Wasserman's Inc. v. Township of Middletown

Facts: Plaintiff leased property from Township of Middletown for thirty years under contract. The contract included two stipulations for damage recovery if the lease were to be canceled. They were: 1) that the value of the improvements made to the property (at the time of construction) would be multiplied by years remaining in the lease term divided by total number of years in lease term; and 2) that the Township would pay twenty-five percent of the lessee's average gross receipts for one year, found by averaging the previous three full fiscal years preceding the time of cancellation of the lease. Township canceled contract after about 18 years.

Procedural History: Law division held the contract enforceable. Appellate division affirmed.

Issue: Does the damage stipulation of a contract that is apparently based on punitive measures rather than compensatory damages cause the contract to be unenforceable?

Holding: Maybe, but it must be analyzed for reasonableness by the lower court.

Reasons: "The purpose of a stipulated damages clause is not to compel the promisor to perform, but to compensate the promisee for non-performance." Basing damages on gross profits could award the plaintiff a windfall.

Judgment: Affirmed that town is liable to Plaintiffs for terminating the lease, and that town owes $55,748 for renovation costs. Remanded to consider unreasonableness of stipulated damages.

Comments: A liquidated damages stipulation could be found unreasonable for two main reasons: 1) at the time the contract was made, it was clear that the actual damage resulting from breach would be easily ascertainable; and 2) damages reflect punitive measures rather than compensation.