USS Great Lakes Fleet, Inc. v. Spitzer Great Lakes, Ltd. , 85 Ohio App. 3d 737 ( 1993 )

This cause comes before the court upon the appeal of USS Great Lakes Fleet, Inc. ("Great Lakes") from a judgment in the Lorain County Court of Common Pleas finding no breach of Great Lakes' sales contract with Spitzer Great Lakes, Ltd. ("Spitzer"). We reverse.

In 1986, the parties entered into a contract for the sale of the SS Leon Fraser by Great Lakes to Spitzer for the sum of $200,000. Spitzer intended to convert the ship into a floating casino following passage in the state legislature of an initiative to amend the Ohio Constitution to allow such enterprises. The purchase agreement contained the following restrictive covenant and provision for liquidated damages:

"5. It is understood and agreed that the Vessel is being sold and purchased for purposes other than the water transportation of goods. In the event that efforts to develop the Vessel as a featured attraction are not successful, the Vessel may be sold for the purpose of scrapping and shall not be used in commerce for the transportation of goods. Should Buyer or Buyer's successor for any reason use the Vessel for the transportation of goods in commerce in contravention of the foregoing, Buyer shall be liable to Seller for breach of said covenant. Buyer and Seller, recognizing the difficulty inherent in determining the amount of damages that would be owed in the case of such a breach, hereby agree that the damages due therefor shall be Fifty Thousand Dollars ($50,000.00) and that said amount is a reasonable estimate of the amount of harm likely to be caused by such a breach and is not a penal sum."

When the state legislature failed to pass the initiative, Spitzer sold the ship to Fraser Shipyards, Inc. ("Fraser"). The purchase price was $700,000, which was comprised of an original offer of $650,000, plus an additional $50,000 which the sales agreement specifically provided in the purchase price to cover Spitzer's possible liability to Great Lakes for breach of its contract.¹ Fraser removed the center section of the ship, added specialized equipment, otherwise converted the vessel for further sale and use as a cement carrier, and changed the ship's name to "Alpena." The ship was then sold and is being used to transport cement. Great Lakes filed suit against Spitzer, alleging that the contract had been breached and that the $50,000 damages called for in the contract had not been paid.

The case was tried by the lower court on stipulated facts. The parties stipulated that Spitzer sold the ship not for scrap, but for modification and use as a cement carrier, and that the ship was not being used in direct competition with Great Lakes, as Great Lakes does not transport cement.

In finding for Spitzer, the trial court reasoned that the amount provided as damages in the contract would operate as a penalty because the Alpena was not in competition with Great Lakes and, therefore, Great Lakes was not actually damaged. It is from this judgment that Great Lakes now appeals, asserting two assignment of error:

Assignments of Error "I. The trial court erred when it failed to consider the facts and circumstances surrounding the time of the execution of the contract between the Fleet and Spitzer, and instead retrospectively considered the reasonableness of the liquidated damages clause in light of the facts and circumstances surrounding the time of the breach."

"II. The trial court erred in implicitly adding into the liquidated damages clause of the contract an unwritten requirement that for the clause to take effect, the vessel must have been subsequently used in competition with the Fleet's lake shipping activities."

Great Lakes' assigned errors are interrelated and will, therefore, be addressed together.

Great Lakes alleges that the trial court should have awarded it $50,000 in liquidated damages as it was irrelevant, under the terms of the contract, that there were no actual compensable damages to Great Lakes.

The validity of a liquidated damage clause depends on whether the clause operates as a penalty or as a fair assessment of damages. Darrow v. Kolczun (Mar. 6, 1991), Lorain App. No. 4759, unreported, 1991 WL 35120. The test of whether a contractual provision is a valid liquidated damages provision or a penalty is whether the objective of the provision is reasonable compensation for actual damages. Cad Cam, Inc. v. Underwood (1987), 36 Ohio App.3d 90, 91, 521 N.E.2d 498, 500. Where the parties have agreed to the amount of damages ascertained by estimation and adjustment, and have expressed that agreement in clear and unambiguous terms, that amount should be treated as liquidated damages, and not as a penalty if (1) the damages are uncertain as to amount and difficult to prove; (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intentions of the parties; and (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof. Samson Sales, Inc. v.Honeywell, Inc. (1984), 12 Ohio St.3d 27, 12 OBR 23,465 N.E.2d 392, syllabus.

The only evidence regarding the objective of the parties at the time the contract was formed is found in the affidavit of Spitzer's executive vice president. In this affidavit, the vice president admits that, at the time the contract was being negotiated, Great Lakes indicated a concern that the ship not be sold or placed back into service so as to compete with the Great Lakes Fleet on the Great Lakes. Spitzer agreed that this was a valid concern and, therefore, agreed to the clause at issue. Great Lakes presented no evidence, other than the contract itself, as to what was discussed during negotiations or what the objective of the parties was at the time. Thus, in addition to the recitations in the contract itself, the court had before it evidence that the objective of the parties was reasonable compensation for actual damages which could come to Great Lakes from subsequent sale of the ship. The trial court nevertheless found the clause to be a penalty and not a valid liquidated damages clause, apparently based upon its conclusion that the absence of proof of actual damages precludes effectuation of the clause. If the liquidated damages clause was otherwise valid, however, it is our view that Great Lakes was not required to prove that actual damages resulted from the breach. In adopting this view, we ascribe to what has been called the majority view. 22 American Jurisprudence 2d (1988) 777, Damages, Section 723. See, also, Mount Olivet Baptist Church, Inc. v. Mid-StateBuilders, Inc. (Oct. 31, 1985), Franklin App. No. 84AP-363, unreported, 1985 WL 10493.

This, however, does not end our inquiry. While the only evidence presented showed that the parties contemplated damages which might result if the ship was sold into competition with Great Lakes, the contract itself did not make such a distinction. The clause stated, "[s]hould Buyer or Buyer's successor for any reason use the Vessel for the transportation of goods in commerce * * *, Buyer shall be liable to Seller for breach of said covenant." The trial court implied that the liquidated damages clause would only be enforceable if the ship was sold, not just for the "transportation of goods in commerce," but for the transportation of goods in commerce and in competition with Great Lakes. Great Lakes contends that, since the vessel was not converted into a casino and was not sold for scrap, and instead is being used for the transportation of goods, Spitzer is strictly liable to it under the terms of the sales contract for the liquidated damages amount.

We have found that the contract contained a valid liquidated damages clause. In further interpreting the contract, however, we are not permitted to add conditions which are not found therein. The agreement in question is unambiguous on its face and, therefore, we will not construe it contrary to its plain terms. Aultman Hosp. Assn. v. Community Mut. Ins. Co. (1989),46 Ohio St.3d 51, 544 N.E.2d 920, syllabus. The contract clearly states that Spitzer would be liable to Great Lakes if the ship was sold for the purpose of being utilized to transport any goods in commerce. The ship was sold for use in transporting cement, albeit the transportation of cement is a specialized function which does not compete with Great Lakes. In so doing, Spitzer breached the terms of the liquidated damages clause.

Spitzer also argues that the "S.S. Leon Fraser," the vessel covered by the contract, no longer exists because of the extensive modification which was undertaken in its conversion into the "Alpena." Like the trial court, we find no merit in this argument. The removal of the center section of the ship, the addition of specialized equipment, and the changing of the ship's name is not sufficient to support an argument that the ship covered by the terms of the contract at issue no longer exists.

The first and second assignments of error are well taken. The judgment of the trial court is reversed, and the cause is remanded for entry of an order consistent with this opinion.

Judgment reversedand cause remanded.

COOK, P.J., concurs.

DICKINSON, J., dissents.

¹ The sales agreement referred to clause 5 of the 1986 contract as a "liquidated damages matter between seller and USS Great Lakes Fleet, Inc."