991); Metlife Capital Fin. Corp. v. Washington Ave. Assocs. L.P., 159 N.J. 484, 496 (1999); P.J. Carlin Constr. Co. v. City of N.Y., 59 A.D.2d 847, 848 (N.Y. 1977); Illingworth v.
What we have said thus far applies to liquidated damages clauses in real estate contracts, and other commercial contracts falling outside the scope of the Uniform Commercial Code (UCC), incorporated into the General Laws as chapter 106. TAL asserts on appeal that the master lease is governed by art. 2A of the UCC, G. L. c. 106, § 2A-504 (1), which provides for the enforcement of agreements for liquidated damages “but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission.” Section 2A-504 (1), however, was at no time brought to the attention of the judge and neither party asserted at trial that their dispute over liquidated damages should be resolved under the UCC. Because the case was argued strictly under principles set forth in Kelly v. Marx, 428 Mass. 877 (1999), that decision is now the law of the case.
It has long been the rule in Massachusetts that a contract provision that clearly and reasonably establishes liquidated damages should be enforced, so long as it is not so disproportionate to anticipated damages as to constitute a penalty. See Kaplan v. Gray, 215 Mass. 269, 270-273 (1913). There is no bright line separating an agreement to pay a reasonable measure of damages from an unenforceable penalty clause. In Kelly v. Marx, supra, we provided guidance as to how a judge should analyze the enforceability of a liquidated damages clause in a purchase and sale agreement. We squarely rejected the “second look” approach, where actual damages resulting from the breach are measured to determine whether enforcement of the agreement for liquidated damages would serve unfairly to punish one party rather than compensate the other “who suffered no loss from the [first party’s] breach.” Id. at 879. Generally, a liquidated damages provision will be enforced when, at the time the agreement was made, potential damages were difficult to
Section 20 of the master lease contained numerous covenants that TAL could choose to enforce, or not, at its will, irrespective of the circumstances of CSC’s default. One such covenant, self-labeled as “liquidated damages for loss of a bargain and not as a penalty,” is at issue here. We conclude that CSC carried its burden of establishing that this provision called for damages that were “grossly disproportionate” to a reasonable estimate of anticipated damages at the time the schedules were executed. A reasonable estimate of such damages, occurring after a lease term of thirty-six months (a term guaranteed under the lease), would have been a negligible amount. Failing to provide any recognition for the type, or timing, of the default, while by no means determinative, tends to indicate that the provision’s intended purpose was not to estimate the different types of damages that might arise from a future default, but to penalize for any failure, however immaterial.
3. Whether TAL is entitled to an award of attorney’s fees and costs is governed by the terms of the master lease, which provides for the recovery of “all costs and expenses, including, without hmitation, reasonable attorneys’ fees” incurred by TAL in exercising its rights under the lease. See Northern Assocs., Inc. v. Kiley, 57 Mass. App. Ct. 874, 879 (2003). The lease clearly distinguishes between attorney’s fees and costs. The plain meaning of the language (“all costs”) calls for payment of disbursements made by TAL in connection with this litigation. The lease does not, however, require indemnification for all attorney’s fees, but only payment of those that are “reasonable.” TAL asserts that the amounts requested, and awarded, was reasonable “[gjiven the length of the trial and the nature and extent of the pretrial proceedings, and the fact that requested fees were clearly and fully documented.” We do not agree.
TAL sought in excess of $86,000 in damages at trial. It received only $9,471, a little less than the amount offered by CSC in settlement on October 12, 2001. Significantly, the invoices submitted in connection with the request for attorney’s fees and
We recognize that an award of attorney’s fees is a highly discretionary matter usually left to the judge. See Cargill, Inc. v. Beaver Coal & Oil Co., 424 Mass. 356, 363 (1997); Stowe v. Bologna, 417 Mass. 199, 204 (1994). In these circumstances, however, we conclude that any award of attorney’s fees would not, as matter of law, be reasonable. This case could have, and should have, been resolved long before TAL retained counsel. See Lattuca v. Robsham, 442 Mass. 205, 211 (2004). For the same reason, we decline to award TAL appellate attorney’s fees as requested in its brief.
4. The judgment is modified by striking that part awarding TAL attorney’s fees in the sum of $17,499.18, and as so modified is affirmed.
So ordered.
CSC Consulting, Inc. (CSC), is a subsidiary of Computer Sciences Corporation, which is not a party to this lawsuit.
TAL never selected or took possession of any equipment or furniture identified in the schedules, which were received by Onward at its Natick facility. In some instances, Onward paid for the items and was reimbursed by TAL, but, more frequently, the invoices for the items delivered to Onward were submitted to, and paid directly by, TAL.
Section 15 of the master lease states that, “[i]f any item of Equipment is lost, stolen, destroyed, or irreparably damaged,” Onward would be liable for the amount of rent due at the time of loss, plus the full replacement cost of the items at the time of loss. Although CSC conceded that the leased equipment has either been lost or destroyed, it is liquidated damages provided for in section 20 (6), plus its reasonable attorney’s fees and costs, that TAL seeks to recover.
Siegel acknowledged at trial that this amount was inflated. At the time the figure was submitted, CSC (or Onward) had paid TAL a total of $221,876.08, which covered monthly payment through the end of April, 2001. The judge found that, even assuming the lease’s extension for a fourth year, future payments due through the end of forty-eight months were only $24,460.03. Moreover, reliance on the liquidated damages provision holding CSC responsible for 18 per cent of the acquisition cost, would only have increased the amount due to $49,738.08, or $16,318.72 less than Siegel claimed was due.
Siegel conceded the inaccuracy of this figure as well.
As we shall point out later, Kelly v. Marx, 428 Mass. 877 (1999), concerned a liquidated damages provision in a real estate agreement and, as such, is inapposite to this case. The parties’ reliance on the Kelly case, however, made the principles therein stated the law of the case.
We need not revisit this conclusion or the judge’s rejection of CSC’s related claims of estoppel or “unclean hands.” CSC does not pursue these arguments on appeal but appears satisfied with the amount of damages awarded by the judge.
TAL’s insistence that any waiver, as of September 12, 2001, could not “undo” lease extensions that occurred prior to that date, pursuant to section 6 of the master lease, is negated by the judge’s clear finding that TAL had waived
According to the summary, CSC had paid TAL a total of $237,220.80. This amount was broken down into filing fees ($1,325); late charges ($2,083.03); property taxes ($957.65); and payments under schedule one ($81,242.40), schedule two ($121,442.30), and schedule three ($30,170.42).
TAL’s argument that this finding is not supported by the evidentiary record is directly contrary to its position taken at trial that one difficulty in estimating future damages stemmed from uncertainty as to what equipment would be covered by the lease. We therefore disregard it. See Canavan’s Case, 432 Mass. 304, 308 (2000).
While we do not decide the question, we are aware of no reason why the allocation of the burden of proof, as settled above, would not be the same under the UCC.
It could have been argued at trial that CSC’s failure to return the leased items, as required under the master lease, did not trigger the liquidated damages provision at all, in light of Seigel’s express assurances to Ryan that the items need not be returned. See Dynamic Mach. Works, Inc. v. Machine & Elec. Consultants, Inc., 444 Mass. 768, 773-774 (2005) (waiver of contract performance may be established by words or conduct); McCarthy v. Tobin, 429 Mass. 84, 88 (1999) (waiver of condition excuses performance). See also Realty Developing Co. v. Wakefield Ready-Mixed Concrete Co., 327 Mass. 535, 537-538 (1951) (conduct does not constitute breach of contract unless wrongful or lacking legal excuse). Nevertheless, CSC appears satisfied with the judgment in TAL’s favor and, on appeal, focuses its argument on the penalty nature of the liquidated damages provision.
CSC submitted evidence, through the testimony of an expert appraiser, that software that is licensed, typically, has no resale value, and that computer hardware, after three years, would have little or no resale value. The expert conceded, on cross-examination, that the software might have “some value” if the particular software at issue were transferable. We reject TAL’s claim that the judge’s findings with respect to the anticipated value of the leased items were not supported by the expert’s testimony.