Liquidated Damages UCC 2-718(1) Case: United Air Lines, Inc. v. Austin Travel Corp. (1989) [pp.

1009-1013] 867 F.2d 737 Parties: Plaintiff - United (appellee) Defendant - Austin (Appellant)

Procedural History: District court entered summary judgment for United, awarding them $400k in liquidated damages and unpaid debt + interest and costs. Facts: United owns a CRS program, which it licenses to travel agencies. The CRS is a system that allows the travel agencies to make airline reservations, issue tickets, etc. United and Austin had a K for Austin's use of this system. The K provided for liquidated damages upon premature termination of the K. Liquidated damages were: ○ 80% of the remaining monthly fees due under the K ○ 80% of variable charges for the month preceding termination, multiplied by the months remaining in the K term ○ 50% of the average monthly booking fee revenues (using previous months as a basis for calculation) Austin stopped using the CRS program before the termination of the K, which constituted a breach. United sued Austin on this breach, and the district court entered summary judgment for United, awarding them the liquidated damages as stipulated in the K ($400K). Austin appeals this on the grounds that the liquidated damages clauses in the K were unenforceable penalties. Issue: Whether the liquidated damages clause in he K was an unenforceable penalty. - No. Holding: Affirmed.

Reasoning: ○ To have an enforceable liquidated damages clause, the following is necessary: § The amount is a reasonable proportion to probable loss □ United says that costs they can avoid due to early termination is less than 20%, so the 80% they do incur is a reasonable forecast of costs incurred. Austin argues about this figure, saying they actually save more, but the court says that it doesn’t matter anyway. All that's required is that the amount of liquidated damages is a reasonable forecast. □ Court also points out that United is much more generous about this than other competitors, which gives even more credit as to the reasonableness. § The actual loss is incapable or difficult of precise estimation □ Court doesn’t discuss this - Df didn’t argue about it, so I guess its accepted that this requirement is met. ○ Df also argues that the liquidated damages are actually penalties b/c it provides for the same amount of damages for any type of breach, no matter how insignificant (this would make the damages punitive, which is not allowed for breach of K). § Court says NO. Under contract law, you cannot terminate a K b/c of a non-material breach. United would only be able to collect liquidated damages for a material breach (unless it was expressly stated in K otherwise). § K says for breach under Art 12. Art 12 says for failure of "any of the covenants, agreements, or conditions." Court interprets this as material terms. So unless K explicitly said otherwise, only a material breach would allow

damages. Class Notes • Court raises the point that parties negotiated at arms length. What's the point of this? ○ Sophisticated parties negotiating on terms on K.

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