When Does a Liquidated Damages Provision in a Contract Become an Unenforceable Penalty?

The Nebraska Court of Appeal took on the question in Computer Support Servs. v. Vaccination Servs. (No. A-16-460, May 2017).

Plaintiff is a provider of IT services, and Defendant provides wellness screenings. Plaintiff provided Defendant with IT services. There was no contract. In 2002, they entered into a partnership for a web-based online scheduling service. Plaintiff provided the IT services for this venture and Defendant worked on the marketing. Plaintiff charged Defendant $400 per month for these services.

In 2009, Plaintiff and Defendant signed a contract, where Plaintiff would provide Defendant with IT services for the Health Risk Assessment, and Defendant would pay Plaintiff $2,917 per month for those services. Sometime in 2012, they began discussions to end the partnership. By the summer of 2012, Defendant was only in need of general IT services from Plaintiff.

In October 2012, Plaintiff ended its services to Defendant because Plaintiff believed it was owed a significant amount of money from their previous contract. Plaintiff resumed services immediately once they signed an agreement. In the agreement, Plaintiff agreed to provide to Defendant IT services. Defendant agreed to pay to Plaintiff $3,500 per month. It started in October 2012, and went for 12 months, automatically renewed for a consecutive 12-month term unless either party notified the other party at least 120 days prior to the end of the original term.

The agreement said Defendant could terminate the agreement at any time; however, if Defendant terminated the agreement “early” and “for any reason other than Plaintiff s breach or failure to perform its services as per the terms and conditions of this Agreement” then Defendant would owe Plaintiff “liquidated damages.” September 2013, Defendant sent Plaintiff a letter notifying Plaintiff that Defendant was terminating the agreement “immediately.”

In November 2013, Plaintiff filed a complaint in the district court alleging Defendant owed Plaintiff $45,500 in liquidated damages because it canceled the contract early. On December 20, 2013, Defendant filed an answer and a counterclaim. Defendant denied that it owed Plaintiff any money. It said the agreement was void because Defendant “signed it under duress.” In addition, it alleged that the monthly fee that Plaintiff charged Defendant under the agreement was unconscionable.

The Nebraska Court of Appeals affirmed the decision of the district court, granting summary judgment to Defendant on Plaintiff’s claim that it was owed $45,500 and which granted summary judgment in favor of Plaintiff on Defendant’s counterclaims.

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