Following the construction industry and related legal topics in the United States.

Sunday, March 18, 2007

Argument That Party Enforcing Liquidated Damages Clause Must Present Evidence Of Actual Damages Is All Wet

It is well established in North Carolina that liquidated damages clauses that are not a penalty and are reasonable in amount are enforceable. This is so even if no actual damages are suffered. What was not established in North Carolina is which party has the burden to prove such a clause is enforceable.

In a case of first impression, Seven Seventeen HB Charlotte Corporation v. Shrine Bowl of the Carolinas, Inc. (North Carolina Lawyers Weekly No. 07-07-0325) answers this question. In Seven Seventeen, hosts of an annual high school all-star football game entered into a contract with a Charlotte hotel to use the hotel five times between 2001-2005. The contract included a liquidated damages clause. The all star football game hosts cancelled the contract, moved the event to South Carolina, and got sued. In trial, neither party presented evidence of actual damages. The all star football game hosts got hosed in trial court, having to pay the Charlotte hotel over $118,000 in liquidated damages.

Defendant's brief, mislabeled as "Plaintiff-Appellant's Brief", set the stage for a soggy argument that just didn't float. The Court sided with the national majority of jurisdictions which hold that the party seeking to invalidate the stipulated damages provision has the burden since that party initially agreed to it. Said the Court: "'[P]lacing the burden on the party seeking to avoid a stipulated damages provision to prove that no damages were suffered or that there was no reasonable relationship between the actual or probable compensatory damages and those agreed upon', makes sense from a policy perspective."

Although not a construction case, Seven Seventeen means the obvious - an owner will not have to present evidence of its actual damages in order to prove the enforceability of the liquidated damages clause – which, after all, was drafted so that the owner wouldn’t have to present evidence of its actual damages. About the only thing surprising to this writer about the Seven Seventeen case is that the question was even asked – like whether the law of gravity applies in North Carolina Courts.


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