Opinion ID: 1837505
Heading Depth: 1
Heading Rank: 4

Heading: Enforceability of Repayment Provision.

Text: The defendants claim the contract requirement that the company fully repay the economic development grants if it failed to meet any of its obligations under the EDA was an unenforceable penalty. It argues the amount of the repayment is disproportionate to any damage reasonably anticipated from breach of the contract. The City argues the repayment requirement is more accurately characterized as a liquidated damage clause. It argues any damages resulting from the company's failure to perform its contractual obligations would be difficult to ascertain, thereby supporting such a provision. We first note that the determination of whether a liquidated damage clause is actually a penalty clause is a question of law for the court which is dependent upon the court's construction of the contract. Rohlin Constr. Co. v. City of Hinton, 476 N.W.2d 78, 79 (Iowa 1991). In Rohlin, we observed that liquidated damage clauses are favored, but a contract `term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.' Id. at 80 (quoting Restatement (Second) of Contracts § 356(1) (1981) [hereinafter Restatement]). We adopted the Restatement test for a penalty, which focuses on two factors: (1) `the anticipated or actual loss caused by the breach'; and (2) `the difficulty of proof of loss.' Id. (quoting Restatement § 356(1) cmt. b); accord Aurora Bus. Park Assocs., L.P. v. Michael Albert, Inc., 548 N.W.2d 153, 156-57 (Iowa 1996). `The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty, the easier it is to show that the amount fixed is reasonable.' Rohlin, 476 N.W.2d at 80 (quoting Restatement § 356(1) cmt. b). The defendants' claim that the repayment provision is a penalty rests on their erroneous assumption that the City's only loss is the grant money paid to the company. The defendants argue these damages are readily ascertainable. In addition they contend the company has already paid $134,000 in additional property taxes to the City's benefit and to require it to pay an additional $150,000 results in payments to the City that are disproportionate to any damage resulting from the company's breach of the EDA. We disagree with the defendants' assumption that the only damage sustained by the City as a result of the company's failure to perform its obligations under the agreement was the loss of the grant money. This assumption ignores the fact that the EDA expressly recognized two anticipated benefits to the City from the company's performance of its contractual obligations: (1) an increased tax base; and (2) the creation of jobs. Although damages from a failure to realize the first benefit may be easily computed, the City's loss from the company's failure to create the jobs required by the EDA is difficult, if not impossible, to measure. New workers earn payroll dollars that are spent in the community, generating income for other residents who then spend their earnings, and so on. We conclude the City would have great difficulty in establishing with any degree of certainty the loss it has sustained from the company's breach of the EDA. That leaves, then, the question whether the damages set in the contractthe amount of the grant moneyis an unreasonably large sum in view of the anticipated or actual harm. Clearly it is not. While the City will recover the cash outlays made to the company, this repayment does not cover the costs to the City in issuing the bonds required to obtain the grant funds, nor does it encompass the damages resulting from loss of the anticipated jobs. We find no merit in the defendants' argument that the $134,000 paid by the company in property taxes must also be factored into the analysis. The company's payment of property taxes is not equivalent to payment of damages to the City. The company would owe property taxes even in the absence of the EDA. Furthermore, the company did not pay inflated taxes, notwithstanding the minimum actual value set in the assessment agreements, because, as the company concedes, the extent of its improvements clearly supported the increased valuation of its property. [3] In summary, the contractual provision requiring the company to repay the $150,000 it received from the City is a valid liquidated damage clause. The actual loss sustained by the City from the company's breach of the agreement is difficult to ascertain, and the amount the company must pay upon its breach is not unreasonably large given the identifiable losses sustained by the City from the company's failure to meet its contractual obligations. We conclude the district court did not err in ruling the repayment requirement was not an unenforceable penalty.