Lawyers often look at court decisions wondering if the judges are thinking through the practical applications of their rulings. While we know judges consider real-world application, the outcome of some cases makes it unclear how much stock is put into it. However, in a recent decision, the California Court of Appeal was explicit that it was sending a reminder to attorneys about how they draft agreements.
In Red & White Distribution v. Osteroid Enterprises (2d Appellate Dist. Case No. B291188, August 9, 2019), Red & White Distribution (R&W) appealed a judgment entered after defaulting on the payment terms of their settlement agreement. The settlement agreement allowed for a stipulated judgment to be filed by Osteroid Enterprises that was $700,000 more than the settlement amount, plus attorney fees and interest. R&W argued on appeal that the amount was unreasonable as a liquidated damages provision.
Liquidated damages are a very common tool in contracts. California Civil Code Section 1671, subdivision (b), states “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.” If the damages put in the contract “bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach,” then the court will strike the clause. (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977.)
The court of appeal found that the trial court had erred in entering the judgment because the additional $700,000 was an unenforceable penalty under Civil Code section 1671. The court found that the additional amount had no relationship to the actual amount in dispute and ordered that the judgment be reduced. The Court wrote, “We publish [this case] to remind practitioners whose clients settle a dispute involving payments over time how to incentive prompt payment property, and what may happen if done incorrectly.”
Whether settling a dispute or preparing a contract in business, it is important to properly draft the language to better ensure enforceability later. While you can write almost anything in an agreement, the question always remains: Will it be enforceable? In this instance, the courts have given some clear direction to practitioners on liquidated damages clauses.
Whether you are drafting a contract, negotiating a settlement, or arguing an appeal, Parker Law Group is here to help.