California has long been antithetical to an award of liquidated damages – a contractually stipulated amount of damages to be paid if there is a breach without the need to prove actual damages – unless the amount is reasonably related to the harm that the non-breaching party might suffer as a result of the breach. It is not unusual for settlement agreements to contain liquidated damage provisions for entry as a judgment against a breaching party if they fail to perform the settlement agreement as agreed. Ordinarily, the liquidated damage amount to be entered as a judgment is greater than the sum of the settlement payments required by the settlement agreement with credit given for the amounts paid in the settlement. However, unless the liquidated sum is reasonably related to the harm the non-breaching party is likely to suffer, California Courts have refused to enter judgment for the liquidated damage amount.
A recent case, Red & White Distribution, LLC., et al. v. Osteroid Enterprises, LLC, et al., typifies the approach taken by the Courts. In Red & White, lenders lent $1.8 million to borrowers, who defaulted. The parties settled all contractual and other claims for $2.1 million. The parties also executed a stipulation for entry of judgment which the lender could file ex-parte in the event of any failure by the borrower to timely cure any non-payment. However, this stipulation also stated that in the event of default, the borrowers would be liable to pay $2.8 million plus interest to the lender.
The California appellate court found that $700,000, which corresponded to six months’ interest on the entire principal loan, bore no reasonable relationship to the range of actual damages the parties could have anticipated from a breach of the
settlement agreement and was thus unenforceable. Consequently, the lender would be required to prove actual damages in excess of the payments received, a tedious, and expensive task that requires a trial on damages.
Therefore, if you or your business relies on liquidated damage provisions – whether it is in a settlement agreement, a charge for a returned check, or a liquidated sum as payment upon the happening of some event – you must make sure that the
amount is reasonably related to the range of actual damages you are likely to suffer. To calculate those damages and ensure that your liquidated damage provision will be enforceable, have your legal counsel review the language of your agreement.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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