On appeal from Superior Court of New Jersey, Law Division, Somerset County, whose decision is reported at N.J. Super. .
Before Judges Petrella and Baime.
The opinion of the court was delivered by BAIME, J.A.D.
Plaintiff Saxon Construction & Management Corp. (Saxon) instituted this action in the Law Division, seeking compensatory damages against defendant Masterclean of North Carolina, Inc. (Masterclean) for breach of contract. Masterclean filed several counterclaims. Following a non-jury trial, the Law Division concluded that Masterclean breached the contract, but that Saxon suffered no damages. Masterclean was awarded $26,119.22 in quantum meruit.
Masterclean appeals, contending that the Law Division erroneously refused to enforce a termination clause contained in the contract because it was said to violate public policy. The clause provided in pertinent part that if Masterclean breached the agreement but the cost of completion was less than the unpaid balance of the contract price, Saxon was obliged to pay it the difference. In a reported opinion, Judge Arnold reasoned that the termination provision discouraged Masterclean from performing its duty under the contract because if Saxon spent less money to complete the contract work, Masterclean would profit from its breach. Saxon Constr. & Management Corp. v. Masterclean, Inc., 226 N.J. Super. 653, 545 A.2d 255 (Law Div. 1992) (slip op. at 4-6). The Judge also found that the clause encouraged waste because it provided Saxon with a disincentive to mitigate damages upon Masterclean's breach. Masterclean argues that the parties freely bargained for the contract at arms length and that the court was obliged to enforce the agreement as written. It also claims that the Law Division erred in its factual findings pertaining to the extent to which it performed its contractual obligation.
We agree with Judge Arnold's Conclusion that the termination clause was unconscionable and against public policy. We are also satisfied that the Judge's findings of fact were supported by substantial, credible evidence present in the record. We thus affirm the Law Division's judgment substantially for the reasons expressed by Judge Arnold.
The salient facts are fully described in Judge Arnold's published opinion and need not be recounted at length here. Saxon, a general contractor, was awarded a contract to renovate the interior of four hospital buildings owned by the United States Veterans' Administration (VA). Pursuant to its contract with the VA, Saxon entered into a subcontract with Masterclean for asbestos abatement and removal. After Masterclean completed work on two of the buildings, Saxon, both by telephone and in writing, directed it to commence asbestos removal on the third phase of the project. Saxon also requested that Masterclean commence its predicate work and provide documentary submissions for VA approval, which was a prerequisite to timely commencement of the work on the third building.
Masterclean did not respond to this notification, nor did it commence performance of its contractual duties. As a result, Saxon repeatedly contacted Masterclean, requesting assurance of performance. No response was received, however, and Saxon thus declared Masterclean in default and advised it that, under the contract, it had four days to cure its deficiency. We need not describe in detail what occurred thereafter except to say that Masterclean's contrived explanations for failing to perform were ultimately rejected by Saxon. After terminating the contract, Saxon entered into a new agreement with another subcontractor to complete the abatement and removal of asbestos with respect to the remaining two VA buildings. It is undisputed that Saxon paid the new subcontractor approximately $200,000 less than it would have been required to pay Masterclean had the defendant performed its obligation.
Based upon this evidence, Judge Arnold found that Masterclean had breached the subcontract with Saxon, but that Saxon had suffered no damages. Although the cost of completing the removal of asbestos following Masterclean's breach was less than the contract price, the Judge denied Masterclean's counterclaim in which it sought the difference. As we noted earlier, Judge Arnold concluded that the termination clause was against public policy because it provided the defaulting party with a windfall, provided the subcontractor with an incentive to breach its agreement, and discouraged mitigation of damages. However, Masterclean was awarded the reasonable value of the services rendered.
At issue here is Article 13 of the contract. That clause provides in pertinent part:
If the Subcontractor persistently or repeatedly fails or neglects to carry out the Work in accordance with the Contract Documents or otherwise to perform in accordance with this Agreement and fails within four days after receipt of written notice to commence and continue correction of such default or neglect with diligence and promptness, the Contractor may, and without prejudice to any other remedy he may have, terminate the Subcontract[,] take possession of all materials and finish the Work by whatever method he may deem expedient. If the unpaid balance of the Contract Sum exceeds the expense of finishing the Work, such excess shall be paid to the Subcontractor, but if such expense exceeds such unpaid balance, the Subcontractor shall pay the difference to the Contractor. [Emphasis added.]
The question presented is whether this termination clause violates public policy because it permits a defaulting party to profit by its breach of the agreement and discourages ...