Walter Motor Truck Co. v. State Ex Rel. Department of Transportation

292 N.W.2d 321, 1980 S.D. LEXIS 309

• Court: South Dakota Supreme Court
• Decided: May 21, 1980
• Docket: 12626
• Status: Published

Opinions

FOSHEIM, Justice.

This is an appeal from a judgment in favor of the plaintiff in the sum of $63,-950.00 for payment withheld on a contract to supply crash, fire and rescue equipment to various South Dakota airports. We reverse.

The South Dakota Department of Transportation, Division of Aeronautics, acting as contracting agent for the several cities served by commercial air carriers, assessed the above amount against the plaintiff pursuant to a provision in the contract which reads as follows:

LIQUIDATED DAMAGES. In the event the Contractor fails to deliver the trucks and equipment to the respective airport locations specified in the bid proposal, in accordance with the time of delivery set forth in the bid proposal, the contractor shall be assessed liquidated damages in the amount of $50.00 per calendar day per truck for each calendar day beyond the stipulated delivery day.

The trial court held the assessment was a void penalty in violation of SDCL 53-9-5, which provides:

Every contract in which amount of damage or compensation for breach of an obligation is determined in anticipation thereof is void to that extent except the parties may agree therein upon an amount* presumed to be the damage for breach in cases where it would be impracticable or extremely difficult to fix actual damage.

The defendants contend that the challenged provision is a valid expression of liquidated damages.

The crash, fire and rescue equipment to be furnished under this contract was a new requirement of federal aviation regulations; federal deadlines for utilization of this equipment had already passed when the Division of Aeronautics let the bids. If the Federal Aviation Administration (FAA) continued to grant waivers, no damages could have resulted from late delivery, assuming no disasters occurred in the intervening period. If the FAA had refused to grant further waivers, however, it would have been necessary for each city to refit its municipal fire trucks and have them standing by during every takeoff and landing of common carrier aircraft. Accordingly, actual damages, if any, were controlled to a great extent by FAA decisions. There was no assurance what those decisions might be when the contract was executed.

A person having the right to a promised performance is entitled, if it is not forthcoming when due, to damages in an amount which will compensate him for the detriment caused thereby. SDCL 21-2-1. A provision for payment of a stipulated sum as a liquidation of damages will ordinarily be sustained if it appears (1) that at the time the contract was made the damages in the event of a breach were incapable or very difficult of accurate estimation; (2) that there was a reasonable endeavor by the parties as stated to fix fair compensation; and (3) that the amount stipulated bears a reasonable relation to probable damages and is not disproportionate to any damages reasonably to be anticipated. Anderson v. Cactus Heights Country Club, 80 S.D. 417, 125 N.W.2d 491 (1963). In determining whether a stipulation in a contract for liquidated damages is void as not coming within the statutory exception in SDCL 53-9-5, the language of the parties used in characterizing the damages fixed is entitled to some weight, although it is not controlling. First Loan & Trust Co. v. Schanche, 48 S.D. 86, 202 N.W. 390 (1925); Harden v. Richards, 41 S.D. 415, 171 N.W. 89 (1919); Utley v. Dunning, 38 S.D. 447, 161 N.W. 813 (1917). It must, however, be accepted until it is shown that the provision is for a penalty. 25 C.J.S. Damages §. 105 (1966). In Dave Gustafson & Co. v. State, 83 S.D. 160, 156 N.W.2d 185 (1968), we recognized the modern tendency not to look with disfavor upon liquidated damage provisions in contracts, because they serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable, as is the case in many government contracts. We also noted that they are not against public policy as an appropriate means of inducing due performance, or of providing compensation, in case of failure to perform. See also: Williston on Contracts, Vol. 5, 3d Ed. § 788, page 760.

It appears that the delays in performance on the part of the plaintiff were largely caused by unexpected shortages, and the evidence shows no actual damages sustained by the defendant. The effect of a clause for stipulated damages in a contract is to substitute the amount agreed upon as liquidated damages for the actual damages resulting from breach of the contract, and thereby prevent a controversy between the parties as to the amount of damages. If a provision is construed to be one for liquidated damages, the sum stipulated forms, in general, the measure of damages in case of a breach, and the recovery must be for that amount. No larger or smaller sum can be awarded even though the actual loss may be greater or less. In such case, evidence of the actual loss or harm suffered is irrelevant. Dave Gustafson & Co. v. State, supra; 22 Am.Jur.2d Damages § 235 (1965).

Gustafson expressly overruled that portion of Fitzgerald v. City of Huron, 47 S.D. 533, 199 N.W. 775 (1924), which held that where a delay was not caused by any fault or negligence of the contractor, a “$50.00 per day” provision was void. It also departed from other earlier decisions that measured the reasonableness of stipulated damages by whether they provided a fair compensation for the actual loss incurred by the injured party and, insofar as they exceeded such fair compensation, they were not recoverable. Cf., International Milling Co. v. Reierson, 55 S.D. 139, 225 N.W. 218 (1929); Barnes v. Clement, 12 S.D. 270, 81 N.W. 301 (1899).

Whether the stipulated sum is an unenforceable penalty or an enforceable provision for liquidated damages is a question of law for the court to determine. Anderson v. Cactus Heights Country Club, supra. That determination must ultimately be made from a consideration of the instrument as a whole, the situation of the parties, the subject matter of the contract, the circumstances surrounding its execution, and other factors. 25 C.J.S. Damages § 103 (1966); see Annot., 6 A.L.R.2d 1401 (1949).

It is conceded, and the trial court held, that at the time the contract was made, the damages in the event of a breach were incapable or very difficult of accurate estimation. With reference to the remaining tests, the evidence shows that in the absence of any set guidelines available for determining a liquidated damage fee for fire trucks, the liquidated damage schedules for other public contracts were considered together with the requirement that the equipment be obtained to retain the certification necessary for the airlines to operate from the airport. Consideration was also given to the safety of passengers, as well as possible liability to the airport owners in the event of an accident prior to delivery. Each unit was considered separately, as the individual airports were to have independent grants and were required to meet certification requirements on their own merits. The $50.00 per truck per day rate was proportionate to the damage each city would encounter in providing standby equipment if the plaintiff was tardy in delivering the equipment.

A review of the negotiations at the time the contract was entered into indicates that the parties endeavored to fix a fair compensation in light of the problem the air carrier airports would encounter if no further extensions were granted by the FAA, and that they followed acceptable criteria as expressed in Dave Gustafson & Co. v. State, supra, and Anderson v. Cactus Heights Country Club, supra. Since we are unable to determine that the stipulated damages are so disproportionate to the amount of any damage reasonably to have been contemplated when the contract was executed as to be oppressive, we cannot say the liquidated damage provision was intended to be other than what the parties said it was. Gustafson, supra; 25 C.J.S. Damages, § 105 (1966).

In view of this conclusion, it is unnecessary to consider the remaining assignments of error urged by appellants.

The judgment is reversed.

WOLLMAN, C. J., and DUNN, J., concur. MORGAN and HENDERSON, JJ„ dissent.