_______________________________ GRANTED IN PART: April 25, 1995 _______________________________ GSBCA 13117 MIKE MICHAEL, Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Mike Michael, pro se, Burlington, MA. David G. Gherlein, Office of Regional Counsel, General Services Administration, Boston, MA, counsel for Respondent. VERGILIO, Board Judge. On December 14, 1994, the Board received this appeal from Mike Michael--the successful bidder for a vehicle at an auction conducted by the respondent, the General Services Administration. Mr. Michael did not pay for and remove the vehicle. The contracting officer held Mr. Michael in default and, relying on the terms of the sale, assessed "liquidated damages" of 20% of the price bid by Mr. Michael. Mr. Michael has elected to proceed with the case under small claims procedures, Rule 13. Therefore, the matter will be decided by one judge; the decision shall be final and conclusive, not to be set aside except in case of fraud; and the decision shall have no value as precedent for future cases. 41 U.S.C. 608 (1988). Mr. Michael has not demonstrated that the agency failed to provide reasonable notice that failure to pay for the vehicle could result in an assessment of up to 20% of the price bid. He has demonstrated that the assessment is excessive; that is, the assessment represents something other than appropriate liquidated damages. Accordingly, the Board grants the appeal, in part. The default determination is upheld and the agency is permitted to collect from Mr. Michael a smaller sum (actual damages demonstrated in the record) plus interest. Findings of Fact 1. On August 24, 1994, the agency held a "vehicle auction." Appeal File, Exhibit 1. The brochure announcing the sale both identifies the vehicles to be sold by lot number and description and specifies terms and conditions relating to the sale. The brochure specifies: "SALE SUBJECT TO THE GOVERNMENT PROPERTY SALE TERMS AND CONDITIONS SF [standard form] 114C". Under the caption of "PAYMENT," the package expressly references standard form 114C; it also specifies that successful bidders are required to pay for items within one working day of the date of the sale. Id. 2. Standard form 114C (June 1986) was posted at the site of the auction. Agency Answer. The Default clause of the form specifies: The Purchaser agrees that in the event he fails to pay for the property or remove the same within the prescribed period(s) of time, the Government shall be entitled to retain (or collect) as liquidated damages a sum equal to the greater of (a) 20 percent of the purchase price of the item(s) as to which the default has occurred, or (b) $25, or the purchase price of such item(s) if the purchase price is less than $25. . . . Provided further, That the maximum sum which may be recovered by the Government as damages for failure of the Purchaser to pay for and remove the property shall be the formula amount. The Government shall specifically apprise the Purchaser, either in its original notice of default (or in separate subsequent written notice), that upon the expiration of the period prescribed for curing the default, the formula amount will be retained (or collected) by the Government as liquidated damages. Standard Form 114C (June 1986) ( 9). The form also has a separate provision regarding interest; interest shall accrue on all amounts not paid within thirty calendar days from the date of first written demand, notwithstanding any other provision of the contract. Id. ( 11). 3. Mr. Michael attended the auction. He completed and signed a bidder registration card which states: "SUBJECT TO THE GENERAL SALES TERMS AND CONDITIONS (STANDARD FORM 114C) AND ANY SPECIAL TERMS AND CONDITIONS APPLICABLE TO THIS SALE, I, THE UNDERSIGNED (as bidder number identified above), OFFER AND AGREE TO PURCHASE ALL ITEMS AWARDED TO ME ON THIS SALE AS REGISTERED." Appeal File, Exhibit 2. Mr. Michael also signed a bid card which contains substantially the same language. Id. 4. Mr. Michael submitted the winning bid of $7,900 on a given vehicle. Appeal File, Exhibits 2, 5. After the agency so notified him, Mr. Michael did not pay for (or remove) the vehicle. Id., Exhibits 3-5. 5. The contracting officer provided Mr. Michael with a cure letter dated September 7, 1994. The letter specifies that if the default is not cured by September 29, the agency will assess "liquidated damages in the amount of $1580" (20% of the $7,900 price bid by Mr. Michael). Appeal File, Exhibit 4. 6. Mr. Michael did not pay for (or remove) the vehicle. In a letter dated September 29, to Mr. Michael, the contracting officer sets forth his "determination that you did not conform to the General Sale Terms and Conditions of this sale and are not authorized any financial relief." The letter does not specify that the contract has been terminated, that Mr. Michael is held in default, or that an amount of money will be assessed against Mr. Michael. The letter does specify, "This is the final decision of the Contracting Officer," and indicates that Mr. Michael may file an appeal or claim. Appeal File, Exhibit 5. 7. Through a letter dated September 30 to Mr. Michael, the contracting officer specifies: "You have not cured your default; therefore, your contract is hereby terminated. Liquidated damages in the amount of $1580.00 [m]ust be remitted by you within 30 days of date of this letter." Appeal File, Exhibit 6. This letter contains no reference to filing an appeal or claim. Id. Enclosed with the letter is information "detailing GSA's policy and procedures for charging interest, penalty and administrative costs, and collecting by administrative offset." Id. The attachment explains that interest on the principal amount due will be charged for amounts not paid within given timeframes; that a penalty will be charged on the principal amount due if not paid within ninety days from the due date; and that administrative costs will be charged for the costs associated with the carrying and collection of delinquent accounts. The attachment describes these latter costs (in an expressly non-restrictive list) as including unspecified administrative charges, the cost of a credit report, a debt collection agency fee, and the cost of preparing a claims collection litigation report. Id. 8. The agency sold the vehicle at a subsequent auction for $7,400--that is, $500 less than the price bid by Mr. Michael. The record contains no information regarding the costs the agency incurred in retaining and re-auctioning the vehicle at issue or in processing the cure notices or default of Mr. Michael. The record contains no information relating to how the agency arrived at the 20% figure for use in assessing "liquidated damages." 9. On December 14, the Board received this appeal. Discussion Mr. Michael raises two bases to reverse the agency's determination that he be charged $1580. First, he maintains that he was not given reasonable notice that his failure to purchase the vehicle would result in a twenty percent penalty. Second, he contends that the amount assessed is excessive; in essence, he contends that the agency applied the clause in a punitive manner so as to be unenforceable. The agency provided Mr. Michael with adequate notice that a default could lead to the assessment of damages. Mr. Michael signed both the bidder registration card and the bid card which specify that provisions of standard form 114C are applicable to the auction proceedings. His asserted failure to read and understand the cards is not attributable to the agency. Mr. Michael has not demonstrated why the agency should be held responsible or why he should be held not responsible for his failure to appreciate fully the implications of his submitting a winning bid. Mr. Michael failed to pay for and remove the vehicle. He breached the agreement. The agency properly held him to be in default. The full extent of the agency's explanation in opposition to Mr. Michael's assertion that the amount assessed is excessive provides: The amount of liquidated damages assessed in this situation was reasonable, and clearly not excessive. In fact, it is exactly what the default clause prescribed. The liquidated damages clause is used as an alternative to imposing actual damages. Calculation of actual damages can be an administrative burden, and can be unpredictable for the breaching party. Liquidated damages, on the other hand, are very predictable. The breaching party knows exactly the price he/she must pay in the event of a breach. Agency Answer. The agency here applies the clause as automatically permitting it to recover the full twenty percent of the award price, regardless of the actual damages incurred. The agency's interpretation and application of the clause run afoul of the bounds of legitimate liquidated damages provisions. The Board has held that the liquidated damages provision is not per se punitive; however, the contracting officer must exercise discretion in assessing liquidated damages under the clause such that the "liquidated damages" assessed are not punitive in a given situation. Coover, GSBCA 5758, 80-2 BCA 14,761, at 72,867, affirmed on reconsideration, 81-1 BCA 14,839 (1980); Torres v. General Services Administration, GSBCA 11472, 92-3 BCA 25,178, at 125,469-70.[foot #] 1 Looking to the Restatement (Second) of Contracts for guidance, one finds a discussion of "liquidated damages and penalties": (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. Restatement (Second) of Contracts 356 (1979). The Uniform Commercial Code, 2-718, provides similar guidance. As applied by the agency, the clause entitles the agency to recover the 20% figure without regard to actual damages or regardless of any reasonable mitigation of damages. Thus, had the agency sold the vehicle at a subsequent auction for $10,000, $7,800, $7,000 or $5,000--or any number in between or beyond either extreme--the clause would permit the agency to assess the same charge. Facially, simply assessing the maximum amount permissible under the clause bears no relationship to reasonably anticipated or actually incurred damages. As stated in the clause, the 20% figure serves as a cap on the amount of money for which a successful, but defaulting, bidder may be liable. It ----------- FOOTNOTE BEGINS --------- [foot #] 1 Despite the potentially misleading language in two more recent cases, nothing suggests that either case represents a departure from the precedent at this Board or an abandonment of the general principles distinguishing liquidated damages from penalties. In Casey v. ________ General Services Administration, GSBCA 11570, 92-2 BCA 24,882, _______________________________ at 124,102, the Board refers to the amount assessed as both "liquidated damages" and a "penalty." If the amount paid were a penalty, as opposed to appropriate liquidated damages, it would have fallen outside of the liquidated damages provision. However, the appellant did not contest the amount assessed, only the basis underlying the assessment (claiming there existed a misdescription such that he could not be in default). In Griffith v. General Services Administration, GSBCA 11571, 93-1 _____________________________________________ BCA 25,421, at 126,626, citing Coover, Torres and Casey, the ______ ______ _____ Board states: "We have upheld the validity of this '20 percent' levy numerous times as bearing a reasonable relationship to the Government's administrative costs of terminating a bidder for default and awarding the car, at a possible loss, to the next lowest bidder, if one is available." No facts suggest that the 20 percent assessment did not bear a reasonable relationship to damages in the given case. ----------- FOOTNOTE ENDS ----------- does not follow that assessing the 20% amount is appropriate as "liquidated damages" in every circumstance. The agency has provided no support for why the 20% figure represents a reasonable or realistic assessment of its anticipated or actual damages. The difference in selling price--between that of the breaching party and any subsequent purchaser--is clearly ascertainable. Administrative type costs (encompassing, for example, costs of readvertising and reauctioning a vehicle, storing the vehicle, and pursuing recovery from the breaching party) may well be proper subjects of a liquidated damages provision. However, it is not apparent why such costs should vary based upon the selling price of the vehicle or that the given provision reasonably predicts such costs. To the extent that the "liquidated damages," in part, are to compensate the agency for eventually selling a vehicle at a lower price, Griffith v. General Services Administration, GSBCA 11571, 93-1 BCA 25,421, at 126,626 (1992), the actual loss here is $500. There are no difficulties in proof of loss for this amount. Nothing in the record suggests that the remaining $1,080 reasonably reflects other damages or costs incurred (anticipated or actual) by the agency in pursuing the default and reselling the vehicle. The record does not support the assessment of liquidated damages in the amount of $1,580. That amount is punitive. The record here supports the assessment of $500 as the actual damage reflected by the subsequent sale price. Without a basis to assess damages for other costs associated with the default, the Board permits the agency to assess only the $500. Decision The Board GRANTS IN PART the appeal of Mr. Michael. The agency determination that Mr. Michael defaulted under the conditions of sale is affirmed; the agency is entitled to recover $500. Interest, calculated as described in the contract, is to begin accruing if this amount is not paid within thirty days of the date of this decision. ______________________________ JOSEPH A. VERGILIO Board Judge