Wasserman's Inc. v. Township of Middletown

Plaintiff enters a lease with Defendant. Plaintiff leases the property to operate a business. The lease contains a liquidated damages clause. The clause states that in the event of a breach by Defendant, the Defendant must pay the Plaintiff 25% of Plaintiff's annual gross receipts (based on a three-year average). The Defendant breached, but refused to pay the liquidated damages.

The court reviews the clause under a reasonableness standard. To be enforceable the clause must be reasonable under the totality of the circumstances. The clause fails that tests, and therefore is classified as a penalty clause (unenforceable) as opposed to a liquidated damages clause (enforceable). The amount awarded is grossly disproportionate to the annual profit. Damages based on gross receipts fails the reasonableness test.

Remedies for Breach | Liquidated Damages and Penalties