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10. Which of the following is an accurate statement concerning the rights of the parties?
At the time of contracting, the woman told the father to be at the dock at 5 a.m. on May 15. The father and his family, however, did not show up on May 15 until noon. In the meantime, the owner of the boat agreed at 10 a.m. to take a second family out fishing for the rest of the day. The second family happened to come by and inquire about the possibility of such an outing. In view of the late hour, the owner of the boat charged the family $400 and stayed out two hours beyond the customary return time. The father's failure to appear until noon was due to the fact that he had been trying to charter another boat across the bay at a lower rate and had gotten lost after he was unsuccessful in getting such a charter.
A woman owns an exceptionally seaworthy boat that she charters for sport fishing at a $500 daily rate. The fee includes the use of the boat with the woman as the captain, and one other crew member, as well as fishing tackle and bait. On May 1, a father agreed with the woman that the father would have the full-day use of the boat on May 15 for himself and his family for $500. The father paid an advance deposit of $200 and signed an agreement that the deposit could be retained by the woman as liquidated damages in the event the father canceled or failed to appear.
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Liquidated damages will be found to be reasonable when compared to the compensatory damages incurred as a result of the breach. In other words, the court should compare the anticipated damages at the time the contract was formed against the liquidated damages number itself. If the liquidated damages amount is unreasonable, courts will determine that it amounts to a penalty and will not enforce the provision.
Unjust enrichment is when one party to a contract somehow receives an unfair level of benefit usually by mistake, chance, or the other party's general misfortune.
A is correct. The woman can keep the $200 as a proper amount of liquidated damages. Parties to a contract may include a liquidated damages clause that contains an amount recoverable in the event of a breach. Such a clause will be enforced if: (i) at the time the contract was entered into, the damages recoverable for a potential breach were difficult to determine; and (ii) the amount of damages is found to be reasonable. The reasonableness analysis involves examining the amount of liquidated damages in the contract compared to the prospective or actual compensatory damages from a breach.
Here, the parties agreed that the owner could keep the deposit in the event that the father canceled or failed to appear. This liquidated damages clause is enforceable because, at the time they contracted, it would have been difficult for the owner to determine potential damages from lost profits, and $200 is a reasonable amount given that it was less than half the total fee. Moreover, the second family paid only $400, which means the owner received a total of $600 between the two contracts. This is not unreasonable given that the amount for a daily charter is $500. Thus, the owner received $100 more than she would have received had the father shown up on time under his contract. Although the father could argue that the woman was unjustly enriched to the extent that the deposit exceeded her actual loss by $100, this is not unreasonable in light of the inconvenience of the owner waiting for the father to arrive, the uncertainty around whether a substitute customer would show up, and taking another family instead for two hours beyond the scheduled time frame.
B is incorrect. This answer choice implies that there is some sort of numerical cap or percentage restriction on recoverable liquidated damages. However, at common law, no such rule exists. The test, as stated above, involves an evaluation of the reasonableness of the figure based on the facts in a given case.
C is incorrect. Although the woman received $100 beyond what she would have received in the event that the father had performed under the contract, this does not amount to an unjust enrichment. When the father failed to show up at the specified time, the owner then experienced uncertainty around filling in for the father's family, as well as inconvenience for spending extra time out with the second family for the lesser fee. A $100 difference is therefore reasonable based on the circumstances and does not constitute an unjust enrichment.
D is incorrect. Although a court may find that a liquidated damages clause operates as a penalty where the number is unreasonable, that is not the case here. As explained above, the final $600 total the owner received was not unreasonable based on the facts. She would have received $500 had the father not breached, and the additional $100 reasonable accounts for the additional inconvenience and time expended when substituting with the second family.