Layton Manufacturing Co. v. Dulien Steel, Inc. , 277 Or. 343 ( 1977 )

PER CURIAM.

This is an action brought to recover damages for breach of a lease agreement. Plaintiff appeals from an order dismissing its complaint and awarding judgment in favor of defendant for costs and attorney fees.

After a train derailment had spewed wrecked railroad cars into a drainage ditch near plaintiff’s manufacturing plant, plaintiff leased a portion of its property to defendant for two months in order to allow defendant to remove the wreckage. By the terms of the lease, defendant agreed to pay $100 for the leasehold and promised to remove the cars and leave the property in a "neat, clean, orderly and presentable condition” by September 25, 1973. Defendant had previously contracted with the Southern Pacific Transportation Company for the purchase of the cars. The lease agreement contained a provision which obligated defendant to "pay the additional sum of $30 per day for each day [after September 25, 1973] until the work is completed ... as reasonable rental therefor.”

All of the wreckage, however, was not removed by the time the lease terminated. The continued blockage of the ditch later caused flooding of plaintiff’s manufacturing plant.

On May 10, 1974, plaintiff filed an action for breach of the lease, alleging that the property was not left in "a neat, clean, orderly, and presentable condition” as agreed until April 1, 1974. The total sum prayed for was $5,610 under the $30-per-day holdover provision. Plaintiff alleged no additional ground for recovery. Defendant filed an answer and as a first affirmative defense alleged that the $30-per-day clause was unenforceable as a penalty provision. Plaintiff, on the other hand, contended that the provision was one for liquidated damages.

Pursuant to stipulation by the parties, the affirmative defense was segregated for trial without a jury and separately tried on December 11, 1974. After a hearing, Judge Schlegel held that the clause was a penalty provision. Plaintiff then moved for an order allowing it to file an amended complaint. This motion was granted over defendant’s objection. Defendant’s motion for reconsideration of that ruling was denied. Defendant then petitioned this court for an Alternative Writ of Mandamus to compel the circuit court to disallow the amendment. By way of letter order, we denied that petition. State ex rel Dulien Steel, Inc. v. Honorable Jena Schlegel, 24052, (June 24, 1975).

Plaintiff’s amended complaint, based on breach of contract and trespass, alleged $15,000 consequential damages as a result of the flooding. When this cause came for trial before Judge Ertsgaard on December 15, 1975, defendant orally moved for a reconsideration of the earlier order allowing amendment and moved to strike plaintiff’s amended complaint. The court granted defendant’s motions and entered judgment against the plaintiff. Plaintiff appeals from this dismissal and from the earlier ruling on the agreed damages clause.

We first review the determination that the $30-per-day holdover clause is unenforceable as a penalty provision.

As a general rule, an agreed damages clause is unenforceable where the provision is designed only to secure performance of a contract, rather than preestimate the anticipated damages. See Medak v. Hekimian, 241 Or 38, 404 P2d 203 (1965); Secord v. Portland Shopping News, 126 Or 218, 269 P 228 (1928); Yuen Suey v. Fleshman, 65 Or 606, 133 P 803 (1913); see also Babler Bros., Inc. v. Hebener, 267 Or 414, 517 P2d 653 (1973); Shaw v. Northwest Truck Repair, 273 Or 452, 541 P2d 1277 (1975); Chaffin v. Ramsey, 276 Or 429, 555 P2d 459 (1976). Whether a contract provision is essentially designed to operate as a penalty is a question of law to be decided by the court. Medak v. Hekimian, supra.

A contract provision which presets the amount to be paid to a damaged party will not be construed as an enforceable provision for liquidated damages unless (1) the actual damages resulting from a breach are difficult or impossible to ascertain, and (2) the damages agreed upon had a reasonable relationship to probable losses. Medak v. Hekimian, supra; Secord v. Portland Shopping News, supra; Restatement of Contracts, § 339.

At the time the parties signed the contract, two types of damage from failing to remove the railroad cars could have been contemplated: (a) loss of the use of the land, and (b) flooding due to blockage of the drainage ditch. The extent of either of these losses would be difficult to prove. It would not be unreasonable to attempt to preestimate the damages by stipulation in the contract. The inquiry, then, is solely whether the holdover clause is a reasonable forecast of anticipated loss.

A provision which assesses $30 per day as damages until the debris is removed is not a reasonable forecast of flooding damages which may have been suffered in the interim. If plaintiff’s plant had been inundated two days after the expiration of the lease and if defendant removed all of the offending materials by September 30, 1973, the damages under the contract would be $150. Under the same facts, if the property were not put in presentable condition until several years later, the agreed damages would most likely be grossly disproportionate to the actual harm brought about by the flood. The damages which can be recovered under the contract depend entirely upon the time of performance by defendant of its contractual obligations. This fortuity bears no relationship to any anticipated flooding damages.

The evidence at the hearing was inconclusive on the issue of whether $30 per day was a reasonable forecast for loss of the use of the land. Evidence of the amount of land covered by the debris was conflicting. Defendant’s witness opined that IV2 acres were covered. Plaintiff’s witness testified that the wreckage was strewn on five or six acres. According to plaintiff, the land was normally used for testing machinery. The evidence showed that the parties did not discuss the potential harm caused by a breach in the negotiation of the lease. Plaintiff, however, termed the damages clause as a "penalty” in a letter sending the lease to defendant.

Defendant argues that $30 per day was an unreasonable rental value when compared to the stipulated rent for the main period of the lease ($100 for two months). The rental rate for the lease period was for land rendered useless by large amounts of debris. This is not evidence of the rental value of the same land in an uncluttered condition. Defendant, moreover, was obligated to do more than pay $100 for the use of the land. It agreed to remove the materials and leave the property in a presentable condition. Thus, consideration beyond the payment of money was given in exchange for the two-month occupancy.

Defendant further contends that because plaintiff termed the provision as a "penalty,” it is precluded from now asserting that the clause was a forecast of anticipated harm. The general rule is that the denomination given by the parties to an agreed damages clause is not conclusive. Elec. Prod. Corp. v. Ziegler Stores, 141 Or 117, 125, 10 P2d 910, 15 P2d 1078 (1932); Manley Auto Co. v. Jackson, 115 Or 396, 401, 237 P 982 (1925).

There was no evidence of the intensity and economic value of plaintiff’s normal use of the property. We do not know whether the entire area was incapacitated by the wreckage. Because it would be speculation to decide the reasonableness of the damage estimate, the party bearing the burden of proof on this question must suffer the risk of nonpersuasion; and that party here is the defendant.

We recently recognized in Chaffin v. Ramsey, supra, that the better rule may be to assign the burden of proof to the defendant in cases where defendant resists the enforcement of an agreed damages provision. In Chaffin it was unnecessary to adopt such a rule due to the evidentiary posture of that case.

Aside from Chaffin, however, in this case defendant chose to plead, as an affirmative defense, that the damages clause was a penalty provision. Defendant requested a special hearing on this question in advance of trial. In that hearing, defendant presented evidence first and was first in giving closing arguments. As a practical matter, then, defendant assumed the burden of proof on this issue, and this assumption will not be disturbed on appeal. As the court noted in Raiche v. Standard Oil Co., 137 F2d 446 (8th Cir. 1943), "Having elected to try her case in the trial court on the theory that the burden of proof was upon her, she can not on appeal seek reversal on a different or inconsistent theory.” See also Jensvold v. Chicago, Great Western R. Co., 236 Iowa 708, 18 NW2d 616, 619 (1945). Similarly, in Copper State Mining Co. v. Kidder, 20 Ariz 224, 179 P 641, 643 (1919), the court adopted "the usual rule . . . that the burden of proof is upon him who assumes it by opening and closing the evidence and argument upon the issues involved.”¹

The trial judge in this case apparently placed the burden of proof on the plaintiff in ruling that the provision "has not been established as a reasonable liquidated damages clause.” In view of the assumption of this burden by the defendant, as well as the views we took in Chaffin, defendant in the instant case had the risk of nonpersuasion.

Because this onus fell on the defendant and in view of the evidentiary omissions discussed above, the ruling of the trial court must be reversed.

Prior to the hearing on the agreed damages provision, the parties stipulated that the cause of action would proceed to trial in the event the affirmative defense of penalty was not established. We remand for a trial on plaintiff’s original complaint. Defendant is precluded by its failure of proof in the preliminary hearing from litigating again the reasonableness of the damages clause. In light of this, it is unnecessary to consider the issue of whether amendment of the complaint by plaintiff was proper.

Reversed and remanded for further proceedings consistent with this opinion.

1 Ordinarily the defendant has the burden of proof as to affirmative defenses. ORS 41.210. The general rule is that "The burden is on the defendant to prove matter in avoidance, special, or affirmative defenses, and other new matter urged by him as ground for denying plaintiff relief. However, defendant, by specially pleading matter which he could prove under a denial of the plaintiffs allegations, does not assume the burden of proof as to such matters.” 31A CJS, Evidence 178-80 § 104 (1964). It may be that a denial of plaintiffs allegations by defendant would be sufficient to raise the reasonableness of the agreed damages clause and that the affirmative defense, here, was surplusage. Were we to assume that plaintiff initially had the burden of proof (contrary to the dictum in Chaffin), then, it would not shift because of the affirmative defense. See Haynes v. Dairyland Mutual Ins. Co., 199 NW2d 83, 86 (Iowa 1972). Because of the assumption of the burden of proof in this case by the defendant, it cannot take advantage of such a rule.