Wassenaar v. Panos
111 Wis. 2d 518, 331 N.W.2d 357 (1983)
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Rule of Law:
A stipulated damages clause is enforceable as valid liquidated damages if it is reasonable under the totality of the circumstances. The party challenging the clause bears the burden of proving that the stipulated amount is grossly disproportionate to the actual harm and therefore an unenforceable penalty.
Facts:
- Donald Wassenaar entered into a three-year written employment contract with The-anne Panos to serve as general manager of The Towne Hotel, beginning January 1, 1977.
- The contract contained a clause stating that if the Hotel terminated the contract before its expiration, the Hotel would be responsible for fulfilling the entire financial obligation for the full three-year period.
- On March 31, 1978, The Towne Hotel terminated Wassenaar's employment, 21 months before the contract was set to expire.
- After being terminated, Wassenaar was unemployed for approximately two and a half months.
- Wassenaar secured new employment at another hotel on June 14, 1978.
Procedural Posture:
- Donald Wassenaar sued The Towne Hotel in the circuit court for Milwaukee county for breach of contract.
- The Hotel asserted as an affirmative defense that Wassenaar failed to mitigate his damages.
- The circuit court (trial court) granted Wassenaar's motion to strike the mitigation defense, inferentially upholding the stipulated damages clause.
- A jury found the Hotel wrongfully terminated Wassenaar and awarded damages of $24,640, the amount of his salary for the unexpired contract term.
- The circuit court entered judgment in favor of Wassenaar.
- The Towne Hotel, as appellant, appealed to the Wisconsin Court of Appeals (intermediate appellate court).
- The court of appeals reversed the trial court, holding the clause was an unenforceable penalty and remanded for a new trial on damages.
- Wassenaar, as petitioner, appealed to the Supreme Court of Wisconsin (highest court).
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Issue:
Is a stipulated damages clause in an employment contract, which awards the employee full salary for the unexpired term upon wrongful termination, an enforceable liquidated damages provision rather than an unenforceable penalty?
Opinions:
Majority - Shirley S. Abrahamson
Yes. A stipulated damages clause providing for payment of the remaining salary is an enforceable liquidated damages provision if it is reasonable under the totality of the circumstances. The court adopted a flexible reasonableness test, abandoning rigid, older formulas. The key considerations are whether the injury from the breach was difficult to estimate at the time of contracting and whether the stipulated damages are a reasonable forecast of the harm. This reasonableness analysis incorporates both a prospective view (from the time of contracting) and a retrospective view (considering actual harm at the time of breach). The court reasoned that damages for wrongful discharge are not always easy to ascertain, as they can include consequential damages like harm to professional reputation and loss of career opportunities, which are difficult to prove but which the parties can reasonably anticipate and provide for in a contract. The party challenging the clause—here, the employer—has the burden of proving it is unreasonable, for example, by showing the stipulated sum is grossly disproportionate to the actual harm. In this case, the employer failed to meet its burden of proof by not introducing evidence of the employee's subsequent earnings or proving that the stipulated amount was a windfall. Because the clause was deemed a valid liquidated damages provision, the employee's common law duty to mitigate damages was inapplicable.
Analysis:
This case establishes the modern 'totality of the circumstances' reasonableness test for liquidated damages clauses in Wisconsin, shifting the burden of proof to the party challenging the clause. The decision significantly strengthens the enforceability of such clauses in employment contracts by recognizing that they can validly compensate for difficult-to-prove consequential damages like reputational harm. By explicitly stating that a valid liquidated damages provision supplants the duty to mitigate, the court provides certainty for contracting parties, allowing them to agree upon remedies without fear that a court will later reduce the award based on the non-breaching party's subsequent earnings.
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