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Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc. - 41 N.Y.2d 420, 393 N.Y.S.2d 365, 361 N.E.2d 1015 (1977)

Rule:

Liquidated damage provisions will not be enforced if it is against public policy to do so, and public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority. It is plain that a provision which requires, in the event of contractual breach, the payment of a sum of money grossly disproportionate to the amount of actual damages provides for penalty and is unenforceable. A liquidated damage provision has its basis in the principle of just compensation for loss. A clause which provides for an amount plainly disproportionate to real damage is not intended to provide fair compensation but to secure performance by the compulsion of the very disproportion. A promisor would be compelled, out of fear of economic devastation, to continue performance and his promisee, in the event of default, would reap a windfall well above actual harm sustained. To permit parties, in their unbridled discretion, to utilize penalties as damages, would lead to a terrible oppression in pecuniary dealings.

Facts:

Defendant lessee furnished milk products to customers using new delivery trucks leased under an agreement with plaintiff lessor. The agreement provided that an early termination of the lease through defendant's breach would entitle plaintiff to 50 percent of rents that would have come due until the date of normal expiration. Defendant terminated early, complaining that plaintiff had not repaired and maintained the trucks as provided in the agreement. Plaintiff commenced a suit for payment of the liquidated damages, and defendant counterclaimed for return of its security deposit. The trial court found that plaintiff had substantially performed its obligations and defendant was not justified in terminating the agreement. The decision was affirmed by the appellate division, and defendant appealed.

Issue:

Was the provision in a truck lease agreement requiring payment of an amount equal to one half of the rent otherwise payable for the balance of the lease term in the event of the lessee's breach an enforceable liquidated damages clause?

Answer:

Yes

Conclusion:

The court affirmed the judgment in favor of plaintiff lessor because it substantially performed its obligations and defendant lessee was not justified in terminating the lease agreement early. The court held that it was permissible for the parties to agree in advance what the liquidated damages would be for a breach. It was permissible for the parties to agree in advance that the re-rental or sale value of the vehicles would be 50 percent of the weekly rental. The court held that there was no indication of any disparity of bargaining power or of unconscionability, and the provision for liquidated damages related reasonably to potential harm that was difficult to estimate.

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