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Norwalk Door Closer Co. v. Eagle Lock & Screw Co.

Supreme Court of Connecticut
1966 Conn. LEXIS 576, 153 Conn. 681, 220 A.2d 263 (1966)
ELI5:

Rule of Law:

A contractual clause for liquidated damages is unenforceable, regardless of whether it was a reasonable estimate of damages at the time of contracting, if the breach of contract ultimately causes no actual damages to the non-breaching party.


Facts:

  • Norwalk Door Closer Co. (Norwalk) owned the rights and equipment to manufacture door closers.
  • On June 22, 1956, Norwalk contracted with Eagle Lock & Screw Co. (Eagle) for Eagle to exclusively manufacture the door closers for seven years using Norwalk's equipment.
  • Paragraph 14 of the contract stated that if Eagle terminated the agreement for specified reasons, it would be considered a breach, and Eagle would have to pay Norwalk $100,000.
  • On September 29, 1960, Eagle notified Norwalk that it would terminate the contract effective December 31, 1960.
  • In October 1960, Eagle sold all its assets to another corporation.
  • The acquiring corporation immediately formed a subsidiary that continued manufacturing the door closers for Norwalk from the same location, with the same management, and without any interruption to Norwalk's business.

Procedural Posture:

  • Norwalk (plaintiff) sued Eagle (defendant) in a state trial court to recover $100,000 as liquidated damages for breach of contract.
  • Eagle filed a counterclaim to recover $63,574.33 for goods delivered to Norwalk.
  • The trial court denied Norwalk's recovery of the $100,000, concluding the provision was an unenforceable penalty.
  • The trial court awarded Eagle recovery on its counterclaim.
  • Norwalk (plaintiff-appellant) appealed the trial court's judgment to the state's highest court.
  • Eagle (defendant-appellee) filed a cross-appeal.

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Issue:

Does a contractual provision for liquidated damages become an unenforceable penalty when the breach of contract causes no actual damage to the non-breaching party?


Opinions:

Majority - Alcorn, J.

Yes. A provision for liquidated damages, even if it meets the traditional tests for validity at formation, is unenforceable where a court sees that no actual damage has been sustained. The court's decision is grounded in equity, as enforcing a liquidated damages clause when no harm has occurred would amount to the infliction of a penalty, which is contrary to public policy. The entire premise for an agreed-upon damage estimate vanishes if the damage envisioned by the parties never occurs. Since Norwalk continued its business uninterruptedly and without harm, it cannot recover the $100,000.



Analysis:

This case establishes a significant equitable exception to the general enforceability of liquidated damages clauses. It shifts the analysis from a pure ex-ante (at the time of contract) view of reasonableness to include an ex-post (at the time of breach) consideration of actual harm. The decision empowers courts to refuse enforcement of a liquidated damages clause if the non-breaching party suffers no loss, creating uncertainty for parties who rely on such clauses for predictable risk allocation. This ruling suggests that even a perfectly drafted liquidated damages provision may be struck down if the non-breaching party successfully mitigates all damages.

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