## Facts

- Gary Outdoor Advertising Co. leased two outdoor advertising signs to Sun Lodge, Inc. under two written contracts executed in July and August 1977.
- Each lease had a 36-month term with monthly rental payments; Gary Outdoor remained responsible for maintenance, taxes, and insurance.
- The contracts provided that if Sun Lodge missed two monthly payments, Gary Outdoor could repossess the signs and demand immediate payment of all remaining monthly payments, labeled as “liquidated damages.”
- Rex E. Bishop signed the contracts as Sun Lodge’s president; the contracts also stated that a person signing for a corporation would be personally and severally liable.
- Sun Lodge defaulted early in the lease term; Gary Outdoor sued for roughly 30 months of remaining rent under each lease based on the acceleration clause.
- About one month after the breach, Gary Outdoor re-leased one sign to another advertiser, and about six months later sold both signs.

## Issues

1. Whether a partial summary judgment establishing the Bishops’ personal liability “for any damage” limited the subsequent trial to damages only, foreclosing litigation over liability defenses.
2. Whether the clause accelerating all remaining rent upon default, while permitting repossession and later re-leasing/sale of the signs, was enforceable as liquidated damages or void as a penalty.
3. Whether the trial court could consider public-policy unenforceability of the clause despite defendants’ failure to plead it as an affirmative defense.

## Decision

- The Arizona Supreme Court affirmed the judgment for Sun Lodge and the Bishops and affirmed an award of attorney’s fees to defendants.
- The partial summary judgment did not preclude litigation of liability defenses; it only addressed the personal exposure of the individual signatories if damages were ultimately awarded.
- The acceleration clause was an unenforceable penalty because it allowed recovery of the full remaining contract price while also allowing repossession and subsequent re-leasing and sale of the same signs.
- The trial court properly considered the penalty/public-policy issue even though it was not pleaded as an affirmative defense.

## Legal Principles

- A stipulated-damages clause is unenforceable if it is punitive rather than a reasonable forecast of compensation for a breach, particularly where the stipulated amount is disproportionate to anticipated or actual loss.
- A provision requiring payment of all remaining installments while permitting the non-breaching party to repossess and continue to profit from the same property (through re-leasing or sale) is likely a penalty and void as against public policy.
- A partial summary judgment that declares an individual signatory personally liable “for any damage” does not establish the underlying contractual liability; it merely fixes who will be responsible if liability and damages are later proven.
- Courts may refuse to enforce contract terms that violate public policy, including penalty clauses, even if the issue was not properly raised as an affirmative defense.

## Conclusion

The court held that the leases’ acceleration clause functioned as a penalty because it sought full remaining rent despite repossession and later re-leasing and sale of the signs, and it affirmed judgment for defendants; it also ruled that the earlier partial summary judgment did not limit the case to damages and that public-policy invalidity could be addressed despite pleading defects.


Gary Outdoor Advert. Co. v. Sun Lodge, Inc., 133 Ariz. 240, 650 P.2d 1222 (Ariz. 1982)