Opinion ID: 317105
Heading Depth: 1
Heading Rank: 3

Heading: stand-by deposit fee as liquidated damages

Text: 22 The district court held that Shel-Al did not sustain its burden of establishing that the $48,000 stand-by deposit fee was a penalty as distinguished from liquidated damages. Shel-Al's contentions on appeal are (1) that the trial court erroneously placed the burden of proof on this issue on Shel-Al; and (2) that these clauses providing for retention of the deposit were penal in character as a matter of Alabama law. There is no Alabama decision in point on the burden of proof issue; however, the weight of authority places the burden of establishing the contract provision to be a penalty on the party urging it. Harbor Island SPA, Inc. v. Norwegian America Line A/S, 314 F.Supp. 471, 474 (S.D.N.Y.1970); Manufacturers Cas. Ins. Co. v. Sho-Me Power Corp., 157 F.Supp. 681 (W.D.Mo.1957). But cf. Waggoner v. Johnston, 408 P.2d 761 (Okla.1965); Patterson v. Anderson Motor Co., 45 Tenn.App. 35, 319 S.W.2d 492 (1965). 7 23 Even if this burden of proof had been placed on American National, there was adequate evidence to sustain the finding that the $48,000 was liquidated damages, since American National's probable damages were not readily capable of accurate ascertainment and were not out of proportion to the stipulated $48,000. The district court pointed out that two elements of damages could be sustained by American National as a result of the commitment's abortion. First, for the entire period of the commitment American National had to manage its affairs so that it would have available at the correct time the $1,600,000, which would encompass possible loss of interest rate on that amount for an undefinable period. Second, another cost to American National if the commitment was not consummated was the administrative expense involved in preparing for the proposed closing. The record showed that American National hired attorneys in Galveston and Birmingham and expended considerable time of one of its agents in letters, telephone calls and inquiries. Regardless of who had the burden of proof, there was substantial evidence to support the court's judgment for American National. 24 According to Shel-Al, in determining the difference between a penalty and a liquidated damages provision, one line of authority examines only whether the actual amount of damages is disproportionate to the amount stipulated. Another line, asserts Shel-Al, is concerned solely with whether or not there is an agreement of the parties that damages would be difficult of ascertainment. The principal case relied on by Shel-Al, Stratton v. Fike, 166 Ala. 203, 51 So. 874 (1909), is alleged to be in this second group which considers evidence of the actual amount of damages irrelevant and inadmissible. Shel-Al asserts that Stratton focuses on whether the parties agreed as a matter of fact that the damages were uncertain and not on whether the damages are uncertain in fact from the nature of the contract. The Supreme Court of Alabama in Stratton, supra at 876-877, stated: 25 'The intention of the parties to the contract, however, must control in all cases, if that can be ascertained. 'The object and end to be attained in all construction of contracts is to ascertain the intention of the parties, and this is no exception to the rule . . ..' The first general principle in the construction of all contracts is that they shall be so expounded as to carry into effect the intention of the parties. To this end, the court should, if necessary, look to the subject matter of the contract, the situation of the parties, the motives that led to it, and the objects intended to be attained by it. 26 'If, from the nature of the contract, the damages for the breach cannot be calculated with any degree of certainty, a stipulated sum will usually be held to be liquidated damages-- that is, it will be considered that the parties agreed in advance upon the amount, and it will be so treated-- but, if it is doubtful from the whole contract as to which was intended, the courts, being inclined to do equal justice to the parties if possible, will resolve the doubt in favor of the penalty construction . . .. Where the damages sustained by a breach of a single stipulation in a contract are uncertain, and there is no fixed or certain standard or data by which they can be ascertained, and the parties in the contract have fixed that amount, it is reasonable to conclude that they named and fixed that amount because the amount would be uncertain if there was a breach; and it will be so treated. It will in such case be considered by the court as the measure of compensation for the breach, if it is not out of all proportion to the probable and presumable loss. Stipulations for a certain amount of damages in ordinary building contracts for failure to complete within a given time, if not clearly disproportionate to the probable loss, will be construed to be liquidated damages and enforceable as such.' 27 Beginning with the central inquiry of determining the intention of the parties, Stratton examines not whether the parties themselves agreed at the time of making the contract that the damages were uncertain, but whether as a matter of fact from the 'nature of the contract' damages were uncertain. Stratton implies that if a court finds damages to have been uncertain and the amounts stipulated as damages in case of breach are not out of proportion to probable damages, then it may be concluded that the parties stipulated damages because of these combined circumstances. The parties here were competent to contract. To construe the liquidated damages provision initially as a penalty, in the language of Stratton, supra at 877, 'would give the stipulation no effect whatever, and would be making a contract for the parties and not construing the one they made.' 28 The thrust of Shel-Al's second contention is that the stand-by deposits are void and unenforceable as a matter of law. The principal argument is that since there were several covenants to be performed in the commitment, some of minimal or trivial importance, a stipulated sum made payable for failure to perform any condition, including the relatively unimportant ones, may be held a penalty. Shel-Al's thesis is that a contract which calls for the forfeiture of a fixed sum for the failure to fulfill various conditions of differing importance, is invalid because the damage suffered for the failure to fulfill one condition cannot possibly be the same as for the failure to perform another. Therefore, the parties to such a contract would not have agreed that the fixed amount was a reasonable estimate of the damage to be suffered and hence the fixed amount is penal in character. Shel-Al's authority for this proposition is again language in Stratton, supra at 876, to wit: 29 'Where the agreement or covenant is for the performance of several things, and the stipulation is for the payment of a sum in gross in the event of a failure to perform, in whole or in part, the sum stated will be considered as a penalty . . ..', 30 in addition to the admonishment in Keeble v. Keeble, 85 Ala. 552, 5 So. 149, 150 (1888): 31 'When the contract provides for the performance of several acts or different degrees of importance, and the damages resulting from the violation of some, although not all, of the provisions are of easy ascertainment, and one large gross sum is stipulated to be paid for the breach of any, it will be construed a penalty and not as liquidated damages.' 32 Finally, Shel-Al asserts that under Alabama law a lump sum which is forfeited is case of breach whose purpose is to secure the performance of a party is construed as an unenforceable penalty. Forsyth v. Central Foundry Co., 240 Ala. 277, 198 So. 706 (1940). Here, argues Shel-Al, exact compliance and exact performance of each of the conditions in the commitment were necessary or the $48,000 would be lost. Therefore, this fee was to secure performance and was unenforceable. 33 American National counters that these arguments concerning lump sum forfeiture for failure to fulfill one of many conditions are not the applicable theories in this case. Here, a unlike the contract to build a house or to perform a job, the financing either takes place in which case there is a refund of the stand-by deposit, or it does not, in which case the deposit is retained. All of the various covenants of Shel-Al are parts of a single complex act, the closing of the purchase and loan, and the precise damage where the breach of covenants results in a failure to close, is incapable of being ascertained in advance and is therefore a proper situation for liquidated damages. There is a series of covenants which call for a single act which are all part of one complex act, all with one primary purpose, so that in essence the contract calls for one stipulation-- the closing of the loan. The several conditions to be performed by the parties are but steps leading up to that primary purpose, and it is clear that the stipulated sum was intended to fix the amount of damages to be paid in case a single act-- the closing-- was not carried out. 8 34 Moreover, prior Alabama cases were not concerned with a stand-by deposit situation and Shel-Al does not cite any decision in Alabama or another jurisdiction which has held as a matter of law that a stand-by deposit in these circumstances is void as a penalty. Rather, the courts have unanimously enforced stand-by clauses as a thoroughly lawful manner of doing business in the mortgage finance world. American National cites seven decisions, in which various types of stand-by deposit provisions have been attacked in one way or another, and in each the courts have sustained the validity of the provisions. Regional Enterprises, Inc. v. Teachers Ins. & Annuity Ass'n, 352 F.2d 768 (9th Cir. 1965); Chambers & Co. v. Equitable Life Assurance Soc'y, 224 F.2d 338 (5th Cir. 1955); White Lakes Shopping Center v. Jefferson Standard Life Ins. Co., 208 Kan. 121, 490 P.2d 609 (1970); Goldman v. Connecticut Gen. Life Ins. Co., 251 Md. 575, 248 A.2d 154 (1968); Paley v. Barton Savings & Loan Ass'n, 82 N.J.Super. 75, 196 A.2d 682 (Super. Ct.N.J.1964); Boston Road Shopping Center, Inc. v. Teachers Ins. & Annuity Ass'n, 13 A.D.2d 106, 213 N.Y.S.2d 522 (1961), aff'd, 11 N.Y.2d 831, 227 N.Y.S.2d 444, 182 N.E.2d 116 (1962); Continental Assurance Co. v. Van Cleve Bldg. & Constr. Co., 260 S.W.2d 319 (Mo.App.1953). 9 Although the Alabama courts may in the future conclude that stand-by deposits are inherently unconscionable and illegal, we cannot ascertain any basis in the current Alabama law, nor in other jurisdictions, to support a ruling here that stand-by deposits are per se void. 35 The judgment is affirmed.