Court Opinion

ID: 9567162
Source: CourtListenerOpinion
Date Created: 2023-08-21 19:49:57.783354+00
Date Added: 2024-06-11T10:00:16.484354
License: Public Domain

LENT, J.,
concurring.
I agree with the reasoning of the majority opinion but wish to separately state my views on refining the law on agreed damages clauses. Because of clashing precedent, it has become difficult to predict the result in any close case on the validity of a stipulated damages provision. The outcome often depends upon which set of conflicting rules the court chooses to follow; and in many cases the reasons for that choice have remained unarticulated. Because such discretion is unchecked by consistent standards, I believe that it is time to reformulate simpler guidelines in this area which are consistent with our expressed policies in past decisions.
One key area of ambiguity is in the effect given to the "intent” of the parties in determining the reasonableness of a damages provision. Although it is often expressed that the actual intent of the parties is *351immaterial in determining objective reasonableness,1 speculation upon the presumed "intent” of the parties has crept into our decisions under the guise of requiring a "genuine pre-estimate” of anticipated damages.2 As is pointed out in 5 Williston on Contracts 693, § 778 (Jaeger ed. 1961):
"The only sense in which the intention of the parties can have any meaning in this connection, and this seems to be the meaning generally given to the phrase by the courts when the matter is analyzed by them, is an intention to name a sum that is fixed in good faith as the equivalent of the injury, which will probably be caused by breach of the contract, rather than an attempt to secure performance by a provision for an excessive payment.
" 'Intention of the parties’ is, however, a misleading and undesirable designation for this requirement, and the first step toward clearing the confusion of the law on the subject is to drop the use of the phrase from the discussion. Even the suggested substitute of an inquiry whether the parties in good faith attempted to estimate the real injury is a somewhat artificial cloak for the true principle.”3
*352There is a conflict of views in our decisions as to whether the reasonableness of an agreed damages clause is determined in an objective manner (i.e., tested at the time of contract, was the stipulated sum a reasonable forecast of anticipated harm) or in a subjective manner (i.e., does the damages provision show a good-faith attempt to pre-estimate the actual loss). Nowhere is this split more apparent than when we are asked to determine the validity of a single stipulated sum for varying contractual breaches of degree or kind.
In general, three views have been expressed in this area.4 Some courts, following the intent theory, have found that where an agreed damages clause provides the same amount of damages for breaches of varying importance it is unenforceable irrespective of whether the actual breach was of major or minor consequence. Presumably, these courts reason that if the parties genuinely intended to estimate the actual loss, they would have specified different sums for differing breaches. Some courts find the provision unenforceable if it would have been unenforceable as to any of the breaches to which it applies. Other courts enforce the damages clause if it is otherwise enforceable as to the breach which actually occurred.
The present case offers a good illustration. The parties contracted that, after the expiration of the lease, $30 per day would be owed until the property was left in a presentable condition. Were one to rely heavily on the intent theory, it would be possible to conclude that the parties could not have intended $30 per day to be a reasonable estimate of damages if all *353but a few scraps of metal were removed (a minor breach). Therefore, it could be argued that the clause is inoperative as the parties actually "intended” a penalty clause. Under this analysis, the clause would be inoperative even if $30 per day was a reasonable forecast of the damages which were actually incurred. Carried to an extreme, then, the intent theory can be used to strike down most agreed damages provisions by postulating lesser breaches for which the stipulation would be plainly unreasonable.5 Stipulated damages provisions have been voided in past Oregon decisions under this logic.6
Even if an objective theory is followed, problems persist. Suppose that at the time of making the contract the sum provided bears a reasonable relationship to anticipated loss and the actual damages are difficult to ascertain. In such a situation the agreed valuation will normally be considered as liquidated damages.7 Yet our cases disclose that even if these conditions are met, if there are no actual damages or if the stipulated sum is grossly disproportionate to the actual damages, the clause will not be enforced.8 As *354was recognized in Wright v. Schutt Construction, 262 Or 619, 624, 500 P2d 1045 (1972), this approach is not universally followed:
"The authorities also are not in complete accord on the question of the effect of evidence that despite such a good-faith 'pre-estimate’ or 'forecast’ of such damages, the parties were mistaken in that no actual damages resulted from the breach, or the amount of the actual damages was much less than the amount of the liquidated damages.”
Because there is usually little negotiation as to damages clauses or evidence of the intent of the parties at the time of the contract, we have become increasingly dependent upon the amount of the actual damages as evidence of the reasonableness of the stipulated sum. As noted in 5 Corbin on Contracts 362-64, § 1063 (1964):
"The probable injury that the parties had reason to foresee is a fact that largely determines the question whether they made a genuine pre-estimate of that injury; but the justice and equity of enforcement depend also upon the amount of injury that has actually occurred. It is to be observed that hindsight is frequently better than foresight, and that, in passing judgment upon the honesty and genuineness of the pre-estimate made by the parties, the court cannot help but be influenced by its knowledge of subsequent events.”
In our past decisions we have considered the relation of actual damages to the forecast of those losses in determining the reasonableness of the agreed damages provision. Babler Bros., Inc. v. Hebener, 267 Or 414, 420, 517 P2d 653 (1973); Wright v. Schutt Construction, supra. See also, Heinkel v. City of Corvallis, 13 Or App 375, 382, 510 P2d 579 (1973). Moreover, this "hindsight” approach is allowed under Uniform Commercial Code § 2-718(1). Codified in this State as ORS 72.7180(1), the section provides that:
"Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and *355the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.” (emphasis supplied.)
Aside from speculation as to what the parties could have intended, the amount of actual damages becomes the key evidentiary factor as a practical matter where the reasonableness of an agreed damages clause is contested. The requirement that damages be difficult to ascertain is usually easily met. As Professor Macneil observes, uncertainty of damages can mean: (1) difficulty of producing proof of damages after breach has occurred; (2) difficulty of discerning what damages were caused by the breach; (3) difficulty of determining what damages were contemplated when the contract was made; (4) absence of a measure of damages for a certain breach; and (5) difficulty of forecasting, when the contract is made, all possible damages by any of the possible breaches.9 In most contracts (except for simple transactions such as a loan of money or a sale of a commodity with a certain market value) one of these difficulties will be present.10 McCormick writes,
"A survey of the rules by which unliquidated damages are measured will disclose how few and limited are the cases where, as a practical matter, it is possible to foretell with any exactness the precise amount or within a narrow range the approximate amount of damages to which the injured party will be entitled in the event of breach.
******
"* * * Consequently where the court in a given case declines to enforce the provision as a penalty, and bases the result upon the fact that the actual damages were readily susceptible of estimation, it will usually be found that the amount agreed to be paid was grossly disproportionate to the actual loss, and it is believed that this is the real and only justification for refusing sanction to the agreement.”11
*356As discussed previously, our past decisions are inconsistent in adhering to either a subjective or objective approach to the validity of agreed damages clauses. It is noted in 5 Corbin on Contracts 336, § 1057 (1964):
"When a court decides in favor of enforcement, it may bolster up its decision by strong general statements as to giving effect to the intention of the parties and as to freedom of contract. In refusing enforcement, it may speak broadly about the injustice of penalties and the inequity of awarding more than compensation measured by harm suffered.”12
It has become difficult to predict with any sureness whether an agreed damages provision will be upheld by the courts. In the area of contractual relations and commercial law, such predictibility is desirable. In light of the present evidentiary role of actual damages and the recent suggestion by this court that defendant should bear the burden of proof on the reasonableness of these provisions,13 a more simple rule can be formulated as follows:
"A liquidated damages clause should be treated as prima facie evidence of damages for breach. When a breach is shown, a presumption should arise in favor of the plaintiff that the amount computed under the liquidated damages clause is the proper recovery. The defendant would then have the opportunity to rebut this presumption by proving that the actual loss was less. In an action for breach of contract, where breach has been shown, but where determining the dimensions of damage is very difficult, plaintiff will be relieved of the burden of proving damages and awarded the liquidated amount. Yet the overcompensation that results when liquidated damages are shown to exceed actual loss is prevented.”14
*357This approach is desirable for many reasons. First, it resolves present ambiguities in the case law and makes easy a prediction of the enforceability of damages provisions. Second, it gives presumptive force to the agreement of the parties. This is in accordance with the policy enunciated in Chaffin v. Ramsey, 276 Or 429, 432, 555 P2d 459 (1976), that:
"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.”
This solution would allow the parties to provide a remedy when proof of actual loss is impossible.
Third, the proposal would implement the policy of compensation which underlies judicial sanctions for breach of contract. As Mr. Justice Holmes once observed,
"The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, —and nothing else.”15
We would thereby disallow overcompensation to a party injured by the breach where actual damages are capable of fixation.
Finally, adoption of this approach would make the *358judicial review of the issue of the validity of a stipulated damages provision a question of fact as opposed to the present treatment as a question of law. By this change, conservation of judicial appellate resources would be maximized. Such a view, moreover, would not significantly change the factual inquiry at the trial level, inasmuch as evidence of the actual damages presently plays a key role.
For these reasons, I would urge the adoption of this as a rule in the future by this court and by parties who litigate the reasonableness of liquidated damages clauses. Because the instant case was not heard by the full court, it would be inappropriate to use these facts as a vehicle for change without the participation of all of the members of this body.

The Restatement of Contracts, § 339 (1932), comment b provides: "In this matter neither the intention of the parties nor their expression of intention is the governing consideration. The payment promised may be a penalty, though described expressly as liquidated damages, and vice versa.”

 See, e.g., Wright v. Schutt Construction, 262 Or 619, 624, 500 P2d 1045 (1972). Compare Chaffin v. Ramsey, 276 Or 429, 555 P2d 459 (1976).

 Similarly, McCormick notes that, "Formerly the validity of agreements was said to depend on whether the intention of the parties was to agree on liquidated damages or to fix a penalty. This gave too great decisiveness to the descriptive items used in the contract, and today the courts will consider the language only as evidence upon the question, Was the sum intended as a pre-estimate of the actual loss? But the decisive question in determining the issue is this, Was the amount named reasonably proportioned to the probable loss? The courts are tending to adopt this last as the sole test.” McCormick, Damages 606, §149 (1935). Likewise, Corbin writes, "Seldom, if ever, however, do [the parties] stop to weigh their own purposes or draw fine distinctions as to their exact intention. They know that a breach will cause injury and disappointment, and they try to guard against its occurrence. It seems improbable that they often make a substantial effort to measure in money the extent of the possible future injury; and the greater the uncertainty and difficulty in *352measuring it, the more likely this is to be true .... [I]n general the only proof that [the parties made an advance valuation] is to he found in the sum specified and its relation to the performance promised and to the injury caused by non-performance. It is by considering this relation that the court must determine intention; it is the relation and not the intention that is the operative fact.” 5 Corbin on Contracts 339-40, §1058 (1964).

Macneil, "Power of Contract and Agreed Remedies,” 47 Cornell L.Q. 495, 509 (1962).

 See Macneil, id at 510; McCormick, supra, at 611. Corbin also suggests that if the sum is a reasonable forecast of the actual loss, it should be enforced even if unreasonable as to other breaches which might have happened. 5 Corbin on Contracts 383-84, § 1066 (1964).

Dairy Coop. Ass’n v. Brandes Cry., 147 Or 488, 500-01, 30 P2d 338 (1934); Elec. Prod. Corp. v. Ziegler Stores, 141 Or 117, 125, 10 P2d 910, 15 P2d 1078 (1932); Alvord v. Banfield, 85 Or 49, 59, 166 P 549 (1917). Contra, Strode v. Smith, 66 Or 163, 179-80, 131 P 1032 (1913). Compare the majority and dissenting opinions in Chaffin v. Ramsey, 276 Or 429, 436, 555 P2d 459 (1976).

Restatement of Contracts § 339 (1932). This test was adopted in Oregon in Medak v. Hekimian, 241 Or 38, 44, 404 P2d 203 (1965) and applied subsequently in Weber v. Anspach, 256 Or 479, 473 P2d 1011 (1970); Harty v. Bye, 258 Or 398, 483 P2d 458 (1971); Wright v. Schutt Construction, 262 Or 619, 500 P2d 1045 (1972); Babler Bros., Inc. v. Hebener, 267 Or 414, 517 P2d 653 (1973); Schlecht v. Bliss, 271 Or 304, 532 P2d 1 (1975); Shaw v. Northwest Truck Repair, 273 Or 452, 541 P2d 1277 (1975); and Chaffin v. Ramsey, 276 Or 429, 555 P2d 459 (1976).

 Wright v. Schutt Construction, 262 Or 619, 625, 500 P2d 1045 (1972); Harty v. Bye, 258 Or 398, 407-08, 483 P2d 458 (1971). See also Learned v. Holbrook, 87 Or 576, 170 P 530, 171 P 222 (1918); Strode v. Smith, 66 Or 163, 131 P 1032 (1913); and Hull v. Angus, 60 Or 95, 118 P 284 (1911).

Macneil, supra, n. 4 at 502.

 But see Babler Bros., Inc. v. Hebener, 267 Or 414, 420, 517 P2d 653 (1973).

 McCormick, supra, n. 3, 604, 605 § 148.

 As the court noted in Evans v. Moseley, 84 Kan 322, 114 P 374, 375 (1911): "There is no branch of the law on which a unanimity of decision is more difficult to find, or on which more illogical and inconsistent holdings may be found.”

 Chaffin v. Ramsey, 276 Or 429, 434-36, 555 P2d 459 (1976).

Comment, "Liquidated Damages as Prima Facie Evidence,” 51 Ind L J 189, 197-98 (1975). Such a rule would only apply in non-adhesion settings. In situations where oppressive bargaining is present, liquidation clauses should bear the more intense traditional scrutiny.

Holmes, "The Path of the Law,” 10 Harv L Rev 457,462 (1897). For a fuller exposition of the compensatory theory of contract damages, see: Comment, "Liquidated Damages as Prima Facie Evidence,” supra n. 14; Birmingham, "Breach of Contract, Damages Measures, and Economic Efficiency,” 24 Rutgers L Rev 273 (1970). We have previously recognized that breach of contract carries no moral stigma by disallowing punitive damages for such a breach. See, Weaver v. Austin, 184 Or 586, 200 P2d 593 (1948). It must be, then, a compensatory theory which is the underpinning of the allowance of remedies for breach of contract. Such a theory is consistent with judicial abhorrence of "penalty” provisions. As has been noted, "It has been said that penalties are opposed because the law opposes harsh bargains but since the law often accepts harsh bargains in other situations that explanation is not entirely satisfactory. Possibly the opposition to penalty clauses stems from a belief that one should be free to breach his contract upon payment of the actual damages that the breach causes, or even upon the belief that such breaches should be encouraged as a method of maximizing economic resources.” Dobbs, Remedies 821, § 12.5 (1973).