RKR Motors, Inc. v. Associated Uniform Rental & Linen Supply, Inc.
995 So.2d 588, 2008 WL 4862514 (2008)
Rule of Law:
When calculating lost profits for breach of contract, all costs related to the performance of the contract, including a prorated share of fixed overhead expenses, must be deducted from projected revenue to avoid an unmerited windfall to the non-breaching party. Furthermore, while liquidated damages clauses are generally enforceable if damages are not readily ascertainable and the stipulated sum is not grossly disproportionate to expected damages, equity will relieve against enforcement if the amount is unconscionable in light of circumstances at the time of the breach.
Facts:
- RKR Motors, Inc. (RKR Motors) and Associated Uniform Rental & Linen Supply, Inc. (Associated Uniform) entered into three contracts.
- Under these contracts, Associated Uniform agreed to rent and launder uniforms for use by RKR Motors' employees.
- The contracts contained a liquidated damages clause stipulating a payment amount for cancellation prior to the termination date, calculated as the greater of 75% of the average weekly service charge multiplied by unexpired weeks or the purchase price of inventory.
- RKR Motors subsequently terminated all three contracts.
- Associated Uniform's average net profits for a three-year period were consistently 8% of its average total revenue.
- Associated Uniform serviced approximately 1000 customers, and RKR Motors was considered a "typical" customer.
Procedural Posture:
- Associated Uniform filed a multi-count complaint against RKR Motors, including a count for breach of contract.
- RKR Motors filed an answer and affirmative defenses, asserting the liquidated damages clause was "unreasonable," a "penalty," and "unconscionable."
- Approximately one week prior to the commencement of the bench trial, RKR Motors admitted liability for breaching the contracts, leaving only the determination of damages.
- At the bench trial, both parties presented expert testimony regarding the amount of Associated Uniform's lost profits.
- The trial court accepted Associated Uniform's expert's methodology, finding that Associated Uniform suffered $82,444 in actual lost profits by considering only saved expenses.
- The trial court found that the contract's liquidated damages amount of $102,309 was not disproportionate to its calculated actual lost profits of $82,444, but "in the best interest of equity," it awarded Associated Uniform only the $82,444 in lost profits.
- RKR Motors appealed the amount of lost profits awarded, arguing the methodology used by the trial court was legally incorrect.
- Associated Uniform cross-appealed, asserting the trial court erred by not awarding damages pursuant to the liquidated damages provisions of the contract after finding them not disproportionate to its determined actual lost profits.
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Issue:
1. Does the proper methodology for calculating lost profits in a breach of contract action require the deduction of a prorated share of fixed overhead expenses related to performing the contract, even if those expenses would not have been "saved" by the breach? 2. Did the trial court err by declining to award liquidated damages despite finding them not disproportionate to its erroneously calculated actual lost profits, and if so, is the liquidated damages clause enforceable if the correctly calculated lost profits demonstrate the liquidated amount to be unconscionable?
Opinions:
Majority - Rothenberg, J.
Yes, the proper methodology for calculating lost profits in a breach of contract action requires the deduction of a prorated share of fixed overhead expenses related to performing the contract, even if those expenses would not have been "saved" by the breach, and yes, the trial court erred in declining to award liquidated damages but a correct calculation of lost profits reveals the liquidated amount to be unconscionable, thus requiring an award of actual lost profits. The court reversed the trial court's award of $82,444 in lost profits, finding that the methodology used by Associated Uniform's expert, and adopted by the trial court, was legally incorrect. The expert subtracted only those expenses that he believed would be saved as a result of not having to fulfill the contracts, but did not subtract any of Associated Uniform's fixed expenses, such as administrative expenses. Citing Boca Developers, Inc. v. Fine Decorators, Inc. and Physicians Reference Lab., Inc. v. Daniel Seckinger, M.D. & Assocs., P.A., the court clarified that to accurately measure true lost profits, a share of all costs related to the performance of the contract, including fixed and variable costs, must be deducted from the contract price. The court distinguished Knight Energy Services, Inc. v. C.R. International Enterprises, Inc., which Associated Uniform relied upon, by noting that in Knight, there was testimony that fixed costs were not involved in performing the projects, whereas in this case, no evidence was presented to suggest that fixed costs were not involved in the performance. The court highlighted that if Associated Uniform's overall net profit margin was 8%, then an award of $82,444 on a contract worth $129,164.04 would represent an unmerited 64% profit margin on services not rendered, constituting an impermissible windfall. Based on Associated Uniform's established 8% profit margin applied to the total contract value, the true lost profits amounted to $10,333.12, which was very close to RKR Motors' expert's calculation of $10,437. Regarding the cross-appeal, the court found that the trial court erred by not awarding the liquidated damages amount of $102,309 after finding it was not disproportionate to its incorrectly calculated actual lost profits of $82,444. Under Lefemine v. Baron, liquidated damages provisions are upheld if damages are not readily ascertainable and the sum is not grossly disproportionate to expected damages. However, citing Hutchison v. Tompkins, equity will relieve against enforcement if the liquidated damages amount is "unconscionable" in light of the circumstances existing at the time of the breach. Because the correct computation of actual lost profits was $10,437, the court concluded that the liquidated damages amount of $102,309 was "clearly disproportionate" to this amount, making it "unconscionable" to impose the liquidated damages. Therefore, while the trial court was initially correct in awarding lost profits instead of liquidated damages, the amount needed to be corrected. The court reversed the final judgment and remanded for entry of a judgment for Associated Uniform in the amount of $10,437, and for reconsideration of Associated Uniform's entitlement to attorney's fees and costs, granting RKR Motors' request for attorney's fees.
Analysis:
This case clarifies the critical principle in Florida contract law that when calculating lost profits for a breach, all costs of performance, including an allocated share of fixed overhead, must be deducted from the contract price to prevent an unfair windfall to the non-breaching party. It reinforces that the goal of lost profit damages is to put the non-breaching party in the same position as if the contract had been performed, not a better one. Furthermore, the decision underscores the "unconscionability" exception to the enforceability of liquidated damages clauses, demonstrating that even if the initial Lefemine test is met, a grossly disproportionate amount revealed by an accurate lost profit calculation can render the clause unenforceable on equitable grounds. This provides an important check on potentially punitive liquidated damages.
