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California And Liquidated Damage Clauses

California Civil Code Section 1671(b) provides that “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”.  There are several key exceptions to this standard.  First, it does not apply “in any case where 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.”  Cal. Civ. Code § 1671(a).   Second, a different rule obtains when the liquidated damages are sought to be recovered from either: (1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party’s personal, family, or household purposes; or (2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.  Cal. Civ. Code § 1671(c).   In those cases, a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which are presumed to be the amount of damage sustained by a breach, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.  Cal. Civ. Code § 1671(d).

Krechuniak v. Noorzoy, 2017 Cal. App. LEXIS 432 (Cal. App. 6th Dist. May 12, 2017) involved litigation between a sister and a brother.  The trial court awarded the sister $850,000 as a stipulated judgment pursuant to a settlement agreement.  On appeal, the brother argued that the $850,000 award includes a liquidated damages penalty of $250,000 that is unenforceable under Civil Code section 1671.  The Court of Appeal, in an opinion by Judge Brian C. Walsh sitting by designation, affirmed the trial court’s award.  The Court of Appeal declined to review the trial court’s holding de novo, holding that “It is appropriate for an appellate court to independently review the validity of a contractual provision under section 1671, subdivision (b) only when the facts are undisputed and lead to one reasonable conclusion”.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...