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Federal Courts Decide That a ‘resolution Fee’ Provision in a Commercial Contract Wasn’t a Liquidated Damages Provision and Was Enforceable

Poole Huffman, LLC

In any commercial contract, there are likely several things you desire to get from the arrangement, which is why the agreement you sign hopefully has been carefully negotiated prior to execution. To make sure that you get the benefit for which you negotiated, it is important to understand what types of clauses are, and which are not, enforceable under Georgia law. To be sure your contract or any of its clauses won’t be thrown out as unenforceable, ensure you’re relying on representation from a knowledgeable Georgia commercial contracts attorney.

A recent case decided by the federal 11th Circuit Court of Appeals was one that looked at what type of fee provisions could, or could not, be enforced under Georgia law. The underlying deal was one between a chain of “quick service” Mexican restaurants and a supplier of tortillas. The deal called for the tortilla company to supply the restaurant’s tortilla needs. The deal had a provision in it for the imposition of something called a “resolution fee.” In this agreement, the obligation to pay a resolution fee was triggered only if the restaurant didn’t order at least $2.5 million worth of products from the supplier over the span of contract term.

So, if the restaurant cleared $2.5 million, the resolution fee was $0. If it fell short of $2.5 million, the resolution was equal to 5% of the difference between $2.5 million and the value of the products that the restaurant actually ordered and accepted. The deal called for the restaurant to pay the fee within 30 days, if one was owed.

The restaurant didn’t clear the $2.5 million bar. The sum total of its accepted orders was $2,088. The supplier imposed a resolution fee of $124,895. The restaurant did not pay the fee within 30 days. The supplier sued in federal court in Atlanta to recover the fee. The restaurant argued that it didn’t owe the fee because the fee provision in the contract was not enforceable. Specifically, the restaurant’s argument was that the fee provision was a liquidated damages clause and was unenforceable under Georgia law.

The restaurant was correct that liquidated damages clauses may be unenforceable contract terms in Georgia (if they do not satisfy Georgia’s three-part test), but it had a bigger problem. The court determined that the provision in dispute in this case was not a liquidated damages clause at all, so it was enforceable and the supplier was entitled to pursue recovery of the fee.

The restaurant appealed but still lost. The 11th Circuit Court of Appeals agreed with the lower court that the provision at the center of this case simply didn’t meet the law’s standards for a liquidated damages clause. To be a liquidated damages clause, a contract term must state within their contract what the amount of damages for a breach of agreement will be. That wasn’t what this contract term said, though, according to the courts. The contract language did not require that the restaurant breach the agreement in order for the supplier to be entitled to the fee. The contract actually contained no language that imposed a hard-and-fast minimum purchase obligation upon the restaurant at all. Even if the restaurant had bought nothing from the supplier, its lack of purchases would not have amounted to a breach of contract

The $2.5 million figure was not a requirement of the agreement, such that failing to meet it would trigger a legal action for breach. It was just a figure that altered the terms of compensation. That didn’t meet the law’s requirements for a liquidated damages clause, so the supplier was entitled to recover it.

For the useful advice and diligent representation you need for your commercial contract issues, rely upon the experienced Atlanta business attorneys at Poole Huffman, LLC. Our attorneys have been helping our clients achieve their business interests for many years. Contact our attorneys online or by calling 404-373-4008 to schedule your confidential consultation.

More blog posts:

When a Georgia Shareholder Can Receive Reimbursement for Defending Against a Breach of Fiduciary Duty Claim, Atlanta Business Litigation Attorneys Blog, Aug. 22, 2018

Making Sure That the Commercial Contract You Signed in Georgia Is the Agreement You Wanted, Atlanta Business Litigation Attorneys Blog, Aug. 15, 2018

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