Liquidated Damages: Provision in Stipulation for Judgment an Unenforceable Penalty

  Plaintiff sued on a promissory note for $85,000. The parties agreed to settle for the sum of $38,000, payable in installments over 24 months and entered into a stipulation for entry of judgment. The stipulation provided that if a payment was not made on time the original amount of $85,000 became due.

  Can plaintiff recover the sum of $85,000, minus credit for payments made under the agreement? No. Plaintiff is limited to the sum of $38,000, minus credit for payments made under the stipulation. Purcell v. Schweitzer.

  Civil Code section 1671, applicable to liquidated damage provisions in a contract unless another statute specifically applies, provides that “[A] provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.”

  However, a liquidated damages provision becomes an unenforceable penalty if it bears no reasonable relationship to the actual damages that might flow from a breach. The amount must represent the result of a reasonable effort to estimate fair compensation for any loss that may result. Unless there is a reasonable relationship between the amount set as liquidated damages and the damages that would result from a breach, a liquidated damages clause is an unenforceable penalty. [See, Greentree Financial Group. Inc. v. Execute Sports, Inc.]

  The public policy expressed in section 1671 may not be defeated by words in a contract; the applicability of section 1671 depends on the facts, not words. A party seeking the benefits of a liquidated damage provision must prove that the clause is valid under the facts that existed at the time of contracting—purported waivers are invalid.

  The stipulation that allowed for entry of judgment for nearly $60,000 was an unenforceable penalty because the underlying settlement was for $38,000. The stipulated damages bore no reasonable relationship to the damages that plaintiff might suffer because of a breach. Damages for withholding money are easily determinable—i.e., interest at prevailing rates.

   Mr. Daymude consults with clients and accepts cases involving promissory notes, including those may result in a stipulation for entry of judgment upon terms. For other types of cases accepted, please scroll the Home and My Practice pages. If you are seeking a legal consultation or representation, call Michael Daymude at 818-971-9409.

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