Opinion
No. CV 03-0198217 S
April 20, 2005
MEMORANDUM OF DECISION
The above-entitled contract actions have been consolidated for trial before the court pursuant to the agreement of the parties. The plaintiff in each action is White Plains Coat Apron Co., Inc. d/b/a White Plains Linen. The plaintiff is in the business of supplying table cloths, napkins, aprons and other linens to hotels and restaurants on a rental basis. The defendants are Decaro, Inc. d/b/a Splash (Splash) which operates a restaurant in Westport, Connecticut and VJV, Inc. d/b/a Baang Cafe and Bar (Baang) which operates a restaurant in Riverside, Connecticut. The defendants have essentially the same ownership. Plaintiff's action against Baang was commenced as a small claims matter and was transferred to the regular docket upon defendant, Baang's motion pursuant to P.B. § 24-21.
On February 25, 1997, the plaintiff entered into an agreement to provide linens to Splash for a five-year term. Pursuant to the contract, the plaintiff would deliver fresh linens twice a week to Splash by truck and pick up soiled linens at the same time. At the time of delivery a representative of Splash would verify the items included in the delivery and sign a receipt for the plaintiff's driver.
On March 11, 1999, the plaintiff entered into an agreement with Baang for a five-year term on a preprinted form containing substantially the same terms as the 1997 Splash Agreement. On January 15, 2002 the plaintiff and Splash entered into a new five-year agreement on a preprinted form identical to the one signed by Baang in 1999.
The terms of the relevant agreements are included on a two-sided one-page form. Paragraph 1 set forth a price schedule for various linen items to be supplied by the plaintiff on a weekly basis and stipulated that the plaintiff was to be the exclusive linen supplier to the customer during the term of the agreement.
Paragraph 6 provides for the payment of liquidated damages in accordance with a formula in the event of the termination by the customer prior to the expiration of the five-year term of the agreement. The formula provided for damages equal to 20% of the customer's average weekly volume multiplied by the number of weeks remaining in the term of the agreement.
Paragraph 8 provides that the customer would pay costs and expenses incurred by plaintiff in enforcing the agreement, including reasonable attorneys fees.
During 2002, the plaintiff billed Splash $42,505.31 and billed Baang $31,697.43. The pricing terms for both Splash and Baang were changed on May 29, 2003 when the parties signed an agreement entitled "Discount Program" providing for a 5% price reduction. Under terms of that agreement, some or all of the discounts were to be repaid to plaintiff in whole or in part by the customer if the customer terminated its relationship with plaintiff within five years "for any reason whatsoever at any time within the next five years."
During 2003, Splash began experiencing significant problems with the plaintiff's deliveries. Splash's instructions required that deliveries take place after 3:00 p.m. This timing was required to permit Splash's manager to be present to review the delivery and sign the receipt for it. Despite these instructions and Splash's repeated complaints to plaintiff, plaintiff's driver consistently made deliveries at much earlier hours. The driver would threaten or cajole unauthorized Splash employees into signing receipts. If such tactics were unavailing the driver would simply forge a signature on the receipt. In one particularly egregious incident, the driver intimidated and harassed Splash's catering manager, Holly Decaro, who happened to be the wife of one of Splash's owners. The problem was reported in detail to plaintiff in writing with the threat that a recurrence of the problem would cause Splash "to take our linen business elsewhere." The plaintiff does not dispute their driver's conduct, but offered the excuse that the driver, a union member, could not be made to follow their instructions.
The problems with the timing of deliveries to Splash continued on a regular basis until August 2003 when both Splash and Baang replaced the plaintiff with another linen vendor. The plaintiff learned of the defendants' decision when the plaintiff's drivers saw linen from the new vendor at each of the subject restaurants. No notice of cancellation or termination was sent by either defendant to the plaintiff.
In October 2003 the plaintiff's attorney sent letters to each of the defendants demanding liquidated damages for early termination in accordance with terms of the agreements and for return of discounts under the terms of the May 29, 2003 Discount Program. When the defendants refused to pay, litigation ensued. In each complaint the plaintiff claims return of discounts (First Count), liquidated damages (Second Count) and, alternatively, actual damages (Third Count).
The defendants' answers deny the allegations of the complaint and plead five special defenses — payment in full, unconscionable contract, misrepresentation, estoppel as a result of misrepresentation, and violation of the Sherman Act 15 U.S.C. § 1. A sixth special defense, unauthorized signatory, is set forth in Splash's answer.
At trial the defendants produced evidence that in December 2003, the plaintiff and its chief executive officer had entered pleas of guilty in the United States District Court for the Southern District of New York to one count of violating 15 U.S.C. § 1 (the Sherman Act), by participating in a combination and conspiracy to allocate customers in the linen supply market in the New York metropolitan area, including portions of Fairfield County, Connecticut. However, no evidence was presented that either of the defendants were included among the customers allocated in the conspiracy or that they were otherwise victimized by the plaintiff's criminal conduct.
In their briefs, both parties argue that the agreements between the parties are governed by the provisions of Article 2A of the Uniform Commercial Code — Leases which became effective in this state on October 1, 2002 pursuant to the provisions of Public Act 02-131, §§ 1-90. The court agrees. Public Act 02-131 does not provide that its provisions are only applicable to leases entered into following the effective date. The adoption of Article 2A did not repeal existing statutory law governing leases of personal property. Neither party contends that the application of the common law of this state as it existed at the time of the enactment of Article 2A would require a different result.
In Emlee Equipment Leasing v. Waterbury Transmission, 31 Conn.App. 455, 626 A.2d 307 (1993), the Appellate Court found it appropriate to look to the provisions of Article 2A of the Uniform Commercial Code in determining the rights of the parties under a finance lease, even though that Article had not yet been adopted in Connecticut. The court noted the exponential increase in the number and value of commercial leases of personal property and found the provisions of the Article 2A and commentary thereto to be "instructive." The Appellate Court's holding suggests that even prior to the effective date of Article 2A in this state, the Article provisions could be considered as part of the common law. See also Normand Josef Enterprises v. Connecticut National Bank, 230 Conn. 486, 646 A2d. 1289 (1994) in which the Supreme Court noted "We have often drawn upon provisions of the Uniform Commercial Code as a source of analogy for the emergent common law." Id. at 501.
General Statutes § 42a-2A-102(a)(18) defines a "Lease" as "the transfer of the right to possession and use of goods for a period in return for consideration." Section § 42a-2A-102(a)(16) defines "Goods" as "all things that are movable at the time of identification to a lease contract." The terms of the agreements between the plaintiff and the defendants show that the relationships between the parties are within these statutory definitions. The linens which were the subject of the agreements were, at all times, the property of the plaintiff. The charges to the defendants were made by the plaintiff on the basis of quantity of linens delivered to them. The court concludes that the rental or lease of linens under the agreements entered into by the parties are covered by the provisions of Article 2A of the Uniform Commercial Code.
The parties disagree as to the result the court should reach in applying the provisions of Article 2A to the instant facts. Defendant Splash asserts that the persistent failure of the plaintiff's driver to follow Splash's delivery requirements constitute a default under General Statutes § 42a-2A-702(b) entitling Splash to cancel the agreement under § 42a-2A-724. The provisions of § 42a-2A-709(a) provides that "An aggrieved party may cancel a lease contract if the conditions of section 42a-2A-716 or 42a-2A-724 are satisfied . . ."
"(b)The cumulative effect of individual insubstantial defaults may substantially impair the value of the whole lease contract to the other party."
"(a) If the lessor fails to deliver the goods in conformity to the lease contract . . . and with respect to all of the goods if under an installment lease contract the value of the whole lease contract is substantially impaired, the lessor is in default under the lease contract, and the lessee may do one or more of the following:
(1) Cancel the lease contract under 42a-2A-709."
Splash claims that in retaining a replacement vendor it had, in effect, repudiated its agreement with plaintiff. Splash relies on General Statutes § 42a-2A-602(b) which provides: "Repudiation includes language that one party will not or cannot make a performance still due under the contract or voluntary, affirmative conduct that reasonably appears to the other party to make a future performance impossible." Splash mistakes the relevant provisions of Article 2A of the UCC. Under General Statutes § 42a-2A-602(a), repudiation of a contract is, in effect, a default by the repudiating party, entitling the aggrieved party to remedies. The relevant issue here is whether Splash canceled its agreement with the plaintiff following the repeated non-conforming deliveries.
The agreement does not provide for any particular manner in which notices are to be delivered nor does it require that a cancellation of the agreement be communicated to the non-canceling party by any particular means. The plaintiff does not deny that the agreement was, in fact, terminated by Splash. Paragraph 6 of the complaint alleges "Defendant has wrongfully terminated such contract." The court finds that formal notice of cancellation was not necessary in order for defendant Splash to effectively terminate the lease agreement. The remaining question is whether the cancellation was justified under General Statutes § 42a-2A-724.
General Statutes § 42a-1-201(25), which is applicable to all articles of the Uniform commercial code, provides, in relevant part ". . . person has `notice' of a fact if the person: (A) Has actual knowledge of it; (B) Has received a notice or notification of it; or (C) From all the facts and circumstances known to the person at the time in question, has reason to know that it exists."
The parties agree that the agreement was an "installment lease contract" as defined in General Statutes § 42a-2A-726. Under that statute an "installment lease contract means a lease contract in which the terms require or the circumstances permit the delivery of goods in separate lots to be separately accepted . . ." In relevant part General Statutes § 42a-2A-724(a) provides: "If the lessor fails to deliver the goods in conformity to the lease contract . . . or a lessee rightfully rejects the goods or justifiably revokes acceptance of the goods, with respect to any goods involved and with respect to all of the goods if under an installment lease contract the value of the whole lease contract is substantially impaired, the lessor is in default under the lease contract, and the lessee may [c]ancel the lease contract under section 42a-2A-709 . . ." The evidence shows that the repeated failure of the plaintiff's driver to adhere to the agreed-upon delivery times, his forging of receipts and his outrageous behavior toward Splash employees substantially impaired the relationship between the parties and the value of the plaintiff's services under the agreement with Splash. The court concludes that Splash's termination of the agreement was justified under General Statutes § 42a-2A-724(a). Consequently, the court finds the issues for the defendant Splash and against the plaintiff with respect to the plaintiff's second count pertaining to the termination of the January 15, 2002 agreement.
The first count of the plaintiff's complaint claims damages in the amount of discounts granted to Splash in the period between the May 29, 2002 Discount Program and the cessation of deliveries by plaintiff in August 2002. The evidence establishes that discounts totaling $646.27 were granted to Splash during that period. All of the six special defenses asserted by Splash pertain to the January 15, 2002 agreement. None of them pertain to the May 29, 2002 Discount Program. The court finds the issues on the first count for the plaintiff and finds damages in the amount of $646.27.
The plaintiff's complaint against Splash also demands attorneys fees. The court notes that terms of the Discount Program do not provide for such fees and that the Discount Program is made expressly independent of the January 15, 2002 agreement which does provide for the award of attorneys fees. The courts finds that an award of attorneys fees to plaintiff on the first count of its complaint against Splash is not justified.
No evidence was presented of any serious failures of the plaintiff to perform its obligations under its contract with Baang. The court concludes that Baang's action in entering into a contract with another linen supplier during the term of its agreement with plaintiff breached that agreement. The court finds that the defendant, Baang, did not show that it had paid all amounts due the plaintiff under the terms of the agreement and accordingly finds the issues on the defendants' first special defense for the plaintiff.
Baang's second special defense claims that the liquidated damage provisions of paragraph 8 are unconscionable and contrary to public policy. In a recent case, our Supreme Court reviewed the difference between acceptable liquidated damages provisions in a contract and impermissible penalty provisions. In American Car Rental v. Commissioner of Consumer Protection, 273 Conn. 296 (2005) the court rejected the plaintiff's contention that a fee of $150 imposed on car renters each time they drove in excess of 79 miles per hour was a legal liquidated damages provision. The court found that the actual damages suffered by the plaintiff were much less than the fee imposed under the rental contract and that under such circumstances the fee constituted an illegal penalty violating public policy.
The court noted that an illegal penalty provision is "one the prime purpose of which is to prevent a breach of the contract by holding over the head of a contracting party the threat of punishment for a breach. A provision for liquidated damages, on the other hand, is one the real purpose of which is to fix fair compensation to the injured party for a breach of the contract." Id., 306. Citing Berger v. Shanahan, 142 Conn. 726, 118 A.2d 311 (1955), the court articulated three conditions which must be satisfied in order to have a provision construed as a legal liquidated damages provision, "(1) the damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract." Id., 307.
In this case, Baang does not claim that the plaintiff's damages would not be uncertain and difficult to prove. The claim that the representative of Baang who signed the March 11, 1999 agreement was unaware of its provisions was not supported by any evidence. The express terms of that agreement reflect the intent of the parties to liquidate damages. In a somewhat more credible claim, Baang asserts that the amount stipulated under paragraph 6 of the contract is disproportionate to the plaintiff's actual losses.
The evidence in this case shows that the actual damages sustained by the plaintiff as a result of the unjustified termination of the contract by Baang could have included profits of 11% on deliveries for the twenty-eight weeks remaining on the contract. Such damages would be in the range of $1,500 to $1,900 depending on the period chosen to represent Baang's average weekly linen usage. In addition, the evidence shows that the plaintiff may have sustained damages for sales commissions and, perhaps, the cost of certain linens which may not have been fully amortized. Application of the provisions of paragraph 6 of the contract result in liquidated damages of $2,762.09. The court can not find that these liquidated damages are so disproportionate to plaintiff's actual losses as to constitute an illegal penalty. Accordingly, the court finds the issues on Baang's second special defense for the plaintiff.
Paragraph 6 of the contract uses average weekly sales over the three months prior to termination ($493.23). Average weekly sales for the last full year of the contract were $609.57.
Baang did not produce evidence of any misrepresentation made by or on behalf of the plaintiff in connection with procurement of either the March 11, 1999 agreement or the Discount Program. Accordingly, the court finds the issues on Baang's third and fourth special defenses for the plaintiff. As noted above, the evidence failed to show that plaintiff's contract with Baang was procured as a result of a criminal conspiracy to allocate customers as alleged in Baang's fifth special defense. The court therefore finds the issues on that special defense for the plaintiff.
In its first count against Baang the Plaintiff claims an additional $303.56 in damages under the terms of the May 29, 2003 Discount Program requiring the repayment of discounts received in the event of termination of this relationship between Baang and the plaintiff.
Under both paragraph 8 of the March 11, 1999 agreement and under General Statutes § 52-251a, the plaintiff is entitled to reasonable attorneys fees. The court finds that the fees claimed by plaintiff's counsel in the amount of $919.50 are fair and reasonable.
Judgment may enter in favor of the plaintiff against defendant Splash on the first count in the amount of $646.27 and in favor of defendant Splash against the plaintiff on the second and third counts. Judgment may enter in favor of the plaintiff and against defendant Baang on the first count in the amount of $303.56 and $2,762.09 on the second count and for attorneys fees in the amount of $919.50. In as much as the court has found that the March 11, 1999 agreement between the plaintiff and Baang contains a valid and enforceable liquidated damages provision, the plaintiff is not entitled to recover its actual damages from Baang under its third count and judgment may enter on that count in favor of Baang.
David R. Tobin, Judge