Will a Utah court enforce this liquidated damages clause, or strike it as a penalty?
Utah presumes it enforceable, and in Commercial Real Estate itself the clause was upheld. In Commercial Real Estate Investment v. Comcast (2012) the Utah Supreme Court clarified that liquidated damages clauses are not subject to any form of heightened judicial scrutiny: courts begin with the longstanding presumption that they are enforceable, and a party may challenge one only by pursuing a general contractual remedy such as mistake, fraud, duress or unconscionability. For a sale of goods, the Code allows damages to be liquidated only at an amount reasonable in light of the anticipated or actual harm, 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 (§ 70A-2-718).
The trap
Two different tests: outside the Code the old Restatement reasonable-forecast / difficult-to-estimate test and the shock-the-conscience penalty test no longer govern after Commercial Real Estate (later Utah Court of Appeals opinions describe earlier cases such as Reliance Insurance v. UDOT as abrogated), and the challenger must prove a general contract defense; but for goods, § 70A-2-718 still voids an unreasonably large amount as a penalty. In Commercial Real Estate the burden lay with the party challenging the clause, and the court rejected the challenge: an argument that the sum awarded was grossly disproportionate to the actual damages is a weighing after the event, which the court said does not bear on substantive unconscionability, because that question looks at the relative fairness of the obligations assumed at the time of contracting.
8 authorities
- case2012 UT 49Commercial Real Estate Investment, L.C. v. Comcast of Utah II, Inc.Utahdecided 2012read it at the source ↗
The words that state the rule
Thus we clarify that liquidated damages clauses are not subject to any form of heightened judicial serutiny. Instead, courts should begin with the longstanding presumption that liquidated damages clauses are enforceable. See, eg., Bair, 2001 UT 20 , 1 25, 20 P.3d 888 . A party may challenge the enforceability of a liquidated damages clause only by pursuing one of the general contractual remedies, such as mistake, fraud, duress, or unconscionahility.
- statuteUtah Code § 70A-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.
- case2012 UT 49Commercial Real Estate Investment, L.C. v. Comcast of Utah II, Inc.Utahdecided 2012read it at the source ↗
The words that state the rule
We now hold that liquidated damages clauses should be reviewed in the same manner as other contractual provisions.
- case2012 UT 49Commercial Real Estate Investment, L.C. v. Comcast of Utah II, Inc.Utahdecided 2012read it at the source ↗
The words that state the rule
Reviewing liquidated damages clauses for un-conscionability still preserves challenges to penalty clauses. Even our cases purporting to apply the penalty approach conclude that penalties are unenforceable because they are unconscionable.
- case2012 UT 49Commercial Real Estate Investment, L.C. v. Comcast of Utah II, Inc.Utahdecided 2012read it at the source ↗
The words that state the rule
Comcast challenges the enforceability of the liquidated damages clause in its contract with CRE. The burden lies with Comeast in challenging the enforceability of the clause. See Ryan v. Dan's Food Stores, Inc., 972 P.2d 395, 402 (Utah 1998) ("A party claiming unconscionability bears a heavy burden."); Res. Mgmt. Co., 706 P.2d at 1043 (noting, after first laying out the standards for evaluating unconscionability, that "a duly executed written contract should be overturned only by clear and convincing evidence"); see also, eg., Bair, 2001 UT 20 , ( 25, 20 P.3d 388 (noting the burden is on the party seeking to invalidate a liquidated damages clause). As we have previously noted, the burden properly rests on the party challenging the clause's enforceability because "the purpose of a liquidated damages provision is to obviate the need for the nonbreach-ing party to prove actual damages."
- case2012 UT App 305Smargon v. Grand Lodge Partners, LLCUtah Ct. App.decided 2012read it at the source ↗
The words that state the rule
6. At the time of the district court’s decision, it appeared that Utah followed section 339 of the Restatement (First) of Contracts in analyzing the validity of contractual liquidated damages provisions. See Reliance Ins. Co. v. Utah Dep’t of Transp., 858 P.2d 1363, 1366 (Utah 1993) (“In determining the validity of a liquidated damages provision, this court has adopted section 399 of the Restatement of Contracts.”), abrogated by Commercial Real Estate Inv., LC v. Comcast of Utah II, Inc., 2012 UT 49, ¶ 27 (explaining that “[t]he three most recent Utah Supreme Court cases to consider liquidated damages have all done so pursuant to section 339 of the first Restatement of Contracts” but stating that prior case law never “officially adopted the Restatement’s test”). Very recently, in Commercial Real Estate Investment, LC v. Comcast of Utah II, Inc., 2012 UT 49, the Utah Supreme Court abandoned the Restatement approach in favor of reviewing “liquidated damages clauses . . . in the same manner as other contractual provisions,” which are only to be invalidated if “enforcement of a liquidated damages clause would be unconscionable.”
- case2012 UT 49Commercial Real Estate Investment, L.C. v. Comcast of Utah II, Inc.Utahdecided 2012read it at the source ↗
The words that state the rule
Liquidated damages clauses are not subject to heightened judicial serutiny. Instead, such clauses are presumed enforceable, although they may be challenged on the same equitable grounds as other contractual provisions. We conclude that no such *1205 grounds exist to invalidate the liquidated damages clause in the contract between Comcast and CRE.
- case2012 UT 49Commercial Real Estate Investment, L.C. v. Comcast of Utah II, Inc.Utahdecided 2012read it at the source ↗
The words that state the rule
lthough Comcast now argues that over $1.7 million in liquidated damages is "grossly disproportionate" to CRE's actual damages, this type of post hoe weighing does not bear on the question of substantive unconscionability, which focuses on the "relative fairness of the obligations assumed" at the time of contracting.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.