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28. Assuming that the $5,000-per-day liquidated damages clause in the contract between the textile company and the customer is valid, which of the following arguments will serve as the mechanic's best defense to the textile company's action?
The mechanic was inexcusably five days late in repairing the machine, and, as a result, the textile company was five days late in delivering the cloth to the customer. The textile company paid $25,000 to the customer as liquidated damages and then sued the mechanic for $25,000. Both the mechanic and the textile company knew when making their contract on March 1 that, under ordinary circumstances, the textile company would sustain few or no damages of any kind as a result of a five-day delay in the machine repair.
On March 1, a mechanic contracted to repair a textile company's knitting machine by March 6. On March 2, the textile company contracted to manufacture and deliver specified cloth to a customer on March 15. The textile company knew that it would have to use the machine then under repair to perform this contract. Because the customer's order was for a rush job, the customer and the textile company included in their contract a liquidated damages clause, providing that the textile company would pay the customer $5,000 for each day's delay in delivery after March 15.
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B is correct. The mechanic is not liable for the consequential damages (the $25,000 that was a consequence of his inexcusably late delay) because those damages were not foreseeable to him. Here, the mechanic didn't know about the textile company's contract with the customer, so the consequence of the mechanic's breach, in relation to the contract between the textile company and the customer was unforeseeable. Therefore, the best defense, in this case, is that the consequential damages were unforeseeable to the mechanic, and he cannot be held to account for them.
A is incorrect. A «time is of the essence» clause would have made completion of the repair an express condition precedent, and failure to complete by the time agreed would have allowed the textile company to disaffirm the contract. Here, it is true the mechanic contracted to complete the repairs by a specified time, and that this failure to complete was a breach, but without a «time is of the essence clause,» the breach is not material and the textile company cannot disaffirm the contract, and can sue for expectation, reliance, or restitution damages, but not consequential damages.
C is incorrect. Assumption of risk is a defense used in torts. A party that supplies a potentially risky activity will ask participating parties to waive damages caused by the inherent risk involved in the activity. While the defense is supplied via contractual agreement, it is not a defense to breach of contract. Here, the issue is a contractual breach, not a tort, so the answer is wrong.
D is incorrect. In order for a liquidated damages clause to be enforced by a court, it must be reasonable and not punitive. Here the facts do not discuss the reasonableness of the liquidated damages clause but do call us to infer that the clause would stand up in court (and is therefore reasonable). Also, liquidated damage clauses are normally included in a contract when actual damages cannot be specifically calculated at the time the contract is formed and are representative of the party's agreement on the value of the subject of liquidated damages (in this case, timely delivery of the goods).