Diffley v. Royal Papers, Inc.
1997 WL 369714, 948 S.W.2d 244, 1997 Mo. App. LEXIS 1251 (1997)
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Rule of Law:
A contractual provision imposing a fixed percentage fee for late payments is an unenforceable penalty, not a valid liquidated damages clause, if the fee is not a reasonable forecast of the actual harm and the harm itself is easily calculable.
Facts:
- Royal Papers, Inc. was party to a collective bargaining agreement requiring it to make weekly contributions to the Teamsters Negotiated Pension Plan for its warehouse employees.
- The original collective bargaining agreement and the associated Trust Agreement did not contain any provision for a penalty or fee for late payments.
- On May 9, 1994, the Pension Plan Trustees unilaterally issued a memorandum to all contributing employers establishing a new policy.
- This policy instituted a 10% "late penalty" on the total monthly contribution for payments received more than 30 days after the end of the reporting month.
- In late 1995, Royal Papers, Inc. submitted its September pension contribution on November 9 (due October 30) and its October contribution on December 6 (due November 30).
Procedural Posture:
- The Pension Plan Trustees filed an action in trial court against Royal Papers, Inc. to collect $210.80 in late fees.
- Both parties filed motions for summary judgment.
- The trial court entered summary judgment in favor of the employer, Royal Papers, Inc.
- The Trustees (appellants) appealed the trial court's judgment to the Missouri Court of Appeals, where Royal Papers, Inc. was the appellee.
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Issue:
Does a 10% late fee on pension fund contributions constitute an unenforceable penalty clause when the actual damages from the late payment are easily calculable and the fee is not a reasonable forecast of the harm caused?
Opinions:
Majority - Crane, Presiding Judge
Yes. A 10% late fee on pension fund contributions constitutes an unenforceable penalty clause when the actual damages are easily calculable and the fee is not a reasonable forecast of the harm caused. The court reasoned that for a liquidated damages clause to be valid under state law, it must satisfy a two-part test: the amount must be a reasonable forecast of the harm, and the harm must be of a kind that is difficult to accurately estimate. Here, the 10% fee fails both prongs. The actual harm from a late payment—primarily lost interest or investment return and administrative costs—is easily measurable and is significantly less than 10% of the entire contribution. Furthermore, the Trustees' own memorandum labeled the fee a "late penalty," indicating an intent to punish non-compliance rather than to compensate for actual losses. Because the provision is designed to compel performance rather than to provide compensation, it is an invalid penalty.
Analysis:
This decision reinforces the traditional common law distinction between enforceable liquidated damages and unenforceable penalties in contract law. It clarifies that merely labeling a provision "liquidated damages" is insufficient; the clause must be a genuine, reasonable pre-estimate of damages that are difficult to ascertain. The court's application of this state-law principle, even while acknowledging a potential federal ERISA preemption issue, demonstrates that punitive contract terms will be scrutinized regardless of the context. This case serves as a caution to drafters, such as plan administrators, that any late fee provisions must be tethered to a reasonable forecast of actual compensatory damages to be enforceable.
