Tennessee courts will not save a party from its own contract: Liquidated Damages provisions will usually be upheld

When a tenant under a long term lease defaults, you’ll remember that the landlord can’t automatically sue for the entire balance due over the remaining contract. Instead, the landlord has to mitigate its damages, generally by trying to find a replacement tenant to take over the empty space.

But, what about other types of long-term service contracts? Is the service-provider entitled to compensation for both past-due amounts and future contract payments coming due, regardless of whether they can find a “replacement” customer?

This exact issue is presented in three new lawsuits that were filed in mid-December in Davidson County. In the lawsuits, a commercial linen company (i.e. napkins, aprons, bar towels, mats, etc.) sued three Nashville restaurants for breach of the linen rental agreement. In all, the actual past due amount wasn’t that much–instead, the lions share of the requested judgment was for damages for the remaining months of the contract, which this particular agreement. Under this agreement, the provider could recover “60% of the weekly service charge for the unexpired term” as its future damages.

For instance, in the lawsuit against Woolworths on 5th, the restaurant had an actual overdue balance of just $1,430.11. But, after applying the damages clause, the rental company is asking for a total of $77,440.60, which includes 60% of the not-yet-due amounts owed over the 60 month service agreement.

This seems a bit unfair, right?

These types of damages are known as “liquidated damages.” When the actual amount of damages under a contract are uncertain and difficult to calculate, these provisions are agreed to by the parties at the time the contract is signed to provide certainty and establish a method for calculating those damages.

With real estate, it’s really easy to calculate damages —how long was the property vacant after the breach? With longer-term service contracts, it’s more difficult–what expenses and costs did the service provider not incur by not having to provide the linen?

In Tennessee, a liquidated damages clause will be generally be allowed unless the challenging party proves that the provision is really just a penalty and/or designed to punish the breaching party. Tennessee law does not favor penalties, and, if it’s a close call, Tennessee Courts will be inclined to disallow the penalty. Testerman v. Home Beneficial Life Insurance Co., 524 S.W.2d 664 (Tenn.App.1974). In short, a liquidated damages provision should be somewhat reasonable in relation to the possible injury suffered and not unconscionable or excessive.

More recent Tennessee cases tend to favor allowing parties to a contract the freedom to agree to whatever business deal they want, even it’s an awful deal with a fairly onerous damages provision. See Guiliano v. Cleo, Inc., 995 S.W.2d 88, 101 (Tenn.,1999). “‘The bargain may be an unfortunate one for the delinquent party, [but] it is not the duty of courts of common law to relieve parties from the consequences of their own improvidence.’” Id.

This will be interesting to watch. Sure, damages at 60% of the remaining term sounds really high, but maybe that’s representative of the expected profits in the linen rental industry. If it’s close, a Tennessee court will allow this.

Author: David

I am a creditors rights and commercial litigation attorney in Nashville, Tennessee.

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