California & Hawaiian Sugar Co. v. Sun Ship, Inc.
1987 A.M.C. 1792, 794 F.2d 1433 (1986)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under the Uniform Commercial Code, a liquidated damages clause is enforceable if it was a reasonable forecast of potential harm at the time of contracting, even if the actual damages suffered are significantly less. In a case of concurrent breach by two separate contractors, one contractor's default does not excuse the other from liability for liquidated damages.
Facts:
- California and Hawaiian Sugar Company (C and H), a sugar cooperative, required reliable shipping to transport its seasonal sugar crop from Hawaii to its refinery in California.
- In 1979, C and H learned its primary shipping provider would withdraw services by 1981, creating an urgent need for a new vessel for the peak 1981 harvest season.
- C and H commissioned a custom 'integrated tug barge' unit, contracting separately with Sun Ship, Inc. (Sun) to build the barge and Halter Marine, Inc. (Halter) to build the tug.
- The contract with Sun, signed November 14, 1979, set a delivery date of June 30, 1981, for the barge and included a liquidated damages clause of $17,000 for each day of delay.
- The separate contract with Halter required delivery of the tug by April 30, 1981.
- Both parties defaulted on their delivery deadlines; Sun completed the barge on March 16, 1982, and Halter completed the tug on July 15, 1982.
- The barge was useless to C and H without the corresponding tug.
Procedural Posture:
- After the delivery date passed, Sun paid C and H the $17,000 daily liquidated damages from June 30, 1981, until January 10, 1982, but then stopped payments and denied further liability.
- C and H had previously settled its claims against Halter for the late delivery of the tug.
- C and H initiated a lawsuit against Sun in the United States District Court based on diversity jurisdiction to recover the remaining liquidated damages.
- The district court (trial court) found in favor of C and H, upholding the liquidated damages clause.
- Sun (appellant) appealed the judgment to the United States Court of Appeals for the Ninth Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is a liquidated damages clause, which was a reasonable forecast of potential damages at the time of contracting between sophisticated parties, unenforceable as a penalty where the actual harm was substantially less, due in part to a concurrent breach by a third-party contractor?
Opinions:
Majority - Noonan, Circuit Judge
No, the liquidated damages clause is not an unenforceable penalty. A clause is enforceable if it represented a reasonable estimate of anticipated damages at the time of contracting, regardless of the actual damages that later occurred. Sun's argument that the clause should only be triggered by a failure to deliver the fully integrated unit is a misreading of the contract, which unambiguously defines the 'Vessel' as the barge. The court must assess reasonableness under UCC § 2-718(1), which looks to 'anticipated or actual harm.' Because the parties were sophisticated and negotiated at arm's length, their agreement that $17,000 per day was a reasonable measure of damages—given the foreseeable risk of catastrophic losses to the sugar crop—is entitled to deference. The fact that the tug was also delayed (a concurrent cause) does not absolve Sun; to hold otherwise would allow both defaulting parties to escape liability. Furthermore, the difficulty in precisely calculating C and H's total consequential damages makes it appropriate to uphold the parties' own pre-negotiated estimate rather than substitute the court's judgment.
Analysis:
This decision strengthens the enforceability of liquidated damages clauses, particularly in contracts between sophisticated commercial parties. It clarifies that under the UCC's 'anticipated or actual harm' test, a court may uphold a clause based solely on the reasonableness of the forecast at the time of contracting, even when actual damages are minimal. The case establishes an important precedent for situations involving concurrent causation, holding that one party's breach does not nullify another's liability for liquidated damages when both defaults contribute to the overall harm. This discourages defendants from using a third party's concurrent default as a shield against their own contractual obligations.
Unlock the full brief for California & Hawaiian Sugar Co. v. Sun Ship, Inc.