Court Opinion

ID: 9735734
Source: CourtListenerOpinion
Date Created: 2023-08-26 18:29:05.663393+00
Date Added: 2024-06-11T18:27:01.133325
License: Public Domain

SABERS, Justice
(dissenting).
I dissent because the Buyers failed to meet their burden of proof that the stipulated damages were not reasonably related to probable damages.
1. Reasonable endeavor to fix fair compensation.
Safari cites Heikkila v. Carver, 378 N.W.2d 214 (S.D.1985), and argues that the trial court erred in finding that there was no reasonable endeavor by the parties to fix a fair compensation. The Heikkila court emphasized the buyers’ opportunity to closely review the agreement with their attorney and the parties’ arms-length bargaining for the sale contract including the liquidated damages provision. The court further stated that “the default provision itself was the best evidence of the parties’ efforts and intentions at the time of sale.” Id. at 217. Safari points out that, similar to Heikkila, both parties were represented by competent legal counsel at the time of the transaction and the buyers reviewed the agreement extensively with their attorney.
In holding that the parties had not attempted to fix a fair compensation during their negotiations, the trial court stated that there was no discussion of damages for breach, or any attempt to stipulate to an amount of damages representing a fair loss of profits or rental value. The court should consider the instrument as a whole, the situation of the parties, and the surrounding circumstances. Prentice v. Classen, 355 N.W.2d 352 (S.D.1984); Walter Motor Truck Co. v. State, Dep’t of Transp., 292 N.W.2d 321 (S.D.1980). The fact that the original down payment of $75,000 was reduced to $50,000 is a consideration, but not determinative as claimed by the majority. The testimony shows that Buyers were experienced in business and aware of the challenges and uncertainties associated with operating a business. They reviewed the agreement in detail with their attorney and understood that all payments made under the contract would be lost in the event of breach. In fact, Buyers’ attorney made several changes to other provisions of the agreement during the course of negotiations. This would indicate that Buyers understood the liquidated damages provision, believed it was reasonable, and believed the loss of the down payment was reasonable compensation to Sellers in the event of Buyers’ breach. In short, as part of an agreement that was bargained for at arms length, the liquidated damages provision must be considered bargained for at arms length. As in Heikkila, the liquidated damages provision itself is the best *48evidence of the parties’ efforts and intentions to fix a fair compensation.
2. Stipulated damages were reasonably related to probable damages.
Safari also challenges the trial court’s determination that the liquidated damages were not reasonably related to probable damages. The court based this determination partially on the fact that the down payment constituted twenty-eight percent of the entire contract price, or nineteen percent of the total value of the bar and real estate. The court cited the refusal of other jurisdictions to enforce such provisions where payments before default exceeded ten percent of the purchase price. However, in Heikkila, this court upheld a liquidated damages provision where the down payment was nearly twenty-seven percent of the total purchase price.
In this case, the down payment percentage was reasonable because of the type of business involved. Acknowledging the difficulty of ascertaining the probable damages and the potentially quick decline of a bar business, the trial court stated:
A bar business involves managerial expertise on the part of the vendee so that business clientele, and thus good will and ultimately profits, is maintained. Such property (inventory, fixtures, and equipment) is also highly susceptible to waste while in the possession of the vendee; it would thus arguably be difficult to accurately estimate damages in event of a breach.
Here, the major, unexpected events were the incredibly short term of occupancy by the Buyers and the rapid deterioration of the business. Both events were in Buyers’ control and Sellers should not be penalized by an after-the-fact judgment. The reasonableness of the liquidated damage provision must be viewed at the time of contracting not after default or breach. SDCL 53-9-5; Heikkila, supra; Prentice, supra.
As stated in Walter Motor, liquidated damage provisions “serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable[.]” Id. at 323. In this case, the parties recognized the usefulness and need for a liquidated damages provision and included it in the sale contract. The burden of establishing that such a provision is a penalty rests upon the Buyers and they have not sustained their burden of proof. Heikkila, supra; Prentice, supra. They have failed to produce any evidence that the liquidated damages were not reasonably related to probable damages or that the liquidated damages were disproportionate to reasonably anticipated damages. Without such evidence the liquidated damages provision cannot be declared an unlawful penalty. As this court stated in Prentice, supra at 355:
In the absence of any evidence clearly establishing a substantial disparity between the payments made on the contract, together with the improvements made to the property, and the loss of rents and other detriment suffered by the vendors, we cannot say that the enforcement of the liquidated damages clause worked an unconscionable forfeiture upon Mrs. Classen.
While Buyers merely asserted disparity, Sellers’ evidence indicated that their loss may have exceeded $100,000. Under these circumstances, a liquidated damages provision must be upheld.
3. The parties fully complied with the plain language of SDCL 53-9-5.
SDCL 53-9-5 provides in part that:
[T]he parties may agree therein upon an amount presumed to be the damage for breach in cases where it would be impracticable or extremely difficult to fix actual damage.
This is a case where actual damage was impracticable or extremely difficult to fix, and the parties agreed upon an amount presumed to be the damage for breach. The trial court and majority go beyond the statute when they require “discussion” of the stipulated damage. The liquidated damages provision was fully understood and agreed to by both Buyers and Sellers in an arms-length, negotiated transaction. The parties fully complied with the statute. Nothing more can be required.
*49We should reverse the judgment of the trial court and hold as a matter of law that the Buyers failed to sustain their burden of proof that the liquidated damages provision was a penalty. Therefore, Safari is entitled to the entire down payment and initial installment payment under the provision.