McInturff, J.
—Hesco Construction, Inc., and Harold and Janet Schimmels appeal from a judgment in favor of Northwest Acceptance Corporation in an action to recover liquidated damages under a defaulted equipment lease.
In February 1974, Hesco Construction, Inc. (Hesco) leased a hydraulic backhoe from Andrews Equipment Service, Inc. (Andrews) for 4 years with an option to purchase the equipment at the expiration of the lease. The lease was signed for Hesco by its president, Harold E. Schimmels, who also executed a personal guaranty. Andrews assigned the lease to Northwest Acceptance Corporation (Northwest).
Hesco made payments on the lease until June 1975, when it encountered difficulties on a construction project in Oregon. In October 1975, Northwest declared Hesco in default and repossessed the equipment. In an action to recover liquidated damages under the defaulted equipment
lease, the court held Hesco and the Schimmels jointly and severally liable for $35,049.07 including interest and attorney's fees.
On appeal, Hesco argues the written contract was not a true lease but an agreement intended to create a security interest.
See
RCW 62A.1-201(37).
Applying Article 9 of the Uniform Commercial Code on secured transactions, Hesco argues its obligation under the alleged lease was discharged upon repossession of the equipment by Northwest. RCW 62A.9-502(2). Alternatively, Hesco argues the damages are to be determined by RCW 62A.9-504(1), not the contractual liquidated damages clause. In response, Northwest contends these issues are not properly before the court.
CR 8(c) requires affirmative defenses to be set forth in the answer.
In its answer, Hesco defended on the ground Northwest failed to give reasonable notice of an intended disposition of the repossessed equipment as required by RCW 62A.9-504(3).
On Northwest's motion
for partial summary judgment, this affirmative defense was stricken by the court and the case proceeded to trial. Hesco now argues for the applicability of two different sections of the code, RCW 62A.9-505(2) on discharge, and RCW 62A.9-504(1) on damages. This court will not consider assignments of error raised for the first time on appeal, particularly when the issues sought to be raised are in the nature of affirmative defenses, the resolution of which requires a factual hearing.
Puget Sound Marina, Inc. v. Jorgensen,
3 Wn. App. 476, 480, 475 P.2d 919 (1970).
Assuming that the lease was intended as security, the Article 9 code provisions were nevertheless displaced by the parties' written agreement.
Under RCW 62A.9-505(2) upon written notice to the debtor after default, a secured party may propose to retain collateral in satisfaction of the obligation.
Here, Northwest made no such proposal for a "strict foreclosure."
See
J. White & R. Summers,
Uniform Commercial Code
§ 26-8, at 977 (1972). On October 29, 1975, Hesco relinquished possession of the backhoe and signed a document entitled "Voluntary Surrender of Equipment" which stated, in part:
The undersigned being in default in the payment of rental payments owing to Northwest Acceptance Corporation (NAC) under a lease-commercial equipment (lease) dated February 20, 1974, covering the following described property . . . and recognizing that the right of NAC to possession of the equipment under the terms and conditions of the lease,
hereby voluntarily surrenders possession of the equipment to NAC and its assigns.
It is understood that by accepting possession of the equipment, NAC and its assigns do not waive the right to damages under the default damage formula.
/s/ H. E. Schimmels, President
(Italics ours.) Similarly, the liquidated damage clause displaces the applicability of RCW 62A.9-504(1)
regarding the disposition of proceeds on resale of the collateral.
Thus, even if Article 9 were controlling in this instance, the parties' agreement is still enforceable according to its terms, provided it is not otherwise unreasonable or unconscionable. This leads us to the primary issues on appeal, namely, whether the liquidated damage clause is an
unreasonable penalty or whether its enforcement would be unconscionable.
A liquidated damage clause must meet certain preconditions. The amount of damages stipulated must be a reasonable estimation of compensation for the damages caused by the contractual breach. The scope of the harm caused by the breach must be difficult of accurate estimation.
Brower Co. v. Garrison,
2 Wn. App. 424, 432, 468 P.2d 469 (1970);
Management, Inc. v. Schassberger,
39 Wn.2d 321, 326, 235 P.2d 293 (1951). Such clauses are favored by the courts and are rarely construed as a penalty.
Under this’ contractual damage formulation, Hesco is basically liable for arrearages and future rental payments (discounted to the present value) subject to a credit for the depreciated value of the equipment at the time of default. The amount of credit is determined by a recognized accelerated depreciation method known as the "sum of the digits."
Contrary to arguments by Hesco, the test of anticipated damages looks to the time of contracting.
Pettet v. Wonders,
23 Wn. App. 795, 801, 599 P.2d 1297 (1979).
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McInturff, J.
—Hesco Construction, Inc., and Harold and Janet Schimmels appeal from a judgment in favor of Northwest Acceptance Corporation in an action to recover liquidated damages under a defaulted equipment lease.
In February 1974, Hesco Construction, Inc. (Hesco) leased a hydraulic backhoe from Andrews Equipment Service, Inc. (Andrews) for 4 years with an option to purchase the equipment at the expiration of the lease. The lease was signed for Hesco by its president, Harold E. Schimmels, who also executed a personal guaranty. Andrews assigned the lease to Northwest Acceptance Corporation (Northwest).
Hesco made payments on the lease until June 1975, when it encountered difficulties on a construction project in Oregon. In October 1975, Northwest declared Hesco in default and repossessed the equipment. In an action to recover liquidated damages under the defaulted equipment
lease, the court held Hesco and the Schimmels jointly and severally liable for $35,049.07 including interest and attorney's fees.
On appeal, Hesco argues the written contract was not a true lease but an agreement intended to create a security interest.
See
RCW 62A.1-201(37).
Applying Article 9 of the Uniform Commercial Code on secured transactions, Hesco argues its obligation under the alleged lease was discharged upon repossession of the equipment by Northwest. RCW 62A.9-502(2). Alternatively, Hesco argues the damages are to be determined by RCW 62A.9-504(1), not the contractual liquidated damages clause. In response, Northwest contends these issues are not properly before the court.
CR 8(c) requires affirmative defenses to be set forth in the answer.
In its answer, Hesco defended on the ground Northwest failed to give reasonable notice of an intended disposition of the repossessed equipment as required by RCW 62A.9-504(3).
On Northwest's motion
for partial summary judgment, this affirmative defense was stricken by the court and the case proceeded to trial. Hesco now argues for the applicability of two different sections of the code, RCW 62A.9-505(2) on discharge, and RCW 62A.9-504(1) on damages. This court will not consider assignments of error raised for the first time on appeal, particularly when the issues sought to be raised are in the nature of affirmative defenses, the resolution of which requires a factual hearing.
Puget Sound Marina, Inc. v. Jorgensen,
3 Wn. App. 476, 480, 475 P.2d 919 (1970).
Assuming that the lease was intended as security, the Article 9 code provisions were nevertheless displaced by the parties' written agreement.
Under RCW 62A.9-505(2) upon written notice to the debtor after default, a secured party may propose to retain collateral in satisfaction of the obligation.
Here, Northwest made no such proposal for a "strict foreclosure."
See
J. White & R. Summers,
Uniform Commercial Code
§ 26-8, at 977 (1972). On October 29, 1975, Hesco relinquished possession of the backhoe and signed a document entitled "Voluntary Surrender of Equipment" which stated, in part:
The undersigned being in default in the payment of rental payments owing to Northwest Acceptance Corporation (NAC) under a lease-commercial equipment (lease) dated February 20, 1974, covering the following described property . . . and recognizing that the right of NAC to possession of the equipment under the terms and conditions of the lease,
hereby voluntarily surrenders possession of the equipment to NAC and its assigns.
It is understood that by accepting possession of the equipment, NAC and its assigns do not waive the right to damages under the default damage formula.
/s/ H. E. Schimmels, President
(Italics ours.) Similarly, the liquidated damage clause displaces the applicability of RCW 62A.9-504(1)
regarding the disposition of proceeds on resale of the collateral.
Thus, even if Article 9 were controlling in this instance, the parties' agreement is still enforceable according to its terms, provided it is not otherwise unreasonable or unconscionable. This leads us to the primary issues on appeal, namely, whether the liquidated damage clause is an
unreasonable penalty or whether its enforcement would be unconscionable.
A liquidated damage clause must meet certain preconditions. The amount of damages stipulated must be a reasonable estimation of compensation for the damages caused by the contractual breach. The scope of the harm caused by the breach must be difficult of accurate estimation.
Brower Co. v. Garrison,
2 Wn. App. 424, 432, 468 P.2d 469 (1970);
Management, Inc. v. Schassberger,
39 Wn.2d 321, 326, 235 P.2d 293 (1951). Such clauses are favored by the courts and are rarely construed as a penalty.
Under this’ contractual damage formulation, Hesco is basically liable for arrearages and future rental payments (discounted to the present value) subject to a credit for the depreciated value of the equipment at the time of default. The amount of credit is determined by a recognized accelerated depreciation method known as the "sum of the digits."
Contrary to arguments by Hesco, the test of anticipated damages looks to the time of contracting.
Pettet v. Wonders,
23 Wn. App. 795, 801, 599 P.2d 1297 (1979). There is
substantial evidence to support this finding by the trial court:
The liquidated damages are reasonably related to anticipation of possible problems with the leased equipment, the condition it would be in upon its return to the plaintiff and the value of the lease agreement to the plaintiff if the defendants had fully performed said lease.
The hydraulic backhoe is a specialized piece of construction equipment, the marketability of which is dependent upon many factors including a fluctuating economy, the state of the construction industry, and the demand for used equipment. Because this was a lease agreement, Hesco is not entitled to a credit for the resale price of the equipment following repossession. But, two features of this formula make it a fair liquidated damages provision—(1) the lessor's expectation for future rentals under the lease was reduced to the present value; and (2) the lessee was given a credit for depreciation savings because the equipment was returned to the lessor before the end of the lease.
See Siletz Trucking Co. v. Alaska Int'l Trading Co.,
467 F.2d 961, 963 (9th Cir. 1972) (interpreting an identical liquidated damage clause).
There is no basis for a finding of unconscionability.
We have here two contracting parties, both with extensive
experience in construction equipment. Contrary to assertions by Hesco, the damage formula is not impossible to understand.
Mr. Schimmels complains that Northwest did not volunteer an explanation of the formula, but he also admitted that he never bothered to read the contract, and did not ask for an explanation. His son, who was serving as Hesco's secretary-treasurer at the time, is a certified public accountant. Given these circumstances, the trial court properly refused to find the lease unconscionable.
There is no reason why persons, competent and free to contract, may not agree upon this subject (liquidated damages) as fully as upon any other, or why their agreement when fairly and understandingly entered into with a view to just compensation for the anticipated loss, should not be enforced.
Underwood v. Sterner,
63 Wn.2d 360, 366, 387 P.2d 366 (1963), citing
Wise v. United States,
249 U.S. 361, 63 L. Ed. 647, 39 S. Ct. 303 (1919).
We do agree, however, that Hesco should not be responsible for personal property taxes and insurance costs which were incurred several months after repossession. Under the terms of the lease, Hesco was liable for the costs incident to repossession. Northwest declared the lease in default and repossessed the equipment in October 1975. After holding the backhoe for sale for 3 months, Northwest purchased it at a public sale in January 1976. According to Northwest's business records, the personal property taxes were paid in May 1977. No date was indicated for the payment of insurance. Thus, these costs appear to be beyond those contemplated by the lease agreement.
The lease agreement also provided for the payment of attorney's fees and we find no abuse of discretion in the award by the trial court. Attorney's fees on appeal pursuant to RAP 18.1 are awarded in the amount of $887.50.
Judgment of the Superior Court is affirmed with the exception of the award of personal property taxes and
insurance; however, we remand the case to the trial court because we have discovered what appears to be a mathematical error in the damage computation stemming from an incorrect reporting of the cost of the machine at the beginning of the lease. (See Exhibits 1 and 4.) The default damage formula in the lease (Exhibit 1) states the cost to the lessor was $55,544.50, but in Exhibit 4 the cost was computed on the basis of $54,544.50. The court should correct this $1,000 discrepancy.
Green, C.J., and Roe, J., concur.