Not too long ago, I wrote about the lawsuit filed in California challenging a confidentiality agreement allegedly entered into by President Donald Trump. Clifford v. Trump, L.A. Super. Ct. Case No. BC 696568 (filed Mar. 6, 2018). In that post, I focused on the California Civil Code requirements for contract formation.
Recently, Vermont Law School Professor Jennifer Taub penned an article questioning the validity of the liquidated damages provision in the contested contract:
“While an agreement can set out in advance what a breaching party might owe, such ‘liquidated damages’ provisions are not always enforced. Generally, they are honored only if they are viewed as reasonable in light of the anticipated or actual losses caused by the breach. Something that looks like a penalty will be rejected.”
Ms. Taub quotes several other law professors on the subject, but fails to mention that California has a statute that, with certain exceptions, generally validates liquidated damage provisions in contracts. Cal. Civ. Code § 1671(b). The statute further requires that a party seeking to invalidate a liquidated damages provision establish the provision was unreasonable under the circumstances existing at the time the contract was made. A liquidated damages provision will generally be considered unreasonable, and hence unenforceable under Section 1671(b), if the provision bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. Ridgley v. Topa Thrift & Loan Assn., 17 Cal. 4th 970, 977 (1998).
The statute applies a stricter rule when liquidated damages are sought from a party either to (i) a contract for the retail purchase, or rental, by that party of personal property or services, primarily for the party’s personal, family, or household purposes; or (ii) a lease of real property for use as a dwelling by the party or those dependent upon the party for support. In these instances, a liquidated damage provision is void except that the parties may agree upon an amount which shall be presumed to be the 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. Note the stricter rule operates only in one direction. Thus, the general validating rule applies when a consumer party seeks to enforce a liquidated damage provision against a non-consumer party. So much for equal justice under the law.
Section 1671 does not apply when another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract. Students in my commercial law classes should know that Section 2-718 establishes the following test liquidated damage provisions:
Damages for breach by either party may be liquidated in the agreementbut 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.
California however has chosen to incorporate Section 1671 into Division 2 of the Commercial Code.
Finally, it remains to be seen whether California law would apply to confidentiality agreement. The agreement, included as an exhibit to Ms. Clifford's complaint, includes an unusual clause providing that it shall in all respects be construed, interpreted, enforced and governed by the laws of California, Arizona or Nevada "at DD's election". DD, or David Dennison, is alleged to be President Trump's incognito.
