Will a Montana court enforce this liquidated-damages clause?
Only if actual damages would have been impracticable or extremely difficult to fix when the contract was made: otherwise it is void. Montana's default rule is voidness: “Every contract by which the amount of damage to be paid or other compensation to be made for a breach of an obligation is determined in anticipation thereof is to that extent void, except as expressly provided in subsection (2)” (§ 28-2-721(1), MCA). Subsection (2) is the only escape: the parties “may agree therein upon an amount which shall be presumed to be an amount of damage sustained by a breach thereof when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.” For a SALE OF GOODS the governing section is a different one, and it is stricter in one respect: under § 30-2-718(1), MCA, damages “may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy”, and “[a] term fixing unreasonably large liquidated damages is void as a penalty.” Arrowhead Sch. Dist. 75, Park Co. v. Klyap is the leading application of the general section: “the threshold indicator of reasonableness is whether the situation involves damages of a type that are impractical or extremely difficult to prove. When the parties to the contract will suffer difficult to prove damages, a court can assume there was a reasonable motive for adding a liquidated damages” clause. Klyap upheld the clause before it, at 20% of the teacher's annual salary, holding that “although Klyap had no meaningful choice regarding the liquidated damages provision, the clause itself is still not unconscionable because the 20% amount was within Klyap’s reasonable expectations”, and the Court affirmed. The clause still has to be a genuine PRE-ESTIMATE, not a number picked to punish breach: Ballou v. Walker affirmed a finding that a $1.00 buyout figure was “an unconscionable and void attempt to fix liquidated damages, in violation of § 28-2-721, MCA.”
The trap
The impracticability showing is not optional boilerplate. It is the entire basis for enforcement, and a party resisting the clause gets to put on evidence that actual damages were NOT hard to calculate. Klyap arose in a school-district teacher-breach context and its impracticability analysis is fact-specific; the 20% it approved is not a safe harbour, and no authority located turns any figure or percentage into one. Klyap was also not a unanimous reading: the Opinion of the Court carried four votes, with a district judge sitting by designation specially concurring, the Chief Justice concurring in the result but dissenting from the approach, and the opinion's author filing a further special concurrence. A number with no relationship to any estimate of actual harm, Ballou's $1.00, fails even under a clause captioned “liquidated damages.” Note also that § 28-2-722, an adjoining section on liquidated-damages carve-outs, is REPEALED in the statutory text available here; nothing in it can be relied on.
6 authorities
- statuteMont. Code Ann. § 28-2-721enactment date not established
The words that state the rule
Every contract by which the amount of damage to be paid or other compensation to be made for a breach of an obligation is determined in anticipation thereof is to that extent void, except as expressly provided in subsection (2).
- statuteMont. Code Ann. § 28-2-721enactment date not established
The words that state the rule
The parties to a contract may agree therein upon an amount which shall be presumed to be an amount of damage sustained by a breach thereof when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.
The words that state the rule
As indicated by Montana’s statute on liquidated damages, § 28-2-721, MCA,6 and by treatises including WILLISTON ON CONTRACTS, § 65:1, and § 356 of the RESTATEMENT (SECOND) OF CONTRACTS (1965) (hereinafter RESTATEMENT § 356), the threshold indicator of reasonableness is whether the situation involves damages of a type that are impractical or extremely difficult to prove. When the parties to the contract will suffer difficult to prove damages, a court can assume there was a reasonable motive for adding a liquidated damages clause, because, as mentioned, stipulated damages can quantify damages that a court could not otherwise award for lack of proof.
The words that state the rule
Ballou’s tender of $1.00 for Walker’s interest, and the Agreement’s provision upon which it was based, was an unconscionable and void attempt to fix liquidated damages, in violation of § 28-2-721, MCA.
The words that state the rule
In sum, although Klyap had no meaningful choice regarding the liquidated damages provision, the clause itself is still not unconscionable because the 20% amount was within Klyap’s reasonable expectations as a teacher familiar with the employment needs of the School and the damages the School would suffer upon breach of the contract. Accordingly, we hold the District Court correctly determined that the liquidated damages provision was enforceable.
- statuteMont. Code Ann. § 30-2-718enactment date not established
The words that state the rule
Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.