## Facts

- California and Hawaiian Sugar Company (C & H), a cooperative transporting raw sugar from Hawaii to California, faced a time-sensitive need for reliable ocean carriage after its primary shipper announced it would end service in January 1981.
- Sugar harvesting and storage constraints made delay in transportation potentially severe and difficult to measure (seasonal harvest; limited storage; risk of deterioration and waste).
- C & H commissioned a tug-and-barge system and signed separate, negotiated construction contracts with two shipbuilders:
  - Sun Ship, Inc. (Sun) to build an oceangoing sugar barge for $25,405,000, with delivery due June 30, 1981, and liquidated damages of $17,000 per day for late delivery, expressly stated to be “not as a penalty” and “a reasonable measure of the damages.”
  - Halter Marine, Inc. (Halter) to build a catamaran tug for $20,350,000, due April 30, 1981, at Sun’s yard, with liquidated damages of $10,000 per day for late delivery.
- Sun delivered the barge on March 16, 1982; Halter delivered the tug on July 15, 1982; the vessels were joined and delivered shortly thereafter.
- Sun paid C & H $17,000 per day from June 30, 1981 to January 10, 1982, then denied further liability.
- C & H arranged substitute shipping during the delay and avoided catastrophic spoilage and customer shortages.
- C & H settled separately with Halter but continued its contract claim against Sun for late-delivery liquidated damages.

## Issues

1. Under Pennsylvania law (including U.C.C. § 2-718), was the barge contract’s $17,000-per-day late-delivery clause an enforceable liquidated-damages provision or an unenforceable penalty?
2. Did the tug’s separate delay, making the barge unusable if timely delivered, render the barge’s liquidated-damages clause unreasonable?
3. Did C & H’s ability to obtain substitute shipping and reduce actual losses invalidate or limit the agreed liquidated damages?

## Decision

- The Ninth Circuit affirmed the district court’s judgment enforcing the $17,000-per-day liquidated-damages provision against Sun.
- Applying the contract’s Pennsylvania choice-of-law clause, the court treated the transaction as a sale of goods governed by Article 2 and evaluated the clause under U.C.C. § 2-718.
- The court held the clause was reasonable in light of the anticipated harm and the difficulty of proving loss, and it was not converted into a penalty by later events.
- The court rejected Sun’s argument that Halter’s delay and C & H’s mitigation showed minimal actual harm and therefore made the clause punitive.

## Legal Principles

- Under Pennsylvania U.C.C. § 2-718(1), liquidated damages are enforceable if reasonable in light of anticipated or actual harm, the difficulty of proving loss, and the difficulty of obtaining an adequate remedy.
- Reasonableness is assessed primarily from the standpoint of contracting-time expectations; later mitigation or unexpectedly low actual damages does not, by itself, transform a reasonable pre-estimate into a penalty.
- In a negotiated commercial contract between sophisticated parties with counsel, courts give substantial weight to the parties’ allocation of delay risk and their agreement that the liquidated amount is reasonable.
- Separate contracts with separate liquidated-damages provisions may be enforced independently; one contractor’s delay does not automatically excuse another contractor’s agreed liability for late delivery.

## Conclusion

The court enforced the barge contract’s $17,000-per-day late-delivery clause as a valid liquidated-damages provision under Pennsylvania’s U.C.C. because it reasonably addressed hard-to-quantify, time-sensitive shipping risks anticipated at contracting, notwithstanding the tug’s separate delay and C & H’s later success in mitigating harm.


Cal. & Haw. Sugar Co. v. Sun Ship, Inc., 794 F.2d 1433 (9th Cir. 1986)