"American Style" International Supply Contracts. Discusses Liquidated Damages Provisions and Problems for European Companies doing business with U.S.

1. “American Style” Master Supply Contracts: Liquidated Damages
Do you know what your international supply contract really means? When you are late in deliveries or have
to defend against claims for product defects, will you lose sleep over the damages that you will have to pay?
Just consider the enormous contract claims that may arise from the groundings of the Boeing 787 due to the
lithium-ion battery issues.
European suppliers now sign « American Style » contracts with U.S. and even European aircraft manufac-
turers or their first-tier contractors. Your contractual liability can often include liquidated damages, buyer’s
indemnification against third-party claims, and consequential damages. Suppliers should rightly be con-
cerned about how courts will enforce damages clauses for delay or other breaches of contract, particularly in
the United States.
Consider, for example, liquidated damages ( “LD”).
In the United States, LD are often defined as an agreement between parties to a contract that fixes (in
advance) the amount to be paid as damages for a contractual breach, for example, $1,000 per day for each
day that deliveries are late under a supply contract. (See Cuesport Properties, LLC v. Critical Developments,
LLC, where the Maryland Court in May, 2013, reaffirmed a “Late Performance” provision providing for LD
based upon a stipulated sum per diem or per day.)
Liquidated damages have several advantages.
For sellers, a LD provision reduces uncertainty by capping the seller’s liability, even if the cap turns out to
be greater than actual damages to the buyer. For the buyer, a LD paragraph reduces uncertainty by fixing
at least an acceptable level of compensation in the event of a breach. If there is a dispute, an LD provision
eliminates the need for the non-breaching party to prove its actual damages, and streamlines and reduces
the costs of dispute resolution because the buyer need only prove the amount of delay.
The Uniform Commercial § Code 2-718, which most American states have adopted and which applies to all
contracts for the sale of goods, defines LD as follows: “Damages for breach by either party may be liquidat-
ed in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm
caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise
obtaining an adequate remedy.”
Buyers will want to avoid a state court construing a liquidated damages provision as a “penalty” and, accord-
ingly, unenforceable. In most states, a LD provision will be viewed as a “penalty” when the damage result-
ing from a breach of contract is susceptible of definite measurement, or where the stipulated amount would
be grossly in excess of actual damages. However, the amount agreed upon will be construed as enforceable
liquidated damages when the actual damages contemplated at the time of the agreement are uncertain and
difficult to determine with exactness, and when the amount fixed is not out of proportion to the probable
loss. Analysis of a LD provision depends on the parties’ intent, and the breaching party will usually have the
burden of proving a LD clause’s impropriety.
U.S. courts usually will not intervene under what is known as the “blue pencil rule” to modify a “liquidated
damages” paragraph so that the buyer can enforce a lesser amount than that called for in the liquidated
damages provision of the contract. The judge will either declare the “liquidated damages” provision to be
enforceable or strike the paragraph as excessive and an unenforceable “penalty.”
Two U.S. cases illustrate the risks and rewards of relying upon liquidated damages for breach of contract:
Legal Developments: U.S. Aerospace Sector
June 2013 Bulletin
CONTACT INFORMATION
Anthony H. Anikeeff
Government Contracts
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NC | VA | DC

2. Lefemine v. Baron.
This Florida case dealt with a liquidated damages provision in a real estate contract, which provided
that the buyer would forfeit its deposit of 10% of the sales price ($37,000) if it breached the contract.
The LD provision would have been reasonable on its face but for an additional provision which gave the
seller the option of either keeping the deposit as LD or suing under the contract for actual damages. The
court stated:
“The reason why the forfeiture clause must fail in this case is that the option granted to Seller either to
choose liquidated damages or to sue for actual damages indicates an intent to penalize the defaulting
buyer and negates the intent to liquidate damages in the event of a breach. The buyer under a liquidated
damages provision with such an option is always at risk for damages greater than the liquidated sum.
On the other hand, if the actual damages are less than the liquidated sum, the buyer is nevertheless
obligated by the liquidated damages clause because the seller will take the deposit under that clause.
Because neither party intends the stipulated sum to be the agreed-upon measure of damages, the pro-
vision cannot be a valid liquidated damages clause.”
Lessons for Drafting U.S. Aerospace Supply Contracts:
In construing a LD provision, the parties’ intent is of paramount importance. If the parties intend for
liquidated damages to be the remedy, avoid references to the right to elect alternative or cumulative
remedies —it creates a risk to the buyer that the LD will be viewed as a penalty and unenforceable. At
a minimum, suppliers should insist that LD be limited to a specific type of breach (such as damages
for delay) and attempt to limit the buyer’s right to sue for actual damages to other types of contact
breaches, such as for defective products or failure to obtain all governmental approvals. Otherwise, the
remedies provisions of the supply contract will be of uncertain enforceability, increasing the litigation
costs and risks for both parties. .
International Marine, LLC v. Delta Towing, LLC.
In this case, decided in 2013 by the United States Court of Appeals, the sales agreement for two tug-
boats provided for $250,000 in liquidated damages if the boat was used in violation of a noncompeti-
tion provision. The court upheld the LD provision, noting that the parties had heavily negotiated the LD
provision, which was originally $4 million per violation, down to $250,000. Moreover, the difficulty in
proving damages was established by evidence about the nature of the boat charter business to which
the clause applied. Specifically, the court held it to be exceedingly difficult to estimate damages before
a non-competition clause is breached. Further, the amount fixed in the LD provision was reasonable
because it approximated the actual loss that would result from a particular breach, i.e., the range of
expected fees and contract duration. The Federal Court upheld the application of the LD provision to 36
separate violations, even though the total of $9 million in damages was more than the sales price of at
least one of the tugboats under the contract.
Lessons for Drafting U.S. Aerospace Supply Contracts:
Do not expect American judges to modify an enforceable LD provision to make it reasonable in relation
to the total contract amount. The provisions if properly drafted will be enforced strictly according to
their terms. A party can attempt to negotiate a cap on LD, so that they do not exceed the total contract
amount, however. The type of non-competition provision in the maritime case is similar to those in air-
craft or aerospace equipment leasing contracts; these parties should carefully study their LD provisions
prior to executing any such agreements.
Développements Juridiques :
Secteur Aérospatial Américain
Bulletin de Juin 2013
NC | VA | DC
Eliot Norman and
Brendan O’Toole, Williams
Mullen.
Bertrand Tamalet, law
student, University of
Richmond School of Law
provided assistance in the
preparation of this Bulletin.
He also holds a Masters in
Procedural Law from the
University of Perpignan,
France.
Eliot Norman is a senior
partner, Williams Mullen, and
member of the International
Practice Group based in
Washington, D.C. Brendan
O’Toole is an associate in
the firm where he focuses
on commercial litigation.
Mr. Norman advises on the
negotiation and enforcement
of manufacturing supply
agreements and other legal
issues for companies who
are exporting to or investing
in the United States. Eliot
Norman speaks French
fluently and recently spoke
to the AFJE (Association
Francaise de Juristes
d’Entreprise) in Toulouse and
to the BavAIRia Aerospace
Cluster in Munich on Master
Supply Agreements and
related legal issues.
For additional information:
please contact Eliot Norman
enorman@williamsmullen.

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