Will a Connecticut court enforce this liquidated damages clause, or strike it as a penalty?
A term calling for a penalty for breach is contrary to public policy and invalid, but a provision fixing the damages payable on breach is enforceable if it satisfies certain conditions. The label does not control; the parties' intention does, and the provision is ordinarily construed as liquidated damages if three conditions are satisfied: (1) the damage to be expected from a breach was uncertain in amount or difficult to prove; (2) the parties intended to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the presumable loss as the parties looked forward (Bellemare v. Wachovia Mortgage Corp., quoting American Car Rental). In a written contract for the purchase or lease of goods or services primarily for personal, family or household purposes, a liquidated damages provision is in addition unenforceable unless the contract contains, immediately following the provision, a statement in boldface type at least twelve points in size, 'I ACKNOWLEDGE THAT THIS CONTRACT CONTAINS A LIQUIDATED DAMAGES PROVISION', and the person against whom it is to be enforced signs or initials next to that statement (§ 42-150u(a)); the section does not validate a clause that is a penalty. In Bellemare the three conditions were applied to a statute rather than to a bargained clause: the damages § 49-8 provides for 'did not arise from an agreement of the parties', so the parties could not have had the intent to liquidate damages and the section is not akin to a liquidated damages clause.
The trap
A label buys nothing: in determining whether a particular provision is for liquidated damages or for a penalty, the courts 'are not controlled by the fact that the phrase “liquidated damages” or the word “penalty” is used. Rather, that which is determinative of the question is the intention of the parties to the contract.' The third condition is stated looking forward: the amount must not be greatly disproportionate to the presumable loss 'as the parties looked forward'. What a court does when actual damages later prove much larger or smaller was not read and is not stated here. For consumer contracts, § 42-150u(c) takes out of the boldface-acknowledgment requirement contracts with a state, local or federal agency, negotiable instruments, provisions for late fees, prepayment penalties or default interest rates, contracts originated or held by institutions regulated by the Department of Banking or a federal bank regulatory agency (and certain subsidiaries and affiliates), and contracts originated or held by motor-vehicle dealers and repairers licensed under § 14-52 or § 14-67a. Subsection (b) goes further for one contract type: if a consumer dies during the term of a consumer contract or lease for a personal emergency response system, the contract or lease is deemed terminated on that death and any early-termination penalty provision in it 'shall be unreasonable pursuant to section 42-421 '.
6 authorities
The words that state the rule
[T]he law is well established in this jurisdiction, as well as elsewhere, that a term in a contract calling for the imposition of a penalty for the breach of the contract is contrary to public policy and invalid, but a contractual provision fixing the amount of damages to be paid in the event of a breach is enforceable if it satisfies certain conditions.
- statuteConn. Gen. Stat. § 42-150uenactment date not established
The words that state the rule
(a) No provision in a written contract for the purchase or lease of goods or services primarily for personal, family or household purposes that provides for the payment of liquidated damages in the event of a breach of the contract shall be enforceable unless (1) the contract contains a statement in boldface type at least twelve points in size immediately following such liquidated damages provision stating “I ACKNOWLEDGE THAT THIS CONTRACT CONTAINS A LIQUIDATED DAMAGES PROVISION”, and (2) the person against whom such provision is to be enforced signs such person's name or writes such person's initials next to such statement. Nothing in this section shall validate a clause that is a penalty clause or is otherwise invalid under the law of this state.
- statuteConn. Gen. Stat. § 42-150uenactment date not established
The words that state the rule
(c) The provisions of subsection (a) of this section shall not apply to (1) contracts between a consumer and an agency of the state or any political subdivision of the state or of the federal government, (2) negotiable instruments, (3) contract provisions for late fees, prepayment penalties or default interest rates, (4) contracts originated or held by an institution, or any subsidiary or affiliate of such institution, that is regulated by the Department of Banking or by a federal bank regulatory agency, provided, in the case of a contract originated or held by a subsidiary or affiliate of such institution, the subject matter of the contract is an activity that is financial in nature or incidental to such an activity as described in the Bank Holding Company Act, 12 USC 1843(k)(4), and (5) contracts originated or held by a person, firm or corporation licensed by the Department of Motor Vehicles in accordance with the provisions of section 14-52 or 14-67a .
The words that state the rule
A provision for liquidated damages, on the other hand, is one the real purpose of which is to fix fair compensation to the injured party for a breach of the contract. In determining whether any particular provision is for liquidated damages or for a penalty, the courts are not controlled by the fact that the phrase “liquidated damages” or the word “penalty” is used. Rather, that which is determinative of the question is the intention of the parties to the contract. Accordingly, such a provision is ordinarily to be construed as one for liquidated damages if three conditions are satisfied: (1) The damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of abreach of the contract.
- statuteConn. Gen. Stat. § 42-150uenactment date not established
The words that state the rule
(b) For purposes of this subsection, “personal emergency response system” means a twenty-four-hour-per-day electronic alarm system placed in an adult's home that enables him or her to obtain immediate help in case of an emergency. In the event a consumer dies during the term of a consumer contract or consumer lease for a personal emergency response system, the consumer contract or consumer lease for such system shall be deemed terminated upon such consumer's death and any penalty provision contained in the contract or lease regarding early termination shall be unreasonable pursuant to section 42-421 .
The words that state the rule
In the present case, § 49-8 is not akin to a liquidated damages clause because, although the damages may be difficult to prove, they did not arise from an agreement of the parties, and the parties, therefore, could not have *204 had the intent to liquidate damages.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.