The Massachusetts Supreme Judicial Court recently ruled that mitigation of damages is irrelevant to assessing an enforceable liquidated damages provision.
The court in its first impression decision said it was illogical to consider mitigation because by agreeing in advance to an amount of reasonable damages, the parties exchanged the opportunity to determine actual damages after a breach.
The case (NPS, LLC v. Minihane, 415 Mass. 417) involved a dispute between the New England Patriots and a season ticket holder. In 2002, Paul Minihane entered in an agreement with NPS, LLC for a 10-year license for two luxury club seats at Gillette Stadium for Patriots’ home games. NPS was the developer of Gillette Stadium, and is a subsidiary of the Kraft Group, an affiliate of the New England Patriots. Minihane was required to pay $7,500 annually for both club seats through 2011. Minihane initially paid $7,500 and subsequently paid $2,000 towards the license fee for the 2002 season. Minihane, however, made no further payments and in 2003 NPS sued him.
Enforcing the License Agreements is important to NPS because the agreements were pledged as collateral for funding the construction of Gillette Stadium, and the revenue from the agreements is NPS’s primary source of money to pay its debt.
The License Agreement included an acceleration provision, which meant the entire unpaid balance of the license fee was due on default. This meant Minihane had to pay $65,500 when he defaulted after the first year.
The trial court held that this accelerated sum was grossly disproportionate to a reasonable estimate of damages, and awarded actual damages in the amount of $6,000.
However, the SJC set aside the trial court’s holding, ruling that NPS was entitled to the full accelerated amount of $65,500, plus interest.

The standard

The SJC outlined the standard for determining an enforceable liquidated damages provision, noting that “[A] liquidated damages provision will usually be enforced provided two criteria are satisfied: first, that at the time of contracting the actual damages flowing from a breach were difficult to ascertain; and second, that the sum agreed on as liquidated damages represents a ‘reasonable forecast of damages expected to occur in the event of a breach.’” 415 Mass. at 420 (citing Cummings Props., LLC v. National Communications Corp., 449 Mass. 490, 494 (2007)). The court said the reasonableness of a liquidated damages provision depends on the circumstances of each case at the time of contract formation.
Applying this analysis, the court determined that the amount of liquidated damages (equal to what Minihane would have paid if he fully performed) bears a reasonable relationship to the anticipated actual damages. The court further noted that Minihane failed to show the amount of liquidated damages was grossly disproportionate to a reasonable estimate. Id. at 422.

Level of sophistication

The court’s reliance on Cummings raises an issue with respect to the sophistication of the parties to a contract. Cummings upheld the enforceability of a liquidated damages provision in a real estate lease which provided that all future rents may be accelerated in the event of a default. Cummings at 494-96.
The Appellate Division initially vacated an award of damages under the liquidated damages provision based on the SJC’s prior ruling in Commissioner of Ins. v. Massachusetts Acc. Co., 310 Mass. 769 (1942), which held that where a liquidated damages clause establishes the same damages for breach of “any” provision within a contract, regardless of the severity of the breach, it will be struck down as a penalty even for those breaches for which it would not be disproportionate.
On appeal, the SJC in Cummings reinstated the award for liquidated damages and modified its prior ruling in Commissioner of Ins. providing that “in the case of a commercial agreement between sophisticated parties containing a liquidated damages provision applicable to breaches of multiple covenants, it may be presumed that the parties intended the provision to apply only to those material breaches for which it may properly be enforced.” Cummings at 495-96. (Emphasis added).
The court reasoned this modification was consistent with the parties’ inclusion of a severability clause providing that the unenforceability of any provision would not render remaining provisions unenforceable. Id. at 496.
Notably, the court in NPS took care to describe the sophistication of Minihane, detailing that he was a licensed real estate broker with experience as a general contractor and real estate developer, and the chairman of the Boston Finance Commission. The court also noted that he had entered into numerous commercial contracts.
The potential consequence of the court’s reliance in NPS on Cummings is that a contract containing a broad liquidated damages provision applicable to “any” default, regardless of materiality, may still be unenforceable as a penalty under Commissioner of Ins. if it is not made with a sophisticated party possessing the same level of experience as Minihane.

What to include in the contract

As a result of the decision in NPS, parties can now agree to amounts of liquidated damages at the outset of their agreements without the fear that the damages will be struck down as a penalty if a subsequent breach is then perceived to result in an excessive award.
Parties are now also free to include liquidated damages without the fear of having to prove that reasonable efforts were made to mitigate.
Contracting parties, however, should still include a provision waiving any requirement to mitigate damages in the event of a breach. Also, contracting parties should include a severability clause to protect valid provisions of their agreements in the event that a liquidated damages provision is deemed unenforceable.

Michael A. Bean is an attorney in the Boston office of WolfBlock LLP where he represents companies in all strategic phases of their business life cycles, including entity formation, mergers and acquisitions, corporate governance matters, financing transactions, and drafting commercial agreements. He can be reached at 617. 226.4028 or [email protected]. WolfBlock LLP (www.wolfblock.com) is based in Philadelphia with offices throughout the Northeast.