| Court: | United States Court of Appeals, 7th Circuit |
| Facts: | Plaintiff invested in a new bagging plant in order to service deliveries for defendant, and there was a clause for minimum order amounts. Defendant didn't perform, and wouldn't pay the penalty. Plaintiff asserted that this justified a lien on defendant's goods. Defendant counter-sued for the value of the goods plus damages. |
| Posture: | Suit and countersuit brought in Illinois Court. Appealed to IL Supreme Court. Appealed again (by plaintiff). |
| Issue: | Whether or not non-performance by the consumer of a contracted service grants the provider a valid lien on goods involved in the service; whether or not a specific contractual clause constitutes a penalty clause or a liquidated damages clause. |
| Holding: | There was no valid lien. The clause was a penalty clause. Still, damages are recoverable, so everyone needs to go back and re-calculate what they should be. |
| Rule: | The utility of penalty clauses is debatable, and although the Supreme Court
seems to take a less dim view of them than the Illinois courts, it is
not the Supreme Court's place to dictate Illinois economic policy on
penalty clauses in general; merely to determine the issues of the appeal.
There's no precedent for considering a lien valid in such cases (and it also would be bad policy to do so), so it's not. The clause is a penalty clause, because it guarantees the plaintiff extra profit no matter what the nature of the breach, and does not take into account the fact that breach saves the plaintiff expenses. |
| Reasoning: | Not even going to try to duplicate all the financial acrobatics, but
basically you can recongize a penalty clause if the amount sought
is grossly disproportionate, and penalizes breaches disproportionately
regardless of their relative cost.
Even though that clause is unenforceable, though, damages can still be recovered. |
| Dicta: | |