Liquidated damages, excuse by impracticability under the UCC, and wrongful discharge of at-will employees

Black-letter propositions

1. 01

   Under the UCC, damages for breach by either party may be liquidated in the agreement but only at an amount reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

2. 02

   A term fixing unreasonably large liquidated damages is void as a penalty.

3. 03

   A stipulated damages clause must be a reasonable forecast of the provable injury resulting from breach or it is unenforceable as a penalty, and it is presumptively reasonable, so the party challenging it bears the burden of proof.

4. 04

   Damages calculated from a party's gross receipts run the risk of being found unreasonable, because gross receipts do not generally reflect the actual loss caused by breach.

5. 05

   When the buyer breaches and the seller justifiably withholds delivery, the buyer is entitled to restitution of any amount by which the payments exceed the amount fixed by the liquidating terms or, absent such terms, twenty percent of the value of the total performance or $500, whichever is smaller.

6. 06

   A seller's delay or nondelivery is not a breach if performance as agreed has been made impracticable by a contingency whose nonoccurrence was a basic assumption on which the contract was made, or by good-faith compliance with a governmental regulation, unless the seller assumed a greater obligation.

7. 07

   If the excusing cause affects only part of the seller's capacity, the seller must allocate production and deliveries among its customers in a fair and reasonable manner, and the seller must seasonably notify the buyer of the delay or nondelivery and of the estimated quota.

8. 08

   A buyer who receives notice of a material delay or an allocation may, by written notification, terminate the unexecuted portion of the contract or modify it to take the available quota, and the contract lapses if the buyer does not modify it within a reasonable time not exceeding 30 days.

9. 09

   An employee at will may be discharged for no reason or an arbitrary or irrational reason but not for an unlawful reason or purpose that contravenes public policy, and North Carolina recognizes a wrongful discharge claim on that ground.

10. 10

    A discharge violates public policy when the employer fires a driver who refuses to falsify records to show compliance with safety regulations, because highway safety is a well-established public policy.

Use this attack sequence under time

Common wrong turns

• A clause that sets damages far above the probable loss is a penalty and is void.
• Ordinary cost increases do not by themselves make performance impracticable.
• A seller who claims excuse must still allocate fairly and give timely notice.
• An at-will employee may be fired for no reason but not for refusing to violate the law.

Worked example

A lease says that if the tenant breaches, it must pay a fixed sum equal to 25 percent of the tenant's gross receipts for a year, regardless of the actual rent lost. The landlord's actual loss is much smaller.

Practice this topic

Liquidated damages

Section 2-718(1) of the Uniform Commercial Code provides that damages for breach by either party may be liquidated in the agreement but only at an amount that 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 nonfeasibility of otherwise obtaining an adequate remedy, and that a term fixing unreasonably large liquidated damages is void as a penalty. Section 2-718(2) gives a buyer whose breach caused the seller to withhold delivery restitution of payments above the liquidated amount or, absent a liquidation clause, above twenty percent of the value of the performance or $500, whichever is smaller.

Wasserman's Inc. v. Township of Middletown said that a stipulated damages clause must constitute a reasonable forecast of the provable injury resulting from breach, that clauses are presumptively reasonable so the challenger has the burden, and that damages based on gross receipts run the risk of being unreasonable because gross receipts do not generally reflect actual loss.

Excuse by failure of presupposed conditions

Section 2-615 provides that, except so far as a seller has assumed a greater obligation, delay in delivery or nondelivery by a seller who complies with paragraphs (b) and (c) is not a breach if performance has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made, or by good-faith compliance with a governmental regulation whether or not it later proves invalid. Where only part of the seller's capacity is affected the seller must allocate production and deliveries fairly and reasonably among customers and must seasonably notify the buyer of the delay or nondelivery and the estimated quota.

Section 2-616 gives the buyer who receives that notice the right to terminate the unexecuted portion of the contract or to modify it by agreeing to take the available quota, and provides that if the buyer does not modify the contract within a reasonable time not exceeding thirty days it lapses with respect to the deliveries affected.

At-will employment

Coman v. Thomas Manufacturing Co. adopted the principle that there may be a right to terminate a contract at will for no reason or for an arbitrary or irrational reason, but no right to terminate for an unlawful reason or purpose that contravenes public policy, and held that a truck driver who alleged he was told to violate driving-time regulations and falsify logs and was constructively discharged when he refused stated a claim for wrongful discharge.

Frequently asked questions