Convenience Store Leasing and Management v. Annapurna Marketing ( 2019 )

2019 WI APP 40
COURT OF APPEALS OF WISCONSIN
PUBLISHED OPINION
Case No.: 2017AP1505
Complete Title of Case:
CONVENIENCE STORE LEASING AND MANAGEMENT,
PLAINTIFF,
BULK PETROLEUM CORPORATION,
PLAINTIFF-APPELLANT,
V.
ANNAPURNA MARKETING, BUDDI SEBEDI AND BASUDEV ADHIKARI,
DEFENDANTS-RESPONDENTS.
Opinion Filed: July 24, 2019
Submitted on Briefs: April 10, 2018
JUDGES: Neubauer, C.J., Gundrum and Hagedorn, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYS: On behalf of the plaintiff-appellant, the cause was submitted on the briefs
of Matthew W. O’Neill of Fox, O’Neill & Shannon, S.C., of Milwaukee.
Respondent
ATTORNEYS: On behalf of the defendants-respondents Buddi Sebedi and Annapurna
Marketing, the cause was submitted on the brief of Edmund J. Jelinski of
Menasha.
On behalf of defendant-respondent Basudev Adhikari, the cause was
submitted on the brief of Kyle Borkenhagen of Rohde Dales LLP of
Sheboygan.
2019 WI App 40COURT OF APPEALS
DECISION NOTICE
DATED AND FILED This opinion is subject to further editing. If
published, the official version will appear in
the bound volume of the Official Reports.
July 24, 2019
A party may file with the Supreme Court a
Sheila T. Reiff petition to review an adverse decision by the
Clerk of Court of Appeals Court of Appeals. See WIS. STAT. § 808.10
and RULE 809.62.
Appeal No. 2017AP1505 Cir. Ct. No. 2015CV656
STATE OF WISCONSIN IN COURT OF APPEALS
DISTRICT II
CONVENIENCE STORE LEASING AND MANAGEMENT,
PLAINTIFF,
BULK PETROLEUM CORPORATION,
PLAINTIFF-APPELLANT,
V.
ANNAPURNA MARKETING, BUDDI SEBEDI AND BASUDEV ADHIKARI,
DEFENDANTS-RESPONDENTS.
APPEAL from a judgment of the circuit court for Sheboygan
County: L. EDWARD STENGEL, Judge. Reversed and cause remanded with
directions.
Before Neubauer, C.J., Gundrum and Hagedorn, JJ.
No. 2017AP1505
¶1 HAGEDORN, J. This case concerns whether frustration of purpose
relieved a party of duties under a contract (as the circuit court held), and whether
stipulated damages in that contract were an unreasonable and unenforceable
penalty. We reverse.
BACKGROUND
¶2 Annapurna Marketing (AP Marketing) is a real estate holding
company created by friends and business partners Buddi Sebedi and Basudev
Adhikari to operate gas stations. Bulk Petroleum Corporation is a real estate and
petroleum marketing company. In 2003, Bulk purchased a gas station in
Sheboygan that is at the center of this dispute. The station ceased operating
sometime in 2008 or 2009.
¶3 In June 2012, AP Marketing and Bulk executed two agreements—
the first, a land contract to purchase the subject gas station,1 and the second, a fuel
supply agreement (FSA) designed (unsurprisingly) to supply fuel for the station.
The FSA, which was personally guaranteed by Sebedi and Adhikari, is the
disputed contract on appeal.
¶4 Under the FSA, AP Marketing was required to purchase “all fuel at
the Premises” from Bulk. The minimum purchase amount was 15,000 gallons per
month, or 180,000 gallons per year. The price per gallon would be 1.5 cents
above “the Branded Supplier rack price”—essentially, the per-gallon cost to Bulk
1
Bulk executed the purchase through a real estate holding company called “Convenience
Stores Leasing and Management,” which is also a plaintiff in this case but not a party to this
appeal.
3
No. 2017AP1505
plus 1.5 cents. The FSA required Bulk to select a “Branded Supplier”—defined as
“a major brand fuel marketer, or any unbranded fuel supplier with credit card
processing and related marketing capabilities”—to supply fuel to the station. AP
Marketing in turn agreed, without any other evident contractual limitation, that
“any Branded Supplier selected … by [Bulk] is acceptable.” (Emphasis added.)
AP Marketing also agreed through the FSA to submit to certain branding
requirements that might be imposed by a branded supplier, including compliance
“with the image standards set by Branded Supplier.” If AP Marketing failed to
meet the minimum gallon purchase requirement, the FSA included a stipulated
damages provision, which obligated AP Marketing (and again, guaranteed by
Sebedi and Adhikari) to pay ten cents per gallon on the shortfall. However, this
provision did not apply if the failure to purchase the minimum quantity was due to
Bulk’s failure to deliver fuel.
¶5 The FSA was supposed to go into effect just ten days after it was
signed. But complications arose almost immediately. AP Marketing incurred a
number of expenses related to preparing the previously closed station for
operation—including obtaining permits for the fuel tanks and tank insurance,
replacing the ceiling tiles, fixing problems with the plumbing system, and
replacing underground pipes. Replacing the pipes alone cost approximately
$35,000–$36,000. Bulk also had difficulty securing a branded supplier.
¶6 Five and one-half months after the FSA was signed, Bulk entered
into an agreement with U.S. Oil to supply fuel under the ExxonMobil brand. Like
every other supplier contacted by Bulk, U.S. Oil required that AP Marketing
update the façade of the station and move the bathroom doors from the exterior to
the interior before selling its fuel. The agreement with U.S. Oil required Bulk to
purchase a minimum of 480,000 gallons per year, far more than the 180,000 gallon
4
No. 2017AP1505
minimum AP Marketing was required to purchase under the FSA. But Bulk’s
brand manager explained that he thought the quantity was “a very easy number to
hit on a station at this location branded properly.”
¶7 The Defendants ultimately decided that the cost to meet U.S. Oil’s
branding requirements—specifically, the cost of relocating the bathroom
entrances—was too steep. By their own admission, they walked away from the
land contract and the FSA, without making any payments under the land contract
and never having purchased any fuel under the FSA.
¶8 Bulk responded by filing this action, asserting breach of the land
contract against AP Marketing and breach of the FSA against AP Marketing, as
well as Sebedi and Adhikari based on their personal guarantees. The claims went
to a bench trial. The circuit court ultimately concluded that AP Marketing
breached the land contract and ordered judgment for $200,000, a determination
not before us on appeal.
¶9 On the FSA claim, the circuit court entertained posttrial briefing.
AP Marketing, Sebedi, and Adhikari made three arguments. First, they could not
be liable for damages under the FSA because Bulk failed to secure a branded
supplier who would brand the station without modification—a condition
precedent, they insisted, to AP Marketing’s obligation to purchase fuel. Second,
AP Marketing’s performance under the FSA was excused by frustration of
purpose. And third, Bulk failed to prove the lost profits it sought as damages. The
circuit court agreed with the second argument, concluding that the structural
modifications required by U.S. Oil frustrated the principal purpose of the FSA,
which “was to open the station and to sell fuel at a profit.” The court explained
that the requirements placed on AP Marketing by U.S. Oil to make significant
5
No. 2017AP1505
alterations to the premises was the frustrating event. It was a basic assumption,
the court reasoned, that the Defendants could “open the station without significant
alterations and significant … expense.”
¶10 Although it was unnecessary to decide (as the court itself
recognized), the court additionally opined that if damages were to be due for
breach of the FSA, the stipulated damages provision was an unenforceable
penalty.2 It reasoned that Bulk’s actual damages were easily calculable—namely,
the 1.5 cent per gallon profit margin under the FSA. The much higher ten cents
per gallon figure prescribed by the stipulated damages provision was therefore an
unenforceable penalty.
2
The stipulated damages provision provides in full as follows:
19. Failure to Purchase Minimum Quantity. Seller shall
review the quantity of Fuel sold to Purchaser hereunder every six
(6) months during the Initial and any Renewal Term hereof.
Unless due to a shortage of supply or a failure by Seller to
deliver Fuel, if the average gallonage purchased by Purchaser
hereunder during the six (6) month period prior to the review
month does not equal or exceed the Minimum Quantity required
for such period, then Purchaser shall be required to pay Seller an
amount calculated by:
(a) subtracting the actual quantity purchased by Purchaser
from Seller during the applicable period from the Minimum
Quantity required to be purchased within such time period, and
(b) [m]ultiplying the resulting number (the gallonage
shortfall) by $.10 cents.
The parties hereto agree that the payment required hereunder is
not a penalty, but is rather a good faith, reasonable estimate of
the amount needed to reimburse and make Seller whole in the
event of Purchaser’s failure to purchase the Minimum Quantity.
This payment is in addition to any and all other remedies Seller
may have at law or in equity.
6
No. 2017AP1505
¶11 Bulk appeals, and we reverse.
DISCUSSION
¶12 The main question before us is whether the circuit court correctly
concluded AP Marketing’s performance under the FSA was excused under the
doctrine of frustration of purpose. We also address the circuit court’s conclusion
that the stipulated damages provision was an unenforceable penalty.
A. Frustration of Purpose
¶13 The parties profess to disagree over the standard of review, but at the
end of the day, they appear to be in heated agreement. Whether a contract’s
purpose has been frustrated is best characterized as involving both factual and
legal determinations. We review facts found with deference and legal questions
independently. See Wassenaar v. Panos, 111 Wis. 2d 518, 525, 331 N.W.2d 357(1983). The ultimate question of whether a contract’s purpose has been frustrated
is generally a question of law. See Chicago, Milwaukee, St. Paul & Pac. R.R.
Co. v. Chicago & N.W. Transp. Co., 82 Wis. 2d 514, 516, 526-28, 263 N.W.2d
189 (1978) (describing the issue as “whether, under the facts described below,” the
contract’s purpose “was frustrated” and reviewing that question without deference
to the circuit court’s decision); Wm. Beaudoin & Sons, Inc. v. Milwaukee Cty.,
63 Wis. 2d 441, 446-49, 217 N.W.2d 373 (1974) (rejecting the circuit court’s
“conclusion of law” that the purpose of a contractual term has been substantially
7
No. 2017AP1505
frustrated while deferring to the circuit court’s findings of fact).3 We see no
relevant and disputed issues of fact in this case; the issues presented here are ripe
for our independent review.
¶14 Frustration of purpose is a defense to enforcement of a contract; if
the elements are met, then a party’s obligations under the contract are excused.
See Chicago, Milwaukee, 82 Wis. 2d at 522-24; Ryan v. Sheppard, 2010 WI App
105, ¶13, 328 Wis. 2d 533, 789 N.W.2d 616. The doctrine of frustration is “given
a narrow construction” and “applied sparingly.” 17A AM. JUR. 2D Contracts
§ 641 (2016). This is so because it renders null the explicit terms of the contract
and is counter to the strong impulse in the law to enforce contracts as written. Id.
The party asserting the defense has the burden to prove frustration of purpose. Id.,
§§ 632, 640.
¶15 Tracking the RESTATEMENT (SECOND) OF CONTRACTS § 265 (AM.
LAW INST. 1981), our cases define the elements of this defense as follows:
“(1) the party’s principal purposes in making the contract is frustrated; (2) without
that party’s fault; (3) by the occurrence of an event, the non-occurrence of which
was a basic assumption on which the contract was made.” Sheppard, 328 Wis. 2d
533, ¶¶12-13 (citation omitted).
¶16 Proving frustration of purpose is generally a tall order. As the
Restatement explains:
3
See also RESTATEMENT (SECOND) OF CONTRACTS ch. 11, intro. note (AM. LAW INST.
1981) (explaining that whether frustration of purposes or another “extraordinary circumstance”
relieves a party of his or her obligations under a contract “is generally considered to be one of law
rather than fact”); 17A AM. JUR. 2D Contracts § 640 (2016) (“The excuse of frustration is a
question of law, to be determined by the court from the facts of the case.”).
8
No. 2017AP1505
[T]he purpose that is frustrated must have been a principal
purpose of that party in making the contract. It is not
enough that he had in mind some specific object without
which he would not have made the contract. The object
must be so completely the basis of the contract that, as both
parties understand, without it the transaction would make
little sense.
RESTATEMENT (SECOND) OF CONTRACTS § 265 cmt. a. Moreover, the
Restatement and our precedents explain that the frustration must be “substantial.”
Id.; see also Sheppard, 328 Wis. 2d 533, ¶¶12-13. Frustration of purpose only
excuses performance where the frustration is “so severe that it is not fairly to be
regarded as within the risks … assumed under the contract.” RESTATEMENT
(SECOND) OF CONTRACTS § 265 cmt. a. The Restatement affirms that frustration
is not substantial merely because “the transaction has become less profitable for
the affected party or even that he will sustain a loss.” Id. An example from the
Restatement is helpful and especially pertinent here:
A leases a gasoline station to B. A change in traffic
regulations so reduces B’s business that he is unable to
operate the station except at a substantial loss. B refuses to
make further payments of rent. If B can still operate the
station, even though at such a loss, his principal purpose of
operating a gasoline station is not substantially frustrated.
B’s duty to pay rent is not discharged, and B is liable to A
for breach of contract. The result would be the same if
substantial loss were caused instead by a government
regulation rationing gasoline or a termination of the
franchise under which B obtained gasoline.
Id. at cmt. a, ill. 6.
¶17 Moreover, the frustrating event must strike at the foundation of the
contract—a basic assumption on which the contract was made such that the party’s
performance, due to this unexpected circumstance, would be “virtually worthless”
and “meaningless.” 17A AM. JUR. 2D Contracts § 641. “The doctrine does not
apply where the risk of the event that has supervened to cause the alleged
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No. 2017AP1505
frustration was reasonably foreseeable and could and should have been anticipated
by the parties and provision made for it in the agreement.” Id., § 638.
¶18 Two Wisconsin Supreme Court cases are helpful in understanding
the doctrine. In Wm. Beaudoin & Sons, Inc., Milwaukee County entered into a
contract with the plaintiff to do bridge and road work. However, when it came
time for the plaintiff to do certain regrading work, another contractor had already
completed the regrading. Wm. Beaudoin & Sons, Inc., 63 Wis. 2d at 445. The
court concluded that the principal purpose of the regrading term of the contract
had been frustrated because “the condition that necessitated [the regrading term in
the contract] no longer existed.” Id. at 448. Therefore, the court ruled that
because of the intervening event—another contractor performed the work—the
plaintiff was discharged from its duty to perform the work and likewise, was not
entitled to payment. Id. at 448-49.
¶19 In Chicago, Milwaukee, our supreme court reversed a circuit court’s
decision to dismiss a breach of contract claim on the basis of frustration of
purpose. Chicago, Milwaukee, 82 Wis. 2d at 528. The plaintiff and defendant
were railroad companies, and the parties had an agreement for joint use of the
plaintiff’s depot and a certain section of track for their respective passenger lines.
Id. at 518-19. Subsequently, both parties contracted with Amtrak to take over
their responsibilities for passenger transport in that area. Id. at 519-20. The
circuit court reasoned that the defendant’s purpose in making the agreement—to
mitigate losses incurred while conducting passenger transport—had been
frustrated because it was no longer conducting passenger service. Id. at 524-25.
Although agreeing that the principal purpose had been frustrated, our supreme
court rejected use of the defense in part because “the parties were aware of the
possibility of further reductions in passenger service when the contract was
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No. 2017AP1505
entered into.”4 Id. at 529. The court remarked, “It is settled that if the parties
have contracted with reference [to the frustrating event] or have contemplated the
risks arising from it, they may not invoke the doctrine of frustration.” Id. at 527(citation omitted; alteration in original). The supreme court concluded that the
parties had anticipated potential reductions in passenger service, and therefore the
frustrating event (functionally, a reduction in passenger service) did not undermine
a basic assumption upon which the contract was made.5 Id.¶20 In our case, the parties and the circuit court appear to agree that the
alleged frustrating event—U.S. Oil’s demand that the Defendants move the
bathroom doors and update the façade—happened without the fault of the
Defendants (the second element needed to establish frustration). The contested
elements, then, are whether the principal purpose of the FSA was frustrated by the
mandated updates, and whether the FSA was made on the basic assumption that
these structural changes would not be required. The Defendants have not met their
burden to prove either of these elements.
¶21 The Defendants urge us to affirm the circuit court’s conclusion that
the principal purpose of the FSA was “to open the station without delay and sell
4
The court also concluded that the defendant had contributed to the frustrating event by
agreeing to relinquish its passenger service. Chicago, Milwaukee, St. Paul & Pac. R.R. Co. v.
Chicago & N.W. Transp. Co., 82 Wis. 2d 514, 516, 529, 263 N.W.2d 189 (1978).
5
The court noted the distinction between the contract defense of frustration and the
related defense of impossibility, where there is an actual impediment to performance. See
Chicago, Milwaukee, 82 Wis. 2d at 521-22. Here, the parties address only the defense of
frustration.
11
No. 2017AP1505
fuel at a profit.”6 They point to a number of facts they believe demonstrate that all
parties expected a quick opening of the station, including the fact that fuel
purchases were to commence a mere ten days after the land contract was signed.
They further argue that Bulk’s five-month delay in selecting a supplier played a
role in frustrating the purpose of the FSA, which, to reiterate, they believe was to
open the station without delay and at a profit. And the Defendants emphasize the
substantial cost of moving the bathrooms to the interior, pointing to testimony
indicating the alterations “might have cost as much as $30,000.”7 Bulk counters
that the Defendants’ concerns merely related to lower-than-anticipated profits,
which does not constitute substantial frustration of the FSA’s principal purpose.
Bulk is correct.
¶22 The principal purpose of the FSA (by its own terms) was to supply
fuel for sale at the new gas station.8 The Defendants fail to explain how paying
for an updated façade and bathroom modifications frustrated that purpose, much
less to the requisite level of severity—such as a personal services contract when
the person dies, see Sheppard, 328 Wis. 2d 533, ¶¶11-14, or a contract for grading
6
Though separate briefs were filed by AP Marketing and Sebedi on the one hand and
Adhikari on the other, the Defendants’ arguments largely track each other. In addition to the
frustration defense, Adhikari resurrects the condition precedent argument made in the circuit
court, arguing that “the branding of the gas station as it was structurally constituted was a
condition precedent to the purchase and provision of fuel.” Because the circuit court did not need
to address or make findings on this issue, we will not consider it in our review. On remand, the
circuit court may consider whether it is appropriate to take up the issue.
7
Adhikari’s brief concedes that the cost of remodeling was never specifically determined
by the circuit court, but speculates that it “would have certainly cost tens of thousands of dollars.”
AP Marketing and Sebedi give the more specific estimate of “as much as $30,000.”
8
We point out that the Defendants are not arguing that Bulk breached the FSA by
imposing burdens not bargained for or contractually required. They are asserting a defense, a
reason to be excused from performing under the FSA.
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No. 2017AP1505
work when the grading is completed by another contractor, see Wm. Beaudoin &
Sons, Inc., 63 Wis. 2d at 448-49, or an apartment lease to view a coronation
parade when the king falls ill and the parade is cancelled, see Krell v. Henry, 2
K.B. 740 (C.A. 1903) (cited and discussed with approval in Chicago, Milwaukee,
82 Wis. 2d at 522-23). If the cost was so high that the principal purpose was
defeated, the Defendants inexplicably failed to develop a record in support. As
noted, the evidence relating to the estimated cost for bathroom modifications was
not especially specific or certain. And even if we used, for the sake of argument,
the highest estimate mentioned—$30,000—we are given no basis to determine
this amount is prohibitive within the context of a commercial property sold for
$200,000 and expected to sell a minimum of 180,000 gallons annually for ten
years. Further, as the authorities note, reduced profitability, or even outright
financial losses, are insufficient by themselves to prove a frustrated purpose. See
RESTATEMENT (SECOND) OF CONTRACTS § 265 cmt. a. To paraphrase an example
from the Restatement, “If [AP Marketing] can still operate the station, even though
at … a loss, [its] principal purpose of operating a gasoline station is not
substantially frustrated.”9 Id. at cmt. a., ill. 6.
¶23 The Defendants also did not carry their burden to show that a “basic
assumption” of the FSA was that no modifications to the station would be
required. It was not a fundamental premise of the FSA to open the station and sell
fuel as the station was presently constituted. In fact, the FSA expressly vested
9
AP Marketing also points to the delay in Bulk’s selection of a supplier as evidence of a
frustrated purpose. Again, AP Marketing’s argument fails for a lack of proof. To be sure, delays
are rarely preferred, but AP Marketing does not show how the mere passing of time defeated its
ability to sell, albeit later than expected, fuel at the station.
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No. 2017AP1505
Bulk with the discretion to select a supplier of its choice, deeming “any Branded
Supplier” Bulk selected “acceptable.” By entering into the FSA, AP Marketing
agreed to certain branding requirements, including compliance “with the image
standards set by Branded Supplier.” That the chosen supplier would have image
standards made it highly likely, if not inevitable, that some modifications to the
station would be required. As our supreme court stated in Chicago, Milwaukee,
“if the parties have contracted with reference [to the frustrating event] or have
contemplated the risks arising from it, they may not invoke the doctrine of
frustration.” Chicago, Milwaukee, 82 Wis. 2d at 527. While the modifications
may have been more expensive than AP Marketing had hoped, costs that are
unwanted or higher than expected are not the same as ones that are unforeseeable,
the non-occurrence of which underlie the making of the deal.10 Id. at 526(foreseeability is not dispositive, but it is a factor). Defendants have failed to
establish that opening and operating the station in a nearly “as is” condition was
not “so completely the basis of the contract that, as both parties understand,
without it the transaction would make little sense.” RESTATEMENT (SECOND) OF
CONTRACTS § 265 cmt. a.
¶24 In short, the Defendants have not met their burden to prove that the
principal purpose of the FSA was frustrated due to U.S. Oil’s demand for
alterations to the bathrooms, nor that this demand was contrary to a basic
assumption underlying the FSA.
10
The contention that a basic assumption of the FSA was that the station would require
little to no up-front expenses is further belied by the reality that this station had been closed for
three to four years and, in this regard, AP Marketing did spend significant money in up-front
repairs. The record suggests the bathroom updating was a bridge too far for their business model,
not that the FSA itself was premised on no upgrade costs.
14
No. 2017AP1505
B. Stipulated Damages
¶25 Although it was unnecessary to decide (because the Defendants were
relieved of their contractual obligations in toto following the circuit court’s
frustration of purpose holding), the circuit court nonetheless opined that the FSA’s
stipulated damages provision was an unenforceable penalty. Due to the
abbreviated nature of the circuit court’s comments, it is difficult to determine what
facts were found with respect to this issue. But in light of the circuit court’s on-
the-record discussion and stated legal conclusion, we nevertheless offer some
guidance for consideration on remand.
¶26 The validity of a stipulated damages provision is a question of law,
“[b]ut a trial court’s decision concerning the validity or invalidity of [such a
provision] involves factual and legal determinations.” Koenings v. Joseph Schlitz
Brewing Co., 126 Wis. 2d 349, 358, 377 N.W.2d 593 (1985). We defer to the
court’s factual findings under the clearly erroneous standard of review. Id. The
ultimate question of whether the facts, as found, meet the legal standard is a
question of law, although the circuit court’s decision “should be given weight”
because “the factual and legal determinations are intertwined.” Id.¶27 Provisions stipulating damages upon breach may be divided into
“liquidated damages” provisions (which are reasonable and enforceable) and
“penalty clauses” (which are “unreasonable and unenforceable”). Equity Enters.,
Inc. v. Milosch, 2001 WI App 186, ¶18, 247 Wis. 2d 172, 633 N.W.2d 662. The
test to determine whether a stipulated damages provision is enforceable is
“whether the clause is reasonable under the totality of the circumstances,” and the
party seeking to avoid enforcement of the bargain struck bears the burden to show
the clause is unreasonable. Id., ¶19; Wassenaar, 111 Wis. 2d at 526. This “test
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No. 2017AP1505
ensures that the court respects the parties’ bargain, but prevents abuse.” Equity
Enters., Inc., 247 Wis. 2d 172, ¶19. To determine reasonableness, we consider
the following factors:
(1) whether the parties intended to provide for damages or
for a penalty; (2) whether the injury caused by the breach
would be difficult or incapable of accurate estimation at the
time of entering into the contract; and (3) whether the
stipulated damages are a reasonable forecast of the harm
caused by the breach.11
Rainbow Country Rentals & Retail, Inc. v. Ameritech Publ’g, Inc., 2005 WI 153,
¶28, 286 Wis. 2d 170, 706 N.W.2d 95.
¶28 “In addition to these factors, we also consider the policies underlying
the reasonableness test.” Id., ¶¶29-30. One of those policies is the parties’
freedom to contract and allocate risk as they see fit.
[Stipulated damages] clauses allow the parties to control
their exposure to risk by setting the payment for breach in
advance. They avoid the uncertainty, delay, and expense of
using the judicial process to determine actual damages.
They allow the parties to fashion a remedy consistent with
economic efficiency in a competitive market, and they
enable the parties to correct what the parties perceive to be
inadequate judicial remedies by agreeing upon a formula
which may include damage elements too uncertain or
remote to be recovered under rules of damages applied by
the courts. In addition to these policies specifically relating
to stipulated damages clauses, considerations of judicial
economy and freedom of contract favor enforcement of
stipulated damages clauses.
11
These factors are not to be applied mechanistically and “courts may give some factors
greater weight than others.” Rainbow Country Rentals & Retail, Inc. v. Ameritech Publ’g, Inc.,
2005 WI 153, ¶28, 286 Wis. 2d 170, 706 N.W.2d 95 (citation omitted).
16
No. 2017AP1505
Wassenaar, 111 Wis. 2d at 528. “A competing set of policies disfavors stipulated
damages clauses.” Id. Public law ordinarily determines the parties’ remedies, and
stipulated damages are an exception to this rule. Id.Stipulated damages allow private parties to perform the
judicial function of providing the remedy in breach of
contract cases, namely, compensation of the nonbreaching
party, and courts must ensure that the private remedy does
not stray too far from the legal principle of allowing
compensatory damages. Stipulated damages substantially
in excess of injury may justify an inference of unfairness in
bargaining or an objectionable in terrorem agreement to
deter a party from breaching the contract, to secure
performance, and to punish the breaching party if the
deterrent is ineffective.
Id. at 528-29. Accordingly, we do not “blindly” enforce stipulated damages
clauses without first scrutinizing them. Id. at 528.
¶29 The circuit court here noted that it would have been “very easy” to
calculate the anticipated damages based on the “one-and-a-half cents a gallon
above ... the rack rate.” Thus, the court opined that that stipulated damages
provision in the FSA of ten cents per gallon “constitute[d] a penalty, not a fair and
accurate assessment of damages incurred on behalf of the plaintiff.” The
Defendants echo this position.
¶30 However, this may be an incomplete account of the potential
damages that could result from a breach by AP Marketing and the difficulty in
calculating them. Bulk asserts that it is entitled to lost profits and incidental
damages if it proves a breach. See WIS. STAT. §§ 402.708(2), 402.710 (2017-18).
A stipulated damages provision may properly seek to account for “damage
elements too uncertain or remote to be recovered under rules of damages applied
by the courts.” See Wassenaar, 111 Wis. 2d at 528. Here, the FSA expressly
contemplated that Bulk would contract with a fuel supplier to provide for the
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No. 2017AP1505
Defendants’ fuel needs, and Bulk is free to argue that such obligations under the
FSA carried additional risk. A calculation of damages limited to the 1.5 cent per
gallon profit margin for the 180,000 gallons AP Marketing agreed to purchase
under the FSA may not fully take into account Bulk’s recoverable damages
sustained as a result of a breach.12
CONCLUSION
¶31 We conclude AP Marketing is not excused from performance of the
FSA under the frustration of purpose doctrine. The circuit court erroneously
dismissed the claim on this ground. We remand the case to the circuit court with
instructions to reinstate Bulk’s claim that AP Marketing breached the FSA.
Because the circuit court did not determine whether AP Marketing breached the
FSA, that issue—along with any other issues of contractual interpretation and
performance, including the stipulated damages provision—remains to be
adjudicated.
By the Court.—Judgment reversed and cause remanded with
directions.
12
The parties have noted other language and provisions in the FSA that may affect the
damages analysis, such as the last line of the stipulated damages provision, which states that
“[t]his payment is in addition to any and all other remedies [Bulk] may have at law or in equity.”
18