## Facts

- Carborundum contracted with Lake River for Illinois distribution services: Lake River would receive bulk “Ferro Carbo,” bag it, and ship it to Carborundum’s customers, while title remained with Carborundum until delivery.
- At Carborundum’s insistence, Lake River bought and installed special bagging equipment costing about $89,000.
- The parties agreed to a three-year minimum-quantity provision requiring Carborundum to ship 22,500 tons for bagging; if the minimum was not met, Lake River could invoice the difference between actual tonnage bagged and the minimum at prevailing rates.
- Full performance would have generated about $533,000 in bagging charges.
- Due to reduced demand, Carborundum shipped only 12,000 tons; Lake River bagged that amount and was paid for it, but claimed an additional ~$241,000 under the shortfall formula.
- Carborundum refused to pay, asserting the clause was an unenforceable penalty.
- Lake River retained about 500 tons of bagged Ferro Carbo in its warehouse (worth about $269,000) and refused to release it unless paid; Carborundum spent about $31,000 to ship substitute product to serve customers.

## Issues

1. Whether the minimum-quantity shortfall formula was enforceable as liquidated damages under Illinois law or invalid as a penalty.
2. Whether Lake River had a lien or other right to retain Carborundum’s goods to secure payment, and if not, whether Lake River was liable for conversion and consequential damages.

## Decision

- The court held the shortfall formula was an unenforceable penalty under Illinois law and could not be used to award the claimed ~$241,000.
- The court ruled Lake River had no lien or security interest authorizing retention of Carborundum’s product and therefore wrongfully detained it.
- The court affirmed Carborundum’s recovery for the value of the withheld goods and its additional shipping costs.
- The judgment was affirmed in part, reversed in part, and remanded for recalculation of damages using ordinary contract damages principles rather than the invalid liquidated-damages clause.

## Legal Principles

- Under Illinois law, a liquidated-damages clause is enforceable only if actual damages are difficult to measure at the time of contracting and the stipulated amount is a reasonable forecast of likely loss; otherwise it is an unenforceable penalty.
- A stipulated remedy that can place the nonbreaching party in a better position than full performance, or that sets the same measure for breaches of varying severity without relation to probable loss, indicates a penalty rather than liquidation.
- When a liquidated-damages clause is invalid, the nonbreaching party is limited to expectation damages proven under ordinary contract rules (e.g., unrecovered investment, lost profits, and other provable losses).
- Absent contractual language creating a security interest or satisfaction of statutory lien conditions, a warehouse or bailee may not retain the owner’s goods as leverage for a disputed payment claim; wrongful detention supports conversion-type recovery, including foreseeable consequential damages.

## Conclusion

The Seventh Circuit invalidated a minimum-quantity shortfall clause that effectively guaranteed the service provider more than its probable loss, required a remand to compute actual contract damages, and upheld damages against the provider for wrongfully withholding the manufacturer’s goods without a valid lien or security interest.


Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985)