Kvassay v. Murray, 808 P.2d 896 (Kan. Ct. App. 1991)

Posture of the case: Plaintiff Kvassay appeals a trial court's ruling that a liquidated damages clause was unenforceable and additionally, the court's finding that damages for lost profits incurred by plaintiff were not recoverable. Defendant Great American Foods has counterclaimed contending that the trial court was in error to permit their "corporate veil" to be pierced.

Facts: On February 22, 1984, Kvassay, formerly employed as an insurance adjuster, contracted with Great American Foods (Great American)(which was a "corporate" entity of the Murrays) to sell 24,000 cases of baklava to Great American at a cost of $19.00 per case. Under the contract the sales were to transpire over a one-year period and Great American would be Kvassay's sole customer. The contract included a clause which provided that in the event the buyer refused to accept or repudiated delivery of the goods under the Agreement, then the seller would be entitled to damages. Specifically, the damages would be $5.00 for each case remaining to be sold under the contract.

Early on the business relationship became problematic with several checks issued from Great American returned for insufficient funds. Quite often the Murrays would issue a personal check for the amount due. After Kvassay had produced approximately 3,000 cases he ceased production because Great American refused to purchase any more of his delicious baklava.

Shortly afterward, in April 1985, plaintiff filed suit for damages suffered from the collapse of his baklava business. Great American counterclaimed arguing the trial court was wrong for allowing it's corporate veil to be pierced so that the Murrays could be held personally liable for corporate debts.

The trial court ruled that liquidated damages could not be recovered and as a matter of law Kvassay was unable to recover damages for lost profits as they were too speculative and conjectural.

Plaintiff claimed $105,000.00 in losses under the liquidated damages clause of the contract which represented $5.00 per case for the 21,000 cases he was not able to deliver to Great American. The trial court ruled Kvassay's use of expected profits to formulate the liquidated damages was improper as his business lacked duration, permanency, and recognition. The court compared his previous yearly income ($20,000.00) with his claim for liquidated damages and found a disparity so great as to make the clause unenforceable.

As the case involved the sale of goods between merchants the UCC governs. Liquidated damages clause in sales contracts are governed by K.S.A 84-2-718 which states in pertinent part:

(1) Damages for breach by either party may be liquidated but only by an amount which is reasonable in light of the anticipated or actual harm by the breach.............A term fixing unreasonably large liquidated damages is void as a penalty.

Issue: Was the trial court correct when it invalidated the liquidated damages clause despite their use of an incorrect test?

Ruling: The trial court erroneously relied on DerWeff, a Kansas case which was not governed by the UCC and as such is given no effect. Under the UCC which governs this case, reasonableness is the only test. K.S.A 84-2-718 provides three criteria to measure the reasonableness of liquidated damages clauses: 1) the anticipated or actual harm caused by the breach; 2) difficulty of proving the loss; and 3) difficulty of obtaining an adequate remedy. The trial court should not have relied on Kvassay's previous income to measure liquidated damages. Kvassay had produced evidence at the trial showing his accountant's calculations for production costs. If each case for $19.00 he would earn a net profit of $3.55 per case. If he didn't pay himself the profit would be $4.29 per case. Based upon these calculations it is evident that Kvassay would collect 41% over profits in the former case and 16% over profits in the latter case. This alone might lead to the conclusion that the liquidated damages clause is unreasonable. Unreasonably large liquidated damages are void as a penalty under Kansas law.

A better measure of the validity of the clause in this case could be obtained by comparing the actual lost profits caused by the breach with the $5.00 per case set by the clause. Kvassay did not attempt to do this until a jury trial. It's questionable as to whether this evidence would have been permitted at the bench trial.

As the trial court used an improper factor to determine liquidated damages and the correct statutes were not addressed the case was reversed and remanded to the trial court for further consideration of the reasonableness of the clause using the three criteria provided by 84-2-718.