Friday, March 23, 2012

Lake River Corp. v. Carborundum Co. case brief

Lake River Corp. v. Carborundum Co.; (7th Cir, 1985); CB 69; Notes 14
  • Facts: P contracted to be processing and distribution provider – bagged and distributed “FerroCarbo.” D promises to let P process a certain amount over 3 years and will pay at least $533,000. If they fail, they’ll liquidate damages (pay the full $533,000).
  • Issue: whether the formula in the minimum guarantee clause imposes a penalty for breach of contract or is merely an effort to liquidate damages.
  • Holding: It’s a penalty clause, not liquidation of damages.
  • Rule: Liquidated damages must be a reasonable estimate at the time of contracting of the likely damages from breach, and the need for estimation at that time must be shown by reference to the likely difficulty of measuring the actual damages from breach after the breach occurs.
  • Rationale: The damage formula was designed always to assure Lake River more than its actual damages, making it a penalty. LR didn’t have to do as much work, so they shouldn’t get same profit.
  • Commentary: Courts don’t like liquidated damages and penalty clauses b/c it’s taking away their power to decide damages. Clever parties can find their way around the rule by structuring it as “here are what the two parties are going to do as part of the agreement” as opposed to “here’s what happens if K is breached.”
  • UCC Section: § 2-718: Liquidation or Limitation of Damages.

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