Defendant hired plaintiff as general manager of its hotel for three years. The contract had a stipulated damages clause that defendant would be responsible for paying plaintiff the rest of his three years' wages in the event defendant terminated the contract. Defendant did so terminate the contract 21 months before its end. Plaintiff was unemployed for 2½, got a new job for the remainder of the contract period, and then sued for damages.
Jury found that defendant breached the contract and awarded plaintiff 21 months of his salary.
Court of appeals reversed.
Was the stipulated damages clause valid?
Should the stipulated damages have been reduced by the amount plaintiff mitigated?
Because plaintiff was only unemployed for 2½ months, it was disproportionate to the stipulated damages. Enforcing it would be unreasonable and give plaintiff a windfall because he would be paid by both defendant and his new employer.
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[S]everal factors . . . help determine whether a particular clause is reasonable:
Did the parties intend to provide for damages or for a penalty?- Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the time of contract? and
- Are the stipulated damages a reasonable forecast of the harm caused by the breach?
The "difficulty of ascertainment" test has several facets . . . . includ[ing]
- the difficulty of producing proof of damages at trial;
- the difficulty of determining what damages the breach caused;
- the difficulty of ascertaining what damages the parties contemplated when they contracted;
- the absence of a standardized measure of damages for the breach;
- and the difficulty of forecasting, when the contract is made, all the possible damages which may be caused or occasioned by the various possible breaches.
The factors are tested at both the time of contracting and the time of breach. (i.e., It will be tested in light of both actual and anticipated harm and will not a penalty if reasonable in light of either.)
The unpaid salary damages were easily ascertainable, but other damages may be present like injury to the employee's reputation, which would be hard to ascertain. Nevertheless, the parties assumedly took this into consideration in drafting the contract.
Plaintiff suffered the harm of the 2½ months of unemployment, and there is no evidence that his new job has comparable wages and opportunity for advancement, as the circuit refused to admit evidence of his new wages because it had already held that plaintiff had no duty to mitigate his damages.
While an employee's new wages may be relevant in proving that a stipulated damages clause is unreasonable, once it is determined to be reasonable, proof of the actual loss is no longer relevant. Recalculating liquidated damages based on what an employee did or could have earned is antithetical to the purpose of liquidated damages.
The stipulated damages clause was reasonable and therefore valid.
Liquidated damages should not be reduced by the amount mitigated.
Reversed.
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