In Defense of Freedom of Contract, NELF Urged the Court to Enforce a Commercial Liquidated Damages Provision Agreed to by Commercial Parties
Cummings Properties, LLC. v. Hines, Massachusetts Supreme Judicial Court, SJC-13406
In this appeal, an owner of commercial office space seeks to enforce an important kind of lease provision. Here a “liquidated damages” provision set out the parties’ estimate of the money the landlord might lose in the event the tenant were to break the lease by not paying rent. Generally, such provisions will be enforced if the actual amount of the loss could not reasonably have been determined at the time the contract was signed and if the amount chosen as liquidated damages does not appear grossly disproportionate. Otherwise, the liquidated damages will be considered to be an impermissible penalty
When Hines’ company defaulted on rent after four months, the landlord terminated the lease, took possession, and accelerated rent payments for the 56 months remaining on the lease. These payments became due immediately as liquidated damages. After the landlord obtained a judgment against the insolvent company, it proceeded against Hines, who had guaranteed the company’s payment of rent. A judge ruled Hines liable for the full 56 months even though the landlord had found a new tenant for the last four years of the lease.
The Appeals Court overturned the judgment. It conceded that the landlord had no duty to mitigate losses by reletting the property. It believed, however, that even at the time the lease was signed accelerated rent payments were clearly not a reasonable choice for liquidated damages because it was not reasonable to assume that a savvy, successful company like Cummings would always have zero success in reletting the office space in case of a default. More reasonably, the court said, the liquidated damages provision should have provided either for an offset for payments received by any new tenant or for an upfront discount on the rent obligation to account for some likelihood of reletting. Cummings obtained further review by the Supreme Judicial Court.
NELF filed an amicus brief supporting Cummings. NELF’s argument in the case is twofold. First, the case raises an issue of freedom of contract. NELF urged the Court to respect the autonomy of parties when they contract for their mutual benefit. Secondly, the case implicates the ability of parties to contract specifically for the purpose of reducing uncertainty in their commercial transactions. Because commercial parties are frequently confronted by the possibility of costly uncertainties in the performance of contracts, use of liquidated damages is an important means to reduce the uncertainties that arise from any breach that might occur. Here, the liquidated damages should be enforced because they are reasonable. They amount to no more money than the company agreed to pay under the lease anyway, and so they are not a penalty. NELF criticized the Appeals Court for imposing on Cummings in effect an ex post facto duty to mitigate damages by reletting. In doing so, the Appeals Court ruled contrary to the common law prohibition on taking such a “second look” at the adequacy of liquidated damages. Indeed, it apparently drew its legal conclusions from facts that even the trial judge had said were not before him. NELF therefore urged the Court to reinstate the trial judge’s order of judgment.