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Vanderbilt Univ. v. DiNardo - 174 F.3d 751 (6th Cir. 1999)

Rule:

Contracting parties may agree to the payment of liquidated damages in the event of a breach. The term "liquidated damages" refers to an amount determined by the parties to be just compensation for damages should a breach occur. Courts will not enforce such a provision, however, if the stipulated amount constitutes a penalty. A penalty is designed to coerce performance by punishing default. In Tennessee, a provision will be considered one for liquidated damages, rather than a penalty, if it is reasonable in relation to the anticipated damages for breach, measured prospectively at the time the contract was entered into, and not grossly disproportionate to the actual damages. When these conditions are met, particularly the first, the parties probably intended the provision to be for liquidated damages. However, any doubt as to the character of the contract provision will be resolved in favor of finding it a penalty.

Facts:

The employment contract of defendant football coach, Gerry DiNardo, contained a liquidated damages provision. The coach had signed an addendum to the contract, a two-year extension, stating that he wished his attorney to approve it before it was finalized. When the coach subsequently resigned, plaintiff Vanderbilt University sued for breach of contract, demanding that the coach pay liquidated damages for the one year remaining upon the original contract and for the two years of the addendum. The district court granted summary judgment in favor of the university. DiNardo appealed.

Issue:

(a) Was defendant coach liable for liquidated damages? (b) Was the university entitled to summary judgment on the addendum, the two-year extension?

Answer:

(a) Yes (b) No

Conclusion:

(a) The Court of Appeals for the Sixth Circuit affirmed the finding of the district court that the liquidated damages provision was enforceable as it was a reasonable estimate of damages and was within the contemplation of both parties. The stipulated damage amount is reasonable in relation to the amount of damages that could be expected to result from the breach. The parties understood that Vanderbilt would suffer damage should DiNardo prematurely terminate his contract, and that these actual damages would be difficult to measure.

(b) There was a disputed question of material fact as to whether the Addendum is enforceable. A factual dispute existed as to whether defendant's lawyer approval of the contract was a condition precedent to the Addendum's enforceability. Gerry DiNardo testified that he told plaintiff’s representative that the contract extension was not "final" until his lawyer looked at it.  The representative's testimony on this point was consistent with DiNardo's: "He [Gerry DiNardo] said that he wanted to discuss the matter with you [Larry DiNardo], which I said certainly." It is undisputed that on August 25, nine days after Gerry DiNardo signed the Addendum, plaintiff’s representative  sent Larry DiNardo an unsigned copy of the "draft Addendum." The cover sheet on a fax sent by plaintiff to DiNardo on September 27 closes with: "I would like your comments on the contract extension." From these facts, a jury could conclude that the lawyer’s approval was required before the Addendum became a binding contract.

The Court affirmed the grant of summary judgment regarding the liquidated damages provision of the original contract as the provision was enforceable, but reversed the summary judgment regarding the addendum, and remanded as a fact-issue remained as to whether the attorney's acceptance of the addendum was a condition precedent.

 

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