§ 29.3 Enforceability of Contract Provisions Liquidating Damages

LibraryDamages (OSBar) (2016 Ed.)
§ 29.3 ENFORCEABILITY OF CONTRACT PROVISIONS LIQUIDATING DAMAGES

Prior to the Oregon Supreme Court's decision in Illingworth v. Bushong, 297 Or 675, 688 P2d 379 (1984), disapproved by DiTommaso Realty, Inc. v. Moak Motorcycles, Inc., 309 Or 190, 785 P2d 343 (1990), the primary test in Oregon for determining whether or not a contract provision for agreed-upon damages was enforceable was based in large part on the Restatement (First) of Contracts section 339(1) (1932), which focuses on two criteria: at the time of making the contract, (1) whether the sum provided bears any reasonable relationship to the anticipated damages resulting from the breach, and (2) whether the actual damages are capable of ascertainment. If both answers were affirmative, then the provision was enforceable. See Medak v. Hekimian, 241 Or 38, 44, 404 P2d 203 (1965), disapproved by DiTommaso Realty, Inc., 309 Or 190.

In Illingworth, after a thorough review of the prior case law, the Oregon Supreme Court determined that the validity of liquidated-damages provisions must be evaluated under ORS 72.7180(1), the subsection on liquidated damages under the Uniform Commercial Code. The court indicated that the prior analysis under the Restatement had resulted in inconsistencies, and that the commercial law that had developed was the proper starting point for determining enforceability.

ORS 72.7180(1) establishes three criteria for determining whether a liquidated-damages provision is enforceable. The agreed sum must be "reasonable" considering (1) the anticipated or actual harm caused by the breach, (2) the difficulties of proof of loss, and (3) the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. The Oregon Supreme Court in Illingworth, 297 Or at 693, recognized that ORS 72.7180(1) would inevitably require judicial interpretation and suggested that guidance could be found in Restatement (Second) of Contracts section 356(1), which provides:

Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

In Illingworth, an earnest-money agreement contained a forfeiture clause, which provided that the buyer forfeited the $50,000 deposit as liquidated damages in the event of nonperformance. When the buyer was unable to perform, the seller kept the deposit, and the property was sold shortly...

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