Liquidated Damage Clauses

Damages for breach of commercial transaction 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 the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. N.J. STAT. ANN. 12A:2-718

"Based upon the rationale that a liquidated damage clause was made pursuant to an arm's length bargain, courts in New Jersey will enforce these clauses in certain circumstances. See Ellis v. Lionikis, 152 N.J. Super. 321, 328 (1977).

Liquidated damage clauses are enforceable as long as they do not constitute a penalty. See Wasserman's Inc., v. Township of Middleton, 137 N.J. 238, 248 (1994); In re Timberline Property Development, Inc., 136 B.R. 382, 385 (Bankr. D. N.J. 1992).

As a result, New Jersey courts will scrutinize such damage clauses to ensure that the clause does not constitute a penalty. See Norwest Bank Minnesota v. Blair Rd. Assoc., 2003 WL 1456919 (D. N.J. 2003). Liquidated damage clauses are differentiated from a penalty because a penalty is the promise to pay on an event of default, based upon a punishment or threat, rather than estimated actual damages. See Blue Sky MLS, Inc. v. RSG Systems, LLC, 2002 WL 1065873 (D. N.J. 2002).

Liquidated damage clauses in commercial contracts negotiated between sophisticated parties are presumptively reasonable. See id.; Metlife Capital Financial Corp. v. Washington Ave. Assoc., 159 N.J. 484, 496 (N.J. 1999); Presbyterian Homes, 1988 WL 52245 (D. N.J. 1988).

Whether a liquidated damage clause is enforceable depends upon whether the clause is reasonable. See Wasserman's Inc. v. Township of Middleton., 137 N.J. 238 (1994).

Reasonableness will depend upon whether the provision constitutes a reasonable estimation of the harm caused by an event of default. See id.; River Road Assoc. v. Chesapeake Display and Parking Co., 104 F. Supp. 2d 418, 422-23 (D. N.J. 2000). S

ome New Jersey courts have limited enforceability of a liquidated damage clause to that in which the amount of damages is a reasonable estimate of the damages of an event of default, and the breach causes a harm that is incapable of estimation. See In re Timberline Property Development, Inc., 136 B.R. 382, 385 (Bankr. D. N.J. 1992) (citing Barr & Sons, Inc. v. Cherry Hill Center, Inc., 90 N.J. Super. 358, 376-77 (App. Div. 1966).

Some courts have also found that a liquidated damage clause must be designed to provide actual compensation to the aggrieved party. See id. (citing Stuchin v. Kasirer, 237 N.J. Super. 604 (App. Div. 1990))."

New Jersey statutory law preserves the right of set-off. See N.J. STAT. ANN. 2A:50-29. This right, however, is strictly limited to liquidated damages. See Curtis-Warner Corp. v. Thirkettle, 99 N.J. Eq. 806 (1926). The New Jersey Uniform Commercial Code chapter on leases provides that, the benefits provided pursuant to a supply contract between lessor and supplier extend to the lesser, to the extent of the lessee's interest and the final lease. See N.J. STAT. ANN. 12A:2A-209(1). If a supplier modified liquidated damages, with respect to the lessor, than this provisions provides that the modification is enforceable against the lessee. See id.; see also N.J. STAT. ANN. 12:2A-503 and 12:2A:12-504. The chapter on leases in New Jersey's Commercial Code provides that a lease contract may provide for liquidated damages. See N.J. STAT. ANN. 12A:2A-504. A liquidated damage clause, however, is enforceable only if the amount of damages, or the formula for determining the amount, is reasonable. See id. at 12A:2A-504(1). Reasonableness will turn on the estimation of the anticipated harm caused by default under the lease agreement. See id. If the liquidated damage provision is determined unenforceable, then the provisions governing leases under New Jersey's Commercial Code provides the appropriate remedy. See id. at 12A:2A-504(2)