Document Type

Article

Publication Year

2007

Journal Title

Loyola Consumer Law Review

Abstract

Penalty damages in contract -- contrary to Anglo-American law since the late Middle Ages -- ironically are common as reimposed discounts in modern consumer contracts. The reimposable discount is a late-twentieth-century sales scheme that combines legal puffery with illegal penalties. These pitches are used to sell furniture, appliances, cell phones, cars, to rent apartments, and to promote elective eye surgery. The offers are tempting and often heavily marketed in the media.

The common premise is that if the buyer acts now, the seller will discount the good or service by reducing the price, or by postponing the first payment and waiving interest payments during that period. Reimposable discounts mimic true discounts with these enticements. If the buyer breaches -- either a fundamental breach or in some cases a minor breach, such as late payment -- then the discount is reimposed as stipulated damages, or sometimes as an alternative purchase price.

In general, consumer penalties seldom are challenged and rarely litigated. This leads to two significant negative impacts: one suffered by the public in general, and the other by the unfortunate breaching buyer. The first negative impact is illustrated by Congress's recent move to make bankruptcy more difficult to obtain -- the so-called Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Whatever the validity of Congress' view that consumers should be held more responsible for their debts, it is obvious that additional penalties unrelated to sellers' losses are unfair. What is worse, these penalties unnecessarily compound consumer debt and multiply insolvencies.

The second impact, however, is more subtle. Contract penalties have returned to common use at the same moment that tort penalties are in retreat -- under attack from both legislatures and courts. At first glance these seem to be offsetting trends, but the opposite is true. Consumers injured by faulty products or incompetent service providers have fewer remedies. Meanwhile, consumers in breach of contracts increasingly are faced with substantial penalties. These penalties hide under the guise of reimposed discounts, or contractually-stipulated damages.

This is not to condemn true liquidated damages. Reasonable stipulations as to actual losses are both legal and economically efficient -- even in pre-printed form contracts that are entered without negotiation. In addition to their widespread legal acceptance, liquidated damage clauses advance important social policies by providing fuller remedies for sellers and service providers. When litigation is necessary, moreover, they tend to reduce trial costs by sidestepping proof of quantified damages.

What is not legitimate, however, is the stipulation of money damages not directed to any contractual loss -- direct, indirect, consequential, administrative, or otherwise. The law has not changed in this area in more than four hundred years. In spite of this, unlitigated penalties are now pervasive in consumer transactions.

After recounting the ancient and ample precedents barring contract penalties, this article focuses on two examples of contemporary contract penalties with slightly differing sales pitches: new car sales and apartment rentals. Both examples demonstrate that these penalties run afoul of pervasive common law and statutory rules, as well as contemporary economic arguments favoring stipulated damages. The article concludes with a short discussion of why these issues are not being litigated.

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