A Liquidated Damages Provision Providing Inadequate Damages Isn't A "Penalty"

It's black letter law in North Carolina that a liquidated damages provision is enforceable, so long as it is not a "penalty."  The need to make that distinction typically comes up when the Defendant believes the liquidated amount is excessive when compared to the actual damages incurred by the Plaintiff.

In Azalea Garden Board & Care, Inc. v. Vanhoy2000 NCBC 8 (N.C. Super. Ct. March 17, 2009), the Business Court confronted the exact opposite of the usual penalty argument.  The Plaintiff asserted that a provision in the contract severely limiting its recovery was a penalty because it would only allow damages it described as being "woefully inadequate." 

The provision at issue, contained in a $3.6 million contract to buy a nursing facility, said that "Buyer agrees that if he should fail or refuse to complete this transaction after timely acceptance by the seller, then any funds or deposit with the Broker will be forfeited and shall be split 50% to the broker and 50% to the seller." That provision yielded damages to the Plaintiff of only $12,500.

The Court determined this was a liquidated damages provision as a matter of law, and that it did not constitute a penalty. The Court held "Plaintiff's argument that the liquidated damages provision is unreasonable because it is too small in light of the damages actually suffered is not persuasive."  Op. Par. 30.  The Opinion referenced cases from other jurisdictions reaching the same result in a situation the Court described as "rare."

The other issue resolved in the Opinion was whether Tuttle could be liable for a breach of the agreement to purchase the nursing facility even though he had not signed it.  Tuttle asserted the Statute of Frauds.  The Plaintiff responded that the Tuttle was part of a joint venture, that the contract had been signed by an authorized agent of the joint venture, and that it was therefore binding on Tuttle.  

Here's how Judge Tennille articulated the standard for determining whether a joint venture exists:

{14}  A joint venture is “an association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business adventure for joint profit, for which purpose they combine their efforts, property, money, skill, and knowledge, but without creating a partnership in the legal or technical sense of the term.” Pike, 274 N.C. at 8, 161 S.E.2d at 460 (citing In re Simpson, 222 F. Supp. 904, 909 (M.D.N.C. 1963)). An express agreement is not required to prove the existence of a joint venture. See Rhue v. Rhue ___ N.C. App. ___, ___, 658 S.E.2d 52, 59 (2008); see also Wike v. Wike, 115 N.C. App. 139, 141, 445 S.E.2d 406, 407 (1994). Rather, intent to create a joint venture can be inferred by the conduct of the parties and the surrounding circumstances. See Rhue, ___ N.C. App. at ___, 658 S.E.2d at 59; see also Wike, 115 N.C. App. at 141, 445 S.E.2d at 407. The existence of a joint venture “may be based upon a rational consideration of the acts and declarations of the parties, warranting the inference that the parties understood that they were [co-adventurers] and acted as such.” Davis v. Davis, 58 N.C.App. 25, 30, 293 S.E.2d 268, 271 (1982) (citing Eggleston v. Eggleston, 228 N.C. 668, 674, 47 S.E. 2d 243, 247 (1948)). “Facts showing the joining of funds, property, or labor, in a common purpose . . . in which each has a right . . . to direct the conduct of the other[s] through a necessary fiduciary relation[ship]” is sufficient for finding the existence of a joint venture. Pike, 274 N.C. at 8, 161 S.E.2d at 460; Cheape v. Chapel Hill, 320 N.C. 549, 561, 359 S.E.2d 792, 799 (1987).

{15} In North Carolina, joint ventures are similar to partnerships, and they are “governed by substantially the same rules.” Jones v. Shoji, 336 N.C. 581, 585, 444 S.E.2d 203, 205 (1994). A hallmark of a partnership is the sharing of “any profits, income, expenses, joint business property or hav[ing] authority of any kind over each other.” Wilder v. Hobson, 101 N.C. App. 199, 203, 398 S.E.2d 625, 628 (1990).

The Court found a question of fact on whether Tuttle had been part of a joint venture and denied the Motion for Summary Judgment.  But in another opinion issued at the same time in the same case, the Court granted the motion for summary judgment of another Defendant (Allen) on the same grounds, finding that there was no genuine material issue of fact as to Allen's lack of association with the claimed joint venture.  That opinion is Azalea Garden Board & Care v. Vanhoy, 2008 NCBC 7 (N.C. Super. Ct. March 17, 2009).