The Hertz Corporation is a foreign corporation authorized to do and doing business in the State of Mississippi. Hertz operates a Commercial Leasing Division which maintains its principal headquarters in Parsippany, New Jersey. Hertz's Commercial Leasing Division is in the business of financing leases of business and commercial equipment. Hertz was the Plaintiff below and is the Appellant here.
Stanco Communications Products, Inc. is a foreign corporation having its principal place of business in Atlanta, Georgia. Stanco is in the business of marketing security equipment and facilities for use in retail sales businesses. At all times relevant hereto Stanco was represented by its salesman, Lloyd Sharpe. Stanco is not a party to this action.
In August of 1984, Stanco, acting through salesman Sharpe, approached Morrison about the latter's need for video monitoring security equipment in his grocery store. Salesman Sharpe negotiated a lease with Morrison for two active cameras, two inactive cameras, a 19 inch television monitor, a manual switcher, a VCR box and a 9 inch television set. The lease was made on a form Hertz had provided to Stanco and Morrison signed it on August 17, 1984. Salesman Sharpe witnessed Morrison's signature. Apparently Stanco sold Hertz its interest in the equipment for some $4,380.00, and then forwarded the agreement to Hertz, which signed it on September 1, 1984.
The lease agreement provided that Hertz owned the equipment and leased it to Morrison for a term of five years. Morrison gave Hertz a security deposit of $118.88 and agreed to pay Hertz $125.42 per month beginning September 1, 1984. Shortly thereafter Morrison became dissatisfied with the equipment and says it has been inoperable ever since. On March 5, 1985, Hertz declared Morrison in default and advised him that it was terminating the lease. To the point, Hertz cited an acceleration clause in the lease agreement which provided that, upon Morrison's default, Hertz held the option to aggregate all unpaid lease payments for the entire five year term and to declare same immediately due and payable. Hertz also held the right to retake the equipment.
Push came to shove and on December 13, 1985, Hertz commenced the present action by filing its complaint in the Circuit Court of Lowndes County, Mississippi, naming Morrison as defendant. Hertz sued on the lease agreement and demanded accelerated, aggregated rentals in the sum of $6,968.76 together with costs and reasonable attorneys' fees. See Miss. Code Ann. § 11-53-81 (1972).
After several false starts of no import, Morrison answered the complaint and asserted three defenses. First, Morrison admitted the agreement, the security deposit and one monthly payment, and then simply denied that he owed Hertz any more money. Morrison does not dispute the mathematics of Hertz's demand. Second, Morrison's pleading asserted affirmatively Hertz had failed in its duty to mitigate its damages by failing to retake possession of the security equipment after Morrison requested that Hertz do so in December, 1984. Third, Morrison charged that the agreement was in essence a sale and that Hertz had impliedly warranted the fitness of the equipment and had thereafter breached its warranty, thus relieving Morrison of the duty to pay.
Of importance, Morrison made no charge that the acceleration clause of the lease agreement constituted a penalty nor did he assert any other reason in fact or in law why that clause might be unenforceable or why he should be relieved of (any part of) the obligations its written language imposed upon him.
On January 2, 1987, the Circuit Court transferred the case to the County Court of *Page 834 Lowndes County for hearing and disposition.
In due course, Hertz moved for summary judgment. On April 10, 1987, Morrison filed a written response to the motion, including citations of authority. As before, Morrison asserted no factual or legal theory upon which the acceleration clause may be held illegal or unenforceable, other than the breach of warranty and mitigation defenses set forth in its answer.
In time, the Court granted Hertz partial summary judgment, holding the agreement enforceable as a lease rather than as a contract for sale, citing Briscoe's Foodland, Inc. v. CapitolAssociates, Inc., 502 So.2d 619 (Miss. 1986). The Court then set the case for trial on the limited question of Morrison's defense that Hertz had failed in its duty of mitigating its damages. On July 14, 1988, the Court filed an opinion, construing the acceleration clause to provide for a penalty (as distinguished from "liquidated damages") by reason of which Hertz could recover only that amount reasonably necessary to make it whole. The Court found that
Hertz has proven a direct loss sustained by it in the amount of $668.12, being the monthly payments of $125.42 due Hertz by the defendant from September 1, 1984, through March 1, 1985, less one payment of $90.94 and a security deposit of $118.88.
The Court adjudged Hertz entitled to recover of Morrison $668.12, plus attorney fees of $222.71. plus costs, but denied Hertz any further relief. On appeal, the Circuit Court affirmed.
Hertz now appeals to this Court.
Rule 8(c) provides, in pertinent part,
Affirmative Defenses. In pleading to a preceding pleading, a party shall set forth affirmatively . . . duress, estoppel, failure of consideration, fraud, illegality, . . ., statute of frauds, . . ., and any other matter constituting an avoidance or affirmative defense.
If a matter is an affirmative defense, the defendant bears the burden of production and the risk of non-persuasion. McDaniel v.Ritter, 556 So.2d 303, 314 (Miss. 1989); Smith v. Sanders,485 So.2d 1051, 1053 (Miss. 1986). Rule 8(c) saddles him with the burden of pleading as well, as a defense within that rule is waived if not timely and adequately pleaded. Bailey v. GeorgiaCotton Goods Co., 543 So.2d 180, 182-83 (Miss. 1989); Wholey v.Cal-Maine Foods, Inc., 530 So.2d 136, 138-39 (Miss. 1988). The reason for the rule is familiar and goes to the point of fairness. If one such as Morrison is going to defend on the theory of penalty, he should be required to tell his plaintiff so that his plaintiff would have fair opportunity to study the matter and try persuading the trial court the defense ought not prevail. These truisms set our context but beg the question, whether the legal theory the lower court labeled penalty and thereupon declared Hertz's lease substantially legally unenforceable is one within the imperatives of Rule 8(c).
Our positive law declares some subjects off limits to parties who would contract. First National Bank of Vicksburg v.Caruthers, 443 So.2d 861, 864 n. 3 (Miss. 1983) (contracts contrary to public policy); Walker v. Williams, 214 Miss. 34, 42, 58 So.2d 79, 81 (1952) (contract to surrender custody of child); Jones v. McFarland, 178 Miss. 282, 286, 173 So. 296, 297 (1937) (contracts contrary to public policy); Spinks v.Davis, 32 Miss. 152 (1856) (same); Odineal v. Barry, 24 Miss. 9 (1852) (same). Gambling *Page 835 contracts are similarly sans sanction. Such contracts are voidab initio and, if sued on, may be said subject to the affirmative defense of illegality within Rule 8(c).
Other functionally analogous defenses may be found within our law. Consider failure of consideration and the statute of frauds. If one party sues another on a contract, and if the defendant wishes to offer failure of consideration in defense, Rule 8(c) makes him assert the matter affirmatively in his answer or stay silent. If he wishes to charge that the statute of frauds renders the contract unenforceable in law, he must so plead affirmatively.
As defenses to a contract action, failure of consideration, illegality and statute of frauds are similar. Each assumes the contract on its face entitles plaintiff to prevail but then reaches into the bag of rules prescribing forms and limiting the power of persons to contract and pulls one out, saying, "See, this contract may not be enforced." Each finds a rule of law external to the contract and brings it to bear to bar the plaintiff's action. As such, failure of consideration, illegality and statute of frauds each "constitute[s] an avoidance or an affirmative defense." The words "any other" preceding the general "matter constituting an avoidance or an affirmative defense" declare the specifica "failure of consideration, . . ., illegality, . . ., [or] statute of frauds" defenses of like genre with the genera.
The penalty theory the trial court employed is of like genre. It reaches beyond the contract's literal language into the positive law and employs a principle there found to avoid Hertz's enjoyment of substantial benefits embedded in the contract's language. This is what is meant by a "matter constituting an avoidance or affirmative defense" within Rule 8(c).
The rule refers to the nature of a defendant's pleading: A matter is an "avoidance or affirmative defense" only if it assumes the plaintiff proves everything he alleges and asserts, even so, the defendant wins. Conversely, if, in order to succeed in the litigation, the defendant depends upon the plaintiff failing to prove all or part of his claim, the matter is not an avoidance or an affirmative defense. A defendant does not plead affirmatively when he merely denies what the plaintiff has alleged.
For example, discharge in bankruptcy is an affirmative defense within the meaning of Rule 8(c). Bell v. First Columbus NationalBank, 493 So.2d 964, 968 (Miss. 1986). Bankruptcy discharge is specifically enumerated in the rule, and the reason this is so is that it is a matter which says, even though plaintiff proves everything he alleges, if defendant proves discharge in bankruptcy, defendant wins. An example of a non-enumerated affirmative defense is noted in Bailey v. Georgia Cotton GoodsCo., 543 So.2d 180, 182-83 (Miss. 1989). It there appeared that the plaintiff was a foreign corporation which had not qualified to do business in Mississippi and was thus ineligible to sue in our courts. We held this a "matter constituting an avoidance or affirmative defense," but, because defendant had failed timely to assert the point affirmatively, we held the defense waived.
The trial court gutted Hertz's claim on a theory of penalty, and the only cases we find that have considered the point hold that penalty is an affirmative defense which will be deemed waived unless specifically pleaded. Robinson v. GraniteEquipment Leasing Corp., 553 S.W.2d 633, 637 (Tex.Civ.App. 1977); Walter E. Heller Co. v. B.C. M., Inc.,543 S.W.2d 696, 697 (Tex.Civ.App. 1976). Oregon has adopted what it calls the "modern view" that penalty is an affirmative defense and
Dean Vincent, Inc. v. McDonough, 281 Or. 239, 249,574 P.2d 1096, 1101 (1978).the defendant should have the burden to both plead and prove that such a contract provision [an acceleration clause] is invalid. . . .
Here Hertz has pleaded its lease and particularly the acceleration clause thereof. Morrison pleaded two affirmative defenses: mitigation of damages and breach of warranty, neither of which began to encompass the penalty theory upon which the lower *Page 836 Court decided the case.1 Morrison's first defense is simply a denial that Hertz is entitled to any relief on the contract. If Morrison had prevailed in this denial, it would have been because Hertz had failed to prove its contract. The first mention of the penalty defense in the present record is the trial court's July 14, 1988, opinion. See Witt v. Mitchell, 437 So.2d 63, 66 (Miss. 1983). Morrison does not suggest the issue may have been tried by implied consent, see Rule 15(b), Miss.R.Civ.P.; seeJohnson v. Franklin, 481 So.2d 812, 815 n. 4 (Miss. 1985), nor has he offered any post-trial amendment to his answer.2
In the end, we find the acceleration clause as written entitling Hertz to the full $6,968.76 sued for, provided only that the clause be enforceable. The Court below held it unenforceable in substantial part because it is a penalty clause, relying on Shields v. Early, 132 Miss. 282, 95 So. 839 (1923).3
We need not consider whether the defense of penalty is "illegality" per se, though it certainly says to plaintiff that there is a legal rule declaring your contract substantially unenforceable. The defense of penalty is in the nature of an affirmative defense or avoidance within Rule 8(c). It is the sort of defense which says to the plaintiff, "Assuming everything you have alleged and proved is true, I have a defense which substantially avoids your claim. *Page 837 That defense is that your acceleration clause is in the nature of a penalty and under Mississippi law you may not enforce it beyond your actual losses." Because penalty was not and has never been pleaded, the judgment below must be reversed and the case remanded for a new trial on all issues. See Witt v. Mitchell, 437 So.2d at 66-67.
REVERSED AND REMANDED.
ROY NOBLE LEE, C.J., and PRATHER, ANDERSON and PITTMAN, JJ., concur.
HAWKINS and DAN M. LEE, P.JJ., and SULLIVAN and BLASS, JJ., dissent by separate opinion.
In Shields v. Early, supra, 95 So. at 841, the Mississippi Supreme Court in addressing the issue of when a contract provision calling for payment of a specific sum upon its breach is to be considered a penalty stated:
The courts lean in favor of an interpretation that such a stipulation is a penalty. The essence of a penalty is a payment of money stipulated as in terrorem of the party breaching the contract; while the essence of liquidated damages "is a genuine covenanted pre-estimate of damages". Whether a sum stipulated is a penalty or liquidated damages is a question of construction "to be decided upon the terms and inherent circumstances of each particular contract, judged at the time of the making of the contract, not as at the time of the breach." Various tests are used to assist in the construction of the contract. The stipulation will be held to be a penalty if the sum agreed on is extravagant and unconscionable in amount in comparison with the greatest loss that could reasonably follow the breach . . . (citations omitted).
* * * * * *
Upon the basis of the overwhelming evidence in the instant action, as gathered not only from the words used in the lease, but also from the circumstances surrounding the execution of the lease, including the intentions and understandings of the parties, the Court concludes that the "accelerated rental" provision is a penalty, not liquidated damage.
Having concluded that the "accelerated rental" provision is a penalty, Hertz's recovery is limited to its actual damages. 5 Corbin on Contracts, Section 1062, p. 361 (1964) states:
If for any reason the court holds that the sum fixed in the contract is a penalty and not liquidated damages, the plaintiff can recover nothing as damages for the defendant's breach unless he proves actual injury and its amount. In such case, the rules as to certainty of proof and as to the existence of injury and its amount are applicable.
* * * * * *
Applying these well-recognized principals to the case at bar, the weight of the evidence indicates, and the Court so finds, that Hertz terminated the lease on March 5, 1985, due to defendant's default in making his monthly payments. Therefore, plaintiff Hertz has proven a direct loss sustained by it in the amount of $4668.12, being the monthly payments of $125.42 due Hertz by the defendant from September 1, 1984, through March 1, 1985, less one payment of $90.94 and a security deposit of $118.88.
We repeat: because the point has not been tendered, we intimate no opinion on the correctness of the trial court's interpretation and application of the penalty defense.