LIQUIDATED DAMAGES ENFORCEABLE EVEN WHEN A PARTY’S BREACH DOES NOT CAUSE HARM TO NON-BREACHING PARTY
The Pennsylvania Superior Court has ruled that liquidated damages were enforceable as part of a breach of contract case related to the sale of an insurance company.
Ferraro sold his insurance company to M&M. As part of the sales agreement, Ferraro was barred from selling insurance policies to any of his former clients, noted on a customer list by M&M. If Ferraro violated that provision, he would be obligated to pay three-and-a-half times the commission to M&M as liquidated damages.
M&M alleged that Ferraro did violate that provision and sued him, however, the Lawrence County judge sided with Ferraro in his argument that the liquidated damages clause was unenforceable as a penalty and granted Ferraro the ability to file an interlocutory appeal.
In that appeal, Ferraro asked the Superior Court to consider “whether enforcing a provision for liquidated damages when a party’s breach does not cause actual harm to the non-breaching party is considered a penalty under the tests outlined in Holt’s Cigar v. 222 Liberty Associates”; and, “Alternatively, if the liquidated damages provision is not a penalty, is a non-breaching party required to prove that the breaching party caused some harm to the non-breaching party.”
The crux of Ferraro’s argument is that since the prohibited customers approached him without solicitation – because he believed they were unsatisfied with M&M – he was not responsible for their actions and thus did not breach the contract. Bowes, however, said that M&M did not have to show who was responsible for soliciting who in order to recover liquidated damages.
“Simply put, the contract in question does not require that Ferraro solicit the clients nor does the language, to any extent, suggest that, if the clients are not satisfactorily serviced by M&M, then Ferraro becomes free to accept insurance business from the unhappy clientele. The contract clearly and unambiguously does not permit Ferraro to accept any insurance business from those client accounts that M&M purchased as part of the sale of Ferraro’s insurance business. The manner in which the clients reached Ferraro is simply not relevant. The contract language in question is not susceptible to any other meaning.”
Reference: P.J. Annunzio, Pennsylvania Law Weekly, 40 PLW 1159, December 19, 2017
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