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Carr-Gottstein Properties v. Benedict (6/20/2003) sp-5704
Carr-Gottstein Properties v. Benedict (6/20/2003) sp-5704
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
CARR-GOTTSTEIN PROPERTIES, )
LIMITED PARTNERSHIP, ) Supreme Court No. S-10579
)
Appellant, ) Superior Court No.
) 3AN-01-03545 CI
v. )
) O P I N I O N
RUTH L. BENEDICT and )
GERRY L. ZEEK, ) [No. 5704 - June 20, 2003]
)
Appellees. )
________________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Peter A. Michalski, Judge.
Appearances: Dani Crosby and William S.
Cummings, Ashburn & Mason, P.C., Anchorage,
for Appellant. No appearance by Appellees.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Bryner, and Carpeneti, Justices.
FABE, Chief Justice.
I. INTRODUCTION
A lot owner violated a covenant in her subdivision by
taking more than one year to finish construction on her lot. The
covenant contained a flat-rate, per diem liquidated damages
provision for covenant violations. The issue presented by this
appeal is whether flat-rate, per diem liquidated damages can be
charged for construction delays that violate subdivision covenant
regulations. We reverse the superior court and hold that such a
clause is permissible in this case because the developers
liquidated damages clause attempts to address a situation where
it would be difficult to ascertain actual damages or to
reasonably forecast the damages likely to occur in the event of
breach.
II. FACTS AND PROCEEDINGS
Carr-Gottstein Properties developed the Southport
Subdivision Addition No. 1 in Anchorage. Carr-Gottstein executed
a Declaration of Covenants, Conditions and Restrictions (CC&R)
that regulates the use of lots within the subdivision. One
covenant in the CC&R requires owners of lots within the
subdivision to complete any construction of a dwelling within one
year.1 A purpose of this one-year covenant is to protect the
aesthetics of the subdivision. The CC&R contains a liquidated
damages clause that provides a $25 daily fine for any violation
of the CC&R.
Ruth Benedict owned Lot 15, Block 4 in the Southport
Subdivision Addition No. 1 (Lot 15). On September 20, 1999,
Benedict began construction on her lot. On October 31, 2000,
Carr-Gottstein gave Benedict written notice that Benedict was in
violation of the one-year construction limitation covenant.
Carr-Gottstein filed suit to require completion of the
construction and for assessment of liquidated damages. Carr-
Gottstein moved for partial summary judgment on the question
whether Benedict was in compliance with the covenant. Benedict
opposed Carr-Gottsteins motion and filed a cross-motion for
summary judgment challenging the validity of the liquidated
damages provision. The trial court granted both motions for
summary judgment, finding that Benedict was not in compliance
with the covenant but also that the CC&Rs liquidated damages
clause was impermissible because of our ruling in Kalenka v.
Taylor.2 Carr-Gottstein now appeals the granting of Benedicts
motion for summary judgment.3
III. STANDARD OF REVIEW
The general enforceability of flat-rate per diem
liquidated damages clauses is a question of law. Whether a
particular liquidated damages clause is validly applied is a
mixed question of law and fact.4 What legal test a court should
apply in determining the validity of a liquidated damages clause
is a legal issue.5 Whether facts in a particular case meet the
proper liquidated damages test is a factual determination. For
questions of law, the standard of review is de novo; we adopt the
rule of law that is most persuasive in light of precedent,
reason, and policy.6 We review a courts factual determinations
under the clearly erroneous standard.7
IV. DISCUSSION
Generally, parties to a contract are free to stipulate
in advance an amount to be paid as compensation for loss or
injury which may result in the event of a breach of the contract,
and such stipulations are valid and enforceable.8 However, such
an advance stipulation may only provide compensation for breach
of the contract and may not serve as a penalty that punishes the
breaching party.9 Contractual penalties serve no positive
purpose, which is why courts do not enforce them.10 Courts must
determine on a case-by-case basis whether a damages provision is
a valid liquidated damages clause or an unenforceable penalty.11
We have instructed trial courts to employ a two-step
test in making their determinations regarding the validity of
liquidated damages clauses: Liquidated damages clauses are
proper . . . where it would be difficult to ascertain actual
damages, and where the liquidated amount [is] a reasonable
forecast of the damages likely to occur in the event of breach. 12
The Restatement of Contracts uses this widely adopted test.13
Carr-Gottsteins liquidated damages clause meets the
first part of our test. The liquidated damages clause in question
is meant to address the aesthetic harm caused by delays in
construction. In its summary judgment decision, the superior
court found that the damages caused by [Benedicts] breach are of
an aesthetic nature which result in damages that are difficult to
quantify, but which nonetheless require a remedial response[.]
Moreover, it is generally accepted that injuries caused by
construction delays are nearly always difficult to determine . .
. .14 Carr-Gottsteins liquidated damages provision thus meets the
first requirement of our liquidated damages test.
Carr-Gottsteins clause also meets the second part of
our test, as a $25 daily fine is a reasonable forecast of the
damages likely to occur as a result of this covenant breach.
First, because injury caused by [construction] delay is nearly
always difficult to determine, courts are strongly inclined to
accept and enforce an amount agreed to in a liquidated damages
provision for construction delay.15 Furthermore, the per diem
liquidated damages provision takes into account the magnitude of
the breach because the temporal length of the breach in this
situation affects the magnitude of the breach. One purpose of
the one-year limitation on construction is protection of the
subdivisions aesthetics. Lots with unfinished construction often
contain work equipment, displaced earth, unfinished edifices, and
other unpleasant sights. Such aesthetic blight harms the sale
value of other lots within the subdivision and hampers the other
lot owners enjoyment of their property. Each additional day of
unfinished construction prolongs this harm, and its magnitude,
therefore, is correlated to its temporal length. In setting a
per diem fee, Carr-Gottsteins liquidated damages provision
attempts to reasonably forecast damages by assigning different
damages to breaches of different magnitudes.
The superior court also agreed that Carr-Gottsteins $25
per diem liquidated damages clause was an attempt to ascertain
approximate damages, rather than an attempt to set a penalty:
The $25 liquidated damages provision in the current case is much
more in keeping with the type of provisions commonly allowed for
breach of covenant claims. Because the liquidated damages
provision in question meets both prongs of our test and is not a
penalty, it is enforceable.
In properly applying our two-prong test, the superior
court made factual
determinations that suggested it would have preferred to enforce
the liquidated damages provision in question. The superior court
apparently determined, however, that it could not enforce Carr-
Gottsteins liquidated damages provision as a matter of law due to
our decision in Kalenka v. Taylor.16 In its ruling, the trial
court stated that the liquidated damages clause in question would
be perfectly reasonable, but for the ruling in Kalenka. Relying
on Kalenka, the trial court concluded that the failure to
differentiate between degrees of covenant violations is fatal to
the liquidated damages provision of a covenant. The Kalenka and
Carr-Gottstein damages clauses are similar in that they both set
flat-rate per diem fees for covenant violations. Kalenkas
holding, however, does not prohibit all flat-rate per diem
damages clauses. Thus, our holding in Kalenka does not in itself
make Carr-Gottsteins liquidated damages clause unenforceable.
Kalenka continues our line of cases in which we forbid
punitive damages for contractual breaches.17 Although courts
generally enforce bargains according to their terms,18 public
policy limits this principle. We stated in Kalenka that the lack
of a public policy justification for allowing punitive
contractual damages prevents us from permitting such damages:
Punishment of a promisor for having broken his promise has no
justification on either economic or other grounds, and a term
providing such a penalty is unenforceable on grounds of public
policy.19
We found such a penalty provision to be unenforceable
in Kalenka, where the developer of a subdivision had executed a
restrictive covenant that contained the following liquidated
damages clause: A penalty of $1000.00 per day shall be assessed
for unapproved construction.20 In affirming the trial courts
dismissal of this liquidated damages clause, we observed two
troubling aspects of the clause. First, we noted that the clause
was, on its face, a penalty provision: We . . . are inclined to
disallow the penalties sought by the Kalenkas based on their
moniker alone.21 Second, we were concerned that the $1,000 per
day penalty failed to distinguish between types of contractual
breaches. While discussing this second point in Kalenka, we
reaffirmed our previous treatment of liquidated damages clauses
by holding that a liquidated damages clause is invalid when there
is no attempt to forecast actual damages.22 We added that [a]n
indication of this lack of calculation is deemed present when the
amount of stipulated damages is the same for a total or partial
breach, or for breach of minor or major contract provisions.23
We distinguish Carr-Gottsteins liquidated damages
clause from that in Kalenka in two ways. First, Carr-Gottstein
does not describe the CC&Rs liquidated damages clause as a
penalty provision. Second, and more importantly, Carr-Gottsteins
$25 per diem provision is substantively different from Kalenkas
$1,000 per diem penalty. When we disapproved of the $1,000 per
day penalty in Kalenka, we were not frowning on the flat-rate per
diem aspect of the clause. In fact, we have recognized the
validity of flat-rate liquidated damages for per diem violations:
[T]here is no legal objection to stating liquidated damages in
terms of a per diem percentage of the contract price or in terms
of a stated sum per day . . . .24 Additionally, as noted above,
the magnitude of the breach in this case is directly linked to
its temporal length; consequently, the flat-rate per diem damages
provision assigns different damages to different levels of
breach.
Rather than criticizing the flat-rate per diem aspect
of Kalenkas penalty provision, we reasoned that the $1,000
liquidated damages provision was flawed because it assigned a
high penalty to all breaches, whether they were major or minor.
For example, an unapproved alteration to a fence calls for the
same penalty as the unapproved construction of a building.25
Liquidated damages provisions are meant to compensate and not to
punish, and it is hard to imagine that an unapproved alteration
to a fence could justify daily compensation of $1,000. In other
words, it was the disproportionately high penalty, not the flat-
rate per diem aspect of Kalenkas liquidated damages clause, that
we found problematic. In assigning a high flat-rate per diem
penalty, the Kalenkas did not attempt to forecast actual damages;
rather, they attempted to maximize a penalty.
The $25 per diem damages clause in this case is
different. As the superior court noted, [u]nlike the current
situation, the provision at issue in Kalenka was a penalty
provision rather than a damages provision and the amount provided
was quite extreme. The superior court clearly made the factual
determination that, instead of asserting a high, penalty-like per
diem charge for any violation, Carr-Gottstein incorporated a
legitimate damages provision into its subdivision covenant. This
finding was not clearly erroneous.
V. CONCLUSION
Because Kalenka does not prohibit reasonable flat-rate
per diem liquidated damages clauses and because the superior
court recognizes Carr-Gottsteins clause as a reasonable
liquidated damages clause, we REVERSE the courts grant of summary
judgment to Benedict and order the superior court to grant Carr-
Gottstein liquidated damages.
_______________________________
1 This covenant is located in Article VII, Section 7.8 of
the CC&R.
2 896 P.2d 222 (Alaska 1995).
3 After the summary judgment motion, Matrix General, Inc.
bought Lot 15 in a judicial foreclosure sale. Carr-Gottstein
added Matrix General, Inc. as a defendant. Subsequently, Gerry
Zeek bought the lot from Matrix General, Inc. The trial court
then substituted Gerry Zeek as the real party in interest for
Matrix General, Inc.
4 When there is a mixed question of law and fact, we will
evaluate the legal and factual issues separately. Wyller v.
Madsen, 2003 WL 21040213, at *3 (Alaska, May 9, 2003); see also
Central Bering Sea Fishermans Assn v. Anderson, 54 P.3d 271, 277
(Alaska 2002); Nickels v. Napolilli, 29 P.3d 242, 246-47 (Alaska
2001).
5 Central Bering Sea Fishermens Assn v. Anderson, 54 P.3d
271, 277 (Alaska 2002).
6 Bennett v. Bennett, 6 P.3d 724, 726 (Alaska 2000).
7 Gillum v. L & J Enters., 29 P.3d 266, 268 (Alaska
2001).
8 Annotation, Contractual Provision for Per Diem Payments
for Delay in Performance as One For Liquidated Damages or
Penalty, 12 A.L.R. 4th 891, 899 (1982).
9 See id.
10 Restatement (Second) of Contracts 356 cmt. a (1981).
11 11 Arthur Linton Corbin & John E. Murray, Jr., Corbin
on Contracts 1057 (Interim ed. 1964 & Supp. 2002).
12 Zerbetz v. Alaska Energy Ctr., 708 P.2d 1270, 1281
(Alaska 1985) (quoting Williwaw Lodge v. Locke, 601 P.2d 236, 239
(Alaska 1979)).
13 Restatement (Second) of Contracts 356(1) (1981); see
also 22 Am. Jur. 2d Damages 690 (1988); Melvin Aron Eisenberg,
The Limits of Cognition and the Limits of Contract, 47 Stan. L.
Rev. 211, 225 (1995); Milton Constr. Co. v. State Highway Dept,
568 So. 2d 784, 790 (Ala. 1990); Powder Horn Constrs., Inc. v.
City of Florence, 754 P.2d 356, 365 (Colo. 1988); Brazen v. Bell
Atlantic Corp., 695 A.2d 43, 48 (Del. 1997); Sun Ridge Investors,
Ltd. v. Parker, 956 P.2d 876, 878 (Okla. 1998); Phillips v.
Phillips, 820 S.W.2d 785, 788 (Tex. 1991).
14 11 Corbin on Contracts 1072 (Interim ed. 1964 & Supp.
2002).
15 Id.
16 896 P.2d 222 (Alaska 1995).
17 See, e.g., Lee Houston & Assocs. v. Racine, 806 P.2d
848, 856 (Alaska 1991) (reiterating that punitive damages only
available if conduct constituting breach also constitutes
independent tort); ARCO Alaska, Inc. v. Akers, 753 P.2d 1150,
1153 (Alaska 1988) (same).
18 Melvin Aron Eisenberg, The Limits of Cognition and the
Limits of Contract, 47 Stan. L. Rev. 211, 211 (1995).
19 Kalenka, 896 P.2d at 229 (quoting Restatement (Second)
of Contracts 356 cmt. a (1981)); see also 22 Am. Jur. 2d
Damages 686 (1988).
20 Kalenka, 896 P.2d at 229.
21 Id.
22 Id.
23 Id. (quoting United States Sch. Dist. No. 315 v.
DeWerff, 626 P.2d 1206, 1209 (Kan. App. 1981)).
24 Arctic Contractors, Inc. v. State of Alaska, 564 P.2d
30, 49 (Alaska 1977), disapproved of on an unrelated matter by
Native Alaska Reclamation & Pest Control, Inc. v. United Bank
Alaska, 685 P.2d 1211, 1219 (Alaska 1984).
25 Kalenka v. Taylor, 896 P.2d at 229 (internal quotations
omitted).
