Case Name: CHAFFIN et ux, Appellants, v. RAMSEY, Respondent
Court: Oregon Supreme Court
Jurisdiction: Oregon
Decision Date: 1976-10-21
Citations: 276 Or. 429
Docket Number: 
Parties: CHAFFIN et ux, Appellants, v. RAMSEY, Respondent.
Judges: O’CONNELL, J.
Reporter: Oregon Reports
Volume: 276
Pages: 429–445

Head Matter:
Argued June 7,
reversed and remanded October 21, 1976
CHAFFIN et ux, Appellants, v. RAMSEY, Respondent.
555 P2d 459
Kenneth E. Shetterly of Hayter, Shetterly, Noble & Weiser, Dallas, argued the cause and filed a brief for appellants.
No appearance contra.
O’CONNELL, J.

Opinion:
O'CONNELL, J.
This is an action brought by the vendors against the vendee to recover damages for breach of a land sale contract. The case was tried to the court without a jury. The court awarded damages in an amount less than that prayed for, and plaintiffs appeal.
On November 19, 1973, the parties signed an instrument entitled "Purchase Receipt and Agreement of Sale," by the terms of which defendant agreed to purchase real property consisting of 57 acres of land on which was located a covered horse arena, a four-bedroom house, a two-bedroom house, and a storage bam. The contract also included personal property consisting of a tractor, a baler, a mower and other farm equipment. The total purchase price was $130,000. Defendant paid $1,000 down and agreed to pay $34,000 on or before January 1,1974. The balance was due in installments over a period of 12 years. The contract contained a provision making either party liable for ten percent of the sale price in case of breach. Defendant failed to perform and, in April 1974, plaintiffs brought this action to recover ten percent of the sale price or, in the alternative, $15,000, which was alleged to be the actual damages. The trial court awarded plaintiffs damages in the amount of $4,085, representing a loss of rental, and escrow and attorney's fees incurred by plaintiffs.
In denying recovery of ten percent of the sale price, the court explained that the "liquidated damages clause is unenforceable as not bargained for and not a reasonable forecast of just compensation when actual damages could have been ascertained."
The trial court's finding has the effect of categorizing the agreement to pay ten percent of the sale price in case of breach as a provision for a "penalty" rather than as a provision for "liquidated damages." In order for such a clause to be construed as one for liquidated damages, the sum provided, at the time of the making of the contract, must seem to bear a reasonable relationship to anticipated damages and the actual damages must be difficult or impossible to ascertain. Medak v. Hekimian, 241 Or 38, 44, 404 P2d 203, 206 (1965).
It can be argued that any agreement made between two parties should be given the effect intended by them unless the type of agreement entered into is in its nature likely to be oppressive and unfair because the promisor is not in a position to freely bargain with the promisee. Where neither party to an agreement has an advantage over the other in pressing for favorable provisions in making the bargain, there would seem to be no moral precept or social consideration which would call for a judicial repudiation of the agreement merely because the damages could be readily ascertained in advance or because the amount of damages fixed by the contract is admittedly greater than the actual damages the parties might possibly suffer. This view would still leave for judicial scrutiny those cases where the promisor is a party to an adhesion contract prepared by the promisee, or where the promisor is a borrower and thus exposed to oppressive exactions, or in other types of cases where the principle of freedom of contract is outweighed by stronger countervailing policy considerations.
If one were to accept the foregoing reasoning, a provision for liquidated damages would be valid even though the damages agreed upon were disproportionate to the probable loss. To our knowledge, no court has carried the principle of freedom of contract that far. And it is not necessary for us to take that step in the present case, because in our opinion plaintiff proved that the damages agreed upon bear a reasonable relation to the loss which might have been foreseen at the time of the execution of the contract, and the actual damages would have appeared difficult to ascertain.
In making a forecast of possible damages attendant upon breach, both plaintiffs and defendant could reasonably be expected to take into account the fluctuating value and price of land. From the seller's standpoint, the danger of a fall in the market value of land would be an important factor in predicting his possible loss upon the buyer's default. Correspondingly, a rise in the market value of the land would similarly affect the buyer if the seller could not perform.
The property involved in this case was devoted to an unusual type of use, the purchase of which would probably be of interest to a limited number of persons. It therefore would present a difficult problem of calculating its probable market value, and the loss which would result from a failure to perform the contract. In addition to the possible loss of bargain to either buyer or seller, the parties in the present case could have reasonably contemplated consequential damages as a result of the loss of income from the rental properties which were included in the sale. The trial court found that the loss of lease payments on the horse barn amounted to $3,600 and that the loss of the house rentals amounted to $375.00. The court added to this, $110.00, representing escrow and attorney's fees. Although the actual loss incurred is not the test for judging the validity of the provision for agreed damages, it demonstrates how particular kinds of losses can occur and thus indicates the reasonableness of a prediction that includes the possibility of such losses. Since it is the prediction rather than the actual loss by which the agreed damages are tested, the inquiry in the present case is whether the parties could have reasonably anticipated a longer period during which the property would remain unrented and therefore give rise to loss of rentals greater than that actually suffered in this case. We can find no basis for saying that the parties could not have reasonably expected such a condition to occur.
As we noted in Medak v. Hekimian, 241 Or 38, 44, 404 P2d 203 (1965), "[t]he decision of penalty or liquidated damages is one of law for the court ." In our previous cases we have deemed it essential that there be evidence bearing upon the two elements necessary to sustain a provision for liquidated damages, showing (1) that actual damages are difficult to estimate, and (2) that there must be a reasonable relation between the damages agreed upon and the loss which might have been foreseen.. There is a division of authority as to whether the plaintiff or the defendant has the burden of proof on this question. In some states the burden is imposed on the plaintiff. In other states, the defendant has the burden. In Oregon the burden has been placed upon the plaintiff, although in the recent case of Wright v. Schutt Construction Co., 262 Or 619, 629, 500 P2d 1045 (1972), the question is treated as still open for decision, the court saying:
" [W]e need not decide in this case whether, in the usual case, the plaintiff may have the burden to offer evidence to sustain such a payment as one of liquidated damages, rather than as a penalty, or whether the defendant may have the contrary burden."
This willingness to treat the question as open in the face of our previous acceptance of the rule imposing the burden of proof on the plaintiff, is explained in the court's recognition of the shift in attitude toward liquidated damages provisions. Thus we said, in the Wright case:
" [M]uch of the hostility formerly expressed by courts to provisions for liquidated damages has moderated in recent years as the courts have come to recognize that contract provisions for liquidated damages, under proper limitations, can save the time of the courts, as well as of the parties, and also reduce the expense of litigation."
If we were to accept this modern view which recognizes that parties should be entitled to freely contract with each other and be bound by their agreements in the absence of proof of oppressive or "adhesive" circumstances, the burden of proof would fall upon the defendant to show that a liquidated damage provision did not meet the two requirements previously mentioned. But it is unnecessary for us to decide at this time whether we should repudiate the rule previously recognized, placing the burden of proof upon the plaintiff, because even if we were to hold that plaintiff has that burden, the evidence which he adduced was sufficient to meet it in this case.
The cause is remanded with directions to enter a judgment for plaintiffs in the amount of $13,000.00.
Cf., McCormick on Damages 605, § 148 (1935).
In cases involving the sale of land, stipulations by the vendor to pay a certain sum as liquidated damages in case of breach, even though large, have long been recognized as valid. See, Anno., Stipulation in Land Contract for Payment of Specified Sum by Vendor in Case of Default as Provision for Liquidated Damages or Penalty, 48 ALE 899 (1927), and cases cited therein. For example, a contract clause providing $2,000 for liquidated damages was upheld when the vendor could not convey the property which was worth $14,000. Norris v. McMechem, 135 Misc 361, 238 NYS 181 (Sup Ct 1930). In cases where the purchaser has breached the contract, vendors also have been permitted to recover relatively large sums by retaining the forfeited down payments or installment payments. McCormick on Damages 615-16, § 153 (1935); 5 Corbin on Contracts § 1075 (1963). In the case of deposits it has been suggested that there may be a distinction between an actual payment of money and a promise to pay. McCormick on Damages 615, § 153 (1935). In one case in which the purchaser stopped payment on checks totalling ten percent of the sale price, the court allowed the vendor to collect the same sum. The court stated that the only distinction between retaining the deposit and obtaining a judgment was the method of collection. Tudesco v. Wilson, 163 Pa Super 352, 60 A2d 388 (1948). Where installment payments are forfeited, account must be taken of the rental value of the land in calculating the amount of the vendor's loss. Under Oregon cases, the vendee is entitled to a foreclosure sale if he can show the likelihood of the sale bringing an amount greater than the balance owing on the contract. Blondell v. Beam, 243 Or 293, 413 P2d 397 (1966); McCracken v. Walnut Park Garage, Inc., 156 Or 697, 68 P2d 123 (1937).
E.g., Better Food Markets v. American Dist. Tel. Co., 40 Cal2d 179, 185, 253 P2d 10, 14 (1953); Bowbells Pub. School Dist., No. 14 v. Walker, 231 NW2d 173, 178 (N.D. 1975); Massey v. Love, 478 P2d 948, 950 (Okla 1971); Waggoner v. Johnston, 408 P2d 761, 768 (Okla 1965). Contra, Canadian Mining Co. v. Creekmore, 226 Ark 980, 983, 295 SW2d 357, 360 (1956).
Many of the cases impose the burden of proof on the plaintiff because of a statute requiring that interpretation. See, e.g., Calif Civ Code § 1670; 1671; No Dak Cen Code § 9-08-04; 15 Okl St § 214, 215. Such a rule has not escaped criticism. In Sweet, Liquidated Damages in California, 60 Calif L Rev 84, 143-44 (1972), the author suggests that "[t]o give maximum effect to liquidation clauses in negotiated contracts and to avoid the expenditure of unnecessary judicial energy, California pleading and procedure rules should be changed. Rather than require the party relying upon the clause to plead and prove compliance, the party seeking to avoid the clause should be required to persuade the court that the amount selected will not fall within the range of estimated actual damages
E.g., Korshoj Constr. Co. v. Mills County, Iowa, 156 F Supp 138, 139 (S.D. Iowa 1957); Manufacturers Casualty Ins. Co. v. Sho-Me Power Corp., 157 F Supp 681, 684 (S.D. Mo. 1957); Harbor Island Spa, Inc. v. Norwegian America Line A/S, 314 F Supp 471, 474 (S.D. N.Y. 1970); Chisholm v. Reitler, 413 Colo 288, 292, 352 P2d 794, 796 (1960); Jobe v. Writer Corp., 34 Colo App 240, 526 P2d 151, 152 (1974); Howard v. Bar Bell Land & Cattle Co., 81 Ida 189, 197, 340 P2d 103, 107 (1959); Hoefeld v. Sixty-Third & Halstead Realty Co., 289 Ill App 305, 318, 7 NE2d 402, 408 (1937); Selby v. Matson, 137 Iowa 97, 100, 114 NW 609, 610 (1908); Perma-Stone Bi-County Corp. v. Ackerman, 15 Misc2d 640, 182 NYS2d 655, 657 (Sup Ct), aff'd., 8 App Div2d 731, 187 NYS2d 991 (1959); Knoblauch v. Little Falls Dairy Co., 241 App Div 910, 272 NYS 31, 32 (1934); Silver Dollar Club v. Cosgriff Neon Company, 80 Nev 108, 112, 389 P2d 923, 925 (1964). Contra, Wilson v. Clarke, 470 F2d 1218, 1223 (1st Cir 1972).
Salem v. Anson, 40 Or 339, 345, 67 P 190 (1902); Hull v. Angus, 60 Or 95, 105, 118 P 284 (1911); Alvord v. Banfield, 85 Or 49, 58, 166 P 549 (1917); Learned v. Holbrook, 87 Or 576, 585, 170 P 530, 171 P 222 (1918); Secord v. Portland Shopping News, 126 Or 218, 224, 269 P 228 (1928); Lanham v. Reimann, 177 Or 193, 198, 160 P2d 318 (1945); Babler Bros., Inc. v. Hebener, 267 Or 414, 419-20, 517 P2d 653 (1973), and Shaw v. Northwest Truck Repair, 273 Or 452, 541 P2d 1277 (1975).
262 Or at 622, citing Secord v. Portland Shopping News, 126 Or 218, 225, 269 P 228 (1928) and Medak v. Hekimian, 241 Or 38, 45, 404 P2d 203 (1965).
For the arguments in favor of this modern approach, see McCormick on Damages § 157 (1935); Note, Liquidated Damages as Prima Facie Evidence, 51 Ind L J 189 (1975); Sweet, supra note 3.