Lead Opinion
delivered the Opinion of the Court.
¶1 Appellant James Klyap (Klyap) appeals a judgment of the Sixth Judicial District Court, Park County, ordering him to pay liquidated damages under his contract with Arrowhead School District No. 75. We affirm.
¶2 We address the following issue on appeal: Did the District Court err in concluding the damages clause in the contract was an enforceable liquidated damages term rather than an unenforceable penalty?
I. FACTUAL AND PROCEDURAL BACKGROUND
¶3 Arrowhead School District No. 75 (District) is located in Park County south of Livingston. The District consists of one school, Arrowhead School (School). As the District and the School are essentially the same entity for purposes here, the remainder of this Opinion will refer to both as the School in order to avoid confusion.
¶4 For the 1997-98 school year, the School employed about eleven full-time teachers and several part-time teachers. During that school year, the School employed Klyap as a new teacher instructing math, language arts, and physical education for the sixth, seventh, and eighth grades. In addition, Klyap, through his own initiative, helped start a sports program and coached flag football, basketball, and volleyball.
¶5 During that same year, the teachers of the School considered forming a union. Because of this development, the Board of Trustees decided to delay offering teaching contracts until a decision on unionization was made. After the teachers voted not to unionize, the School offered Klyap a contract for the 1998-99 school year on or about June 15,1998, which he accepted by signing on or about June 30,1998.
¶6 Despite this contract, Klyap continued to look for other employment. According to his testimony at trial, Klyap looked for other work in part because he felt the School might not honor the contract. However, at an interview with another school, he told that school he was already under contract.
¶7 At any rate, on or about August 5, 1998, Dome Mountain Ranch offered Klyap a position. Klyap decided to accept the position. On August 12, he informed the School that he would not be returning for the 1998-99 school year even though classes were scheduled to start on August 26. As a result of Klyap’s decision not to teach at the School, the School sought to enforce the liquidated damages clause in Klyap’s teaching contract for the stipulated amount of $4,100, 20% of the $20,500 salary. Klyap gave a check to the School administration but asked that it not be deposited as there were insufficient funds in the account. Later, after consulting with family, Klyap stopped payment on the check as he did not believe the liquidated damages clause was enforceable.
¶8 After Klyap resigned, the School attempted to find another teacher to take Klyap’s place. Although at the time that Klyap was offered his contract the School had 80 potential applicants, only two viable applicants remained available. Right before classes started, the School was able to hire one of those applicants, a less experienced teacher, at a salary of $19,500.
¶9 Finally, as a result of Klyap’s stop payment, the School brought suit against Klyap to enforce the liquidated damages clause. After a bench trial, the District Court determined the clause was enforceable because it was agreed to by the parties as demonstrated by the signed contract and because the damages suffered by the School qualified under § 28-2-721, MCA, as impractical and extremely difficult to fix. Specifically, the court found the School suffered damages because it had to spend additional time setting up an interview committee, conducting interviews, training the new, less experienced teacher, and reorganizing the sports program. The District Court also found that all these activities took away from the other school and administrative duties that had been scheduled for that time and that the new teacher missed all the staff development training earlier that year. Finally, the court found that such clauses are commonly used in Montana and that the School had routinely and equitably enforced the clause against other teachers. After concluding that the School took appropriate steps to mitigate its damages, the court awarded judgment in favor of the School in the amount of $4,100. The court did not, however, award attorney fees, court costs, or interest. Klyap now appeals. Further facts are discussed below.
II. STANDARD OF REVIEW
¶10 As discussed in detail below, this case presents an opportunity to clarify the law regarding liquidated damages in Montana. We begin by setting out the applicable standard of review, which we have applied in the past, but never explicitly stated. Accordingly,
III. DISCUSSION
¶11 Did the District Court err in concluding the damages clause in the contract was an enforceable liquidated damages term rather than an unenforceable penalty?
A. The Parties’ Positions
¶12 Klyap asserts the clause is a penalty which must be stricken from the contract by this Court. In support of his position, Klyap makes a number of the arguments commonly offered against enforcement of liquidated damages. First, Klyap argues that under Weber v. Rivera (1992),
¶13 Next, Klyap asserts the clause is a penalty because the testimony of Druska Kinkie (Kinkie), a trustee on the school board, indicated that the purpose of the clause was to “prevent losing a teacher at a late period of time.” Klyap argues this testimony of intent constitutes a judicial admission of fact which is dispositive in this case because Kinkie admitted to the School’s intent to impose a penalty.
¶14 In addition, Klyap asserts the “no actual damages” defense in arguing the School did not suffer any damages because a new teacher was hired for a lower salary before the start of the school year. Finally, Klyap makes a policy argument that a liquidated damages provision such as the one at issue here should be considered a penalty because the damages are unreasonably oppressive in a profession that is already very low paying.
¶15 In contrast, the School presents arguments that are commonly offered in support of enforcement of liquidated damages provisions. For example, the School points out that while this Court has not had the opportunity to address a liquidated damages clause in a teacher’s contract, a number of other jurisdictions have found such provisions valid without addressing or requiring any specific evidence of negotiation. Citing Arduini v. Board of Educ. (Illl. App. Ct. 1981),
¶16 In response to Klyap’s position on the School’s intention to insert the clause as a penalty, the School asserts that Kinkie’s characterization of the clause as a penalty is not a judicial admission because she was giving a lay person’s opinion on a conclusion of law. Further, the School points out that Kinkie testified the clause had two purposes: to encourage teachers to “think twice” before signing a contract in June and to prevent teachers from quitting at a late period of time.
¶17 In response to Klyap’s “no actual damages” argument, the School points out that it suffered damages that are impractical
¶18 We note here that the parties presented these arguments to the District Court in their proposed findings of fact and conclusions of law. However, because the District Court did not specifically address these arguments other than in its findings and conclusions as already detailed above, we do not present the District Court’s determinations again.
B. The State of the Law of Liquidated Damages
¶19 Before addressing the instant case, our review of the precedent on this issue indicates there is disparity in our case law on the enforceability of liquidated damages clauses. Further, it is apparent that reconciliation of this disparity requires that we delve into the history and development of the law of liquidated damages. To that inquiry we now turn.
1. Freedom of Contract
¶20 The fundamental tenet of modern contract law is freedom of contract; parties are free to mutually agree to terms governing their private conduct as long as those terms do not conflict with public laws. See, e.g., Lewis v. B & B Pawnbrokers, Inc.,
¶21 Liquidated damages are, in theory, an extension of these principles. Rather than wait until the occurrence of breach, the parties to a contract are free to agree in advance on a specific damage amount to be paid upon breach. 24 RICHARD A. LORD, WlLLISTON ON CONTRACTS, § 65:1 (4th ed. 2002) (hereinafter WlLLISTON ON CONTRACTS). This amount is intended to predetermine expectancy damages. Ideally, this predetermination is intended to make the agreement between the parties more efficient. Rather than requiring a post-breach inquiry into damages between the parties, the breaching party simply pays the nonbreaching party the stipulated amount. Further, in this way, liquidated damages clauses allow parties to estimate damages that are impractical or difficult to prove, as courts cannot enforce expectancy damages without sufficient proof.
2. Judicial Enforcement of Liquidated Damages
¶23 Because judicially rewriting a contract is foreign to the principle of freedom of contract and to the court’s normal role of interpretation and enforcement of expectancy damages, the law of liquidated damages has a somewhat tortured history. Indeed, the disparity in Montana’s case law is apparently only one of numerous examples, as the commentators on the subject note many inconsistencies. See Kenneth W. Clarkson et al., Liquidated Damages v. Penalties: Sense or Nonsense?, 1978 WIS. L. Rev. 351 (hereinafter Clarkson) (“The ablest judges have declared that they felt themselves embarrassed in ascertaining the principle on which the decisions [distinguishing liquidated damages from penalties]... were founded.” quoting Ruggles, J. in Cotheal v. Talmage (N.Y. 1854),
¶24 In order to determine whether a clause should be declared a penalty, courts attempt to measure the reasonableness of a liquidated damages clause. Because the language of the clause is obviously not controlling, courts look beyond the contract to analyze reasonableness. As indicated by Montana’s statute on liquidated damages, § 28-2-721, MCA,
¶25 According to RESTATEMENT § 356 and other treatises, damages must be reasonable in relation to the damages the parties anticipated when the contract was executed or in relation to actual damages resulting from the breach. However, these tests are of limited value for a number of reasons. First, the reasonableness of anticipated damages can be difficult to determine because, as mentioned, the parties are usually in a situation where damages are difficult to prove. Hence, the question of reasonableness becomes somewhat circular and subjective: how can one meet a burden of proof to demonstrate anticipated damages are reasonable and yet difficult and impractical to prove at the same time? While this proof may be theoretically possible, it inevitably provides fertile grounds for disagreement between the parties.
¶26 Second, regarding the relation between actual damages and stipulated damages, the parties are usually already before the court because one party asserts the disparity is too great in the first place. The breaching party often argues the stipulated damages should not be enforced because the nonbreaching party did not suffer any actual damages. See, e.g., O’Keefe v. Dyer (1898),
¶27 As a result of this lack of clarity, courts often inquire into the intent of the parties at the time of contracting in order to determine reasonableness. See WlLLISTON ON CONTRACTS, § 65:11. Specifically, courts look to whether the parties negotiated the clause at issue and whether the parties actually attempted to estimate damages in order to determine if the bargaining process was voluntary. However, there is often a lack of evidence of specific negotiation on the liquidated damages clause. Further, form contracts with predrafted liquidated damages present a special problem under this test because there is always a lack of evidence of negotiation. Courts cannot simply strike all stipulated damages clauses in form contracts based on lack of negotiation because such contracts are widely used, the terms are often reasonable, and the contracts provide efficiencies necessary to the conduct of everyday business. Consequently, the intent test has limited usefulness as well.
¶28 When there is evidence of intent, courts look to whether one of the parties specifically intended to penalize the other party for breach in order to secure their performance rather than simply provide for an amount designed to properly compensate for the failure to perform. Under this rule, penalty clauses are declared in terrorem for unfairly forcing performance. See Goetz, 555. However, as WlLLISTON ON Contracts points out,
[D]amages for breach of contract, by their nature, induce performance of contractual undertakings.... [Mjerely because a liquidated damages provision induces performance of a contract does not make the clause a penalty; it is only when it induces performance illegitimately, as when the amount is disproportionately large relative to the reasonably anticipated probable damages (or in some jurisdictions, relative to the actual damages suffered) so thatperformance is coerced by making breach unreasonably costly.
WlLLISTON ON CONTRACTS, § 65:1. Therefore, because parties usually prefer performance of a contract over payment of damages, courts cannot simply strike as in terrorem the legitimate use of liquidated damages to induce performance when evidence demonstrates one party intended to secure performance. Rather, other evidence of unreasonableness, such as that discussed above, is needed to show a clause is a penalty.
¶29 Personal service contracts are a particularly good example of the shortcomings of declaring a clause in terrorem based only on intent. Liquidated damages in a personal service contract induce performance by an employee by predetermining compensation to an employer if the employee leaves. However, the employer clearly prefers performance by the specific employee because that employee was chosen for hire. The preference for performance by a specific person is reflected in the rule that personal service contracts are not assignable. Further, because personal service contracts are not enforceable by specific performance, Reier Broad. Co. v. Kramer,
¶30 Finally, courts also look to how the clause operates as an indicator of reasonableness. For example, courts look at whether the clause provides for the same damages without regard to the materiality of the breach or whether the clause penalizes a mere delay in payment. Wibaux v. Grinnell Live-Stock Co. (1889),
¶31 The end result of these rule variations is that a clause may be reasonable under one test, but unreasonable under another. Consequently, oftentimes, as in the case at bar, the parties disagree about what tests apply to the contract at issue. In addition, parties dispute who has the burden of proof and even whether the question is one of fact or law. To add to the lack of direction, courts tend to only discuss the test under which the clause in that case is held to be a penalty, rather than assessing the clause under each perspective. In sum, these various tests and others result in inconsistencies in the law of liquidated damages and Montana’s jurisprudence is no exception. To illustrate, we now turn to Montana’s case law on the subject.
3. Montana Case Law on Liquidated Damages
¶32 While our first case addressing liquidated damages dates back to 1868, see Bautz v. Kuhworth (1868),
Whether the forfeiture provision imposed a penalty, or provided for liquidated damages, is to be determined from the language and subj ect matter of the contract, the evident intent of the parties and all the facts and circumstances under which the contract was made. The most important facts to be considered are whether the damages were difficult to ascertain, and whether the stipulated amount is a reasonable estimate of probable damages or is reasonably proportionate to the actual damage sustained at the time of the breach.
Morgen,
¶34 After noting the evidence demonstrated damages from delay were impractical or difficult to fix because Big Sky lost months of sales opportunities right before the ski season, we held that Big Sky showed the $500 per day damages were reasonable because $500 was less than the anticipated daily costs of loan interest, utility costs, and lost rent. We also noted that the clause was reasonable because Big Sky introduced evidence showing its actual damages were greater than the liquidated damages. Morgen,
¶35 In addition to comparing the liquidated damages to anticipated and actual damages, we also noted that the liquidated damages were reasonable in light of the intent of parties as shown by their precontract negotiations. Specifically, when given a later completion date during negotiation, Morgen lowered its bid by an amount less than the liquidated damages provided for in the contract with the earlier completion date and Big Sky refused this bid. Morgen,
¶36 Indeed, because Morgen addresses “all the facts and circumstances under which the contract was made,” including the difficulty of proof, the amount of anticipated and actual damages as compared to liquidated damages, the evidence of actual negotiation and intent of the parties, and the nature of the bargaining process between the two parties, the facts and holding of Morgen represent the ideal of liquidated damages under the principle of freedom of contract. The parties to Morgen negotiated with full information and predetermined a damage amount which was upheld by the courts.
¶37 The next two cases addressing liquidated damages, while brief, are consistent with Morgen even though Morgen is not cited. Erickson v. First Nat’l Bank (1985),
¶38 In Ruegsegger v. Welborn (1989),
¶39 Following Morgen, Erickson, and Ruegsegger, our precedent took two dramatic turns, first away from Morgen in Daugherty Cattle Co. v. General Constr. Co. (1992),
¶40 In Daugherty, we addressed another contract for deed which required payments already made under the contract to be considered liquidated damages for reasonable rental value upon default. Citing Erickson, the buyer argued that actual damages in the form of reasonable rental value had to be considered in order to determine whether the $857,000.00 in principal payments and $385,447.50 in interest already paid during the approximately ten years the buyer was in possession should be considered a penalty relative to the contract price of $1,195,000.00. However, in contrast to Morgen’s reliance on evidence of difficulty of proof, actual and anticipated damages, and intent, Daugherty affirmed the district court’s grant of summary judgment. Specifically, Daugherty held that it was not necessary to hear evidence on the reasonable rental value in order to determine whether the liquidated damages clause was reasonable. Regarding Erickson’s reliance on a comparison to actual damages, Daugherty stated the rule was not mandatory because Erickson “does not require a judicial determination that the amount forfeited was a reasonable rental [value].” Daugherty,
¶41 Daugherty also upheld the district court’s statements that to inquire into the actual damages would defeat the language of the contract. More to the point, because Daugherty upheld a summary judgment ruling, the opinion in effect held that there are no genuine issues of material fact involved in the determination of whether a liquidated damages clause should be declared a penalty.
¶42 Only three months later in Weber, we sharply departed from Daugherty without citing or discussing it. In Weber, we considered a form contract used to memorialize a land purchase which provided for 10% of the purchase price as liquidated damages. Citing the “all the facts and circumstances under which the contract was made” rule from Morgen, we held the provision was a penalty because there was no attempt by the parties to reasonably estimate anticipated damages. Specifically, we noted that because a form contract was used and both parties testified that no one knew how 10% of the purchase price was chosen, there was no evidence of actual negotiation between the parties so there was no attempt to reasonably estimate damages. We also held the provision a penalty because it entitled the sellers to the same amount whether they attempted to mitigate or not. Weber,
¶43 While Weber questioned the language of the contract and required introduction of specific evidence unlike Daugherty, in one way Weber is similar to Daugherty because the opinion also rejected the actual damages test. The court stated:
"[A]ny relationship between the amount of actual damages suffered and the amount specified in the provision is merely a fortuitous coincidence and not the result of a reasonable estimate in advance to determine what the damages might be. The fact that the liquidated damage provision in this case may approximate the actualdamages suffered, is insufficient by itself to create a valid liquidated damages provision. Our decision in Morgen ... makes it clear that other factors must also be considered.”
Weber,
¶44 After Weber, the next liquidated damages holding occurred in Story v. City of Bozeman (1993),
¶45 As this discussion demonstrates, our precedent has both required and completely ignored proof that damages be of a type difficult to ascertain; it has relied on proof of actual damages to show reasonableness and it has rejected proof of actual damages to show reasonableness; it has considered actual bargaining as only one factor to be considered and it has held actual bargaining is required; finally, it has considered the penalty/liquidated damages issue as one that requires evidence and also one that is based on contract interpretation.
¶46 In sum, our precedent on liquidated damages has numerous inconsistencies that make application of a uniform rule elusive at best. Yet, in order to resolve the issue presented and provide direction to contracting parties, we must resolve the disparities in our case law. To that task we now turn.
4. Unconscionability
¶47 The above cases represent requirements that courts consider, to varying degrees, the difficulty of proof of damages, the anticipated and actual damages, evidence of intent or actual negotiation between the parties, and the nature of the bargaining process between the parties. However, as already discussed above, when the actual damages are difficult to prove, requiring proof of actual damages to demonstrate reasonableness puts the nonbreaching party in an unfair and untenable position. Further, requiring such proof defeats the efficiency of having such a clause in the first place. Indeed, by the rule from Story, any efficiencies gained from the clause are lost by automatically requiring extensive proof. Further, there may not be any evidence of actual negotiation between the parties due to the common use of form contracts. In addition, more than anything, proof of actual damages seems to be a convenient and comfortable way for a court to simply end the debate regarding a liquidated damages provision because the clause approximates the expectancy damages that a court would normally enforce anyway. At the same time, Daugherty represents the idea that the court simply enforce the contract language between the parties. However, such an approach simply ignores the penalty issue presented to a court.
¶48 After reviewing these cases, cases from other jurisdictions and academic
¶49 First, as outlined above, the principle of freedom of contract holds that the parties themselves are in the best position to determine the terms of a contract because the parties are free to get information and bargain the private law of the contract in their own interest. Under unconscionability, a court will only strike a contract term if the bargaining process itself had some inherent unfairness that actually prevented the contract from being freely negotiated and thus defeated the principle of freedom of contract. Indeed, modem commentators on the subject of liquidated damages assert that unconscionability should be the only exception to court enforcement of liquidated damages clauses.
¶50 Second, unconscionability analysis is the proper approach because it in fact already mirrors the law of liquidated damages. Courts initially exercised equitable power to strike liquidated damages clauses when a more powerful party used its power to set terms that were unfair and allowed double recovery. Goetz, 554-55. That parallel between penalties and unconscionability lives on in today’s case law. When courts look at evidence of intent and actual negotiation between two parties to decide if a clause is a penalty, courts are simply looking at whether the bargaining process was free or oppressive and whether the weaker party had a meaningful opportunity to negotiate terms. Whether damages would be difficult to prove, whether actual negotiation occurred, and whether or not actual damages approximate anticipated damages are all simply evidence of whether the bargaining process was consistent with the principle of freedom of contract such that the term was within the reasonable expectations of the weaker party.
¶51 The cases discussed above, while seemingly inconsistent, also show that unconscionability analysis is at the heart of the law of liquidated damages because each of those
¶52 Third, by approaching liquidated damages from the perspective of unconscionability, future penalty questions can rely on our unconscionability jurisprudence. Specifically, precedence on form contracts and personal service contracts, issues both present in the case at bar, provide this Court with guidance on the fairness of the bargaining process. See, e.g., Chor v. Piper, Jaffray & Hopwood, Inc. (1993),
¶53 Finally, by focusing on the fairness of the bargaining process, courts will less likely be drawn into an “after the fact” debate, a situation which frequently occurs with liquidated damages clauses. And, as mentioned, enforcement of inherently fair contracts will in fact provide for damages that are impractical to prove.
¶54 Accordingly, under the rule we adopt today, liquidated damages clauses are presumed enforceable. Further, the party seeking to avoid the clause has the burden of proving the clause is unconscionable. As a result, we overrule Story,
¶55 While no specific evidence is required or is determinative of the ultimate issue of unconscionability, including evidence of intent, actual negotiation and whether there are damages, a court may consider any relevant evidence in its determination, including whether a clause attempts to waive the general duty to mitigate and whether a clause allows for the same damages without regard to the materiality of the breach. Because unconscionability considers, analogous to the statement in Morgen, “all the facts and circumstances under which the contract was made,” we overrule Daugherty to the extent it prevented one party from introducing relevant evidence by granting summary judgment based on contract language alone. Cf. 360 Ranch Corp. v. R & D Holding (1996),
¶56 To the extent Morgen, Erickson, Ruegsegger, Weber, Daugherty and any other liquidated damages cases address the nature of the bargaining process between the parties, those cases will continue to serve as precedent. To the extent those cases require a specific type of evidence, such as the actual damages noted in Erickson or the evidence of actual negotiation required by Weber, those cases are no longer binding. We note here, however, that this Opinion is not intended in any way to overrule Comphealth,
¶57 We also note in making this holding that it is not intended to address forfeiture under § 28-1-104, MCA,
C. The Arrowhead-Klyap Teaching Contract
¶58 Having determined that unconscionability will guide our review of liquidated damages issues, we now address the case at bar. Unlike employee wage claims for liquidated damages, see Stewart v. Region II Child & Family Servs. (1990),
¶59 Under the unconscionability perspective, we first look to whether or not the clause at issue is a contract of adhesion such that the weaker bargaining party had no meaningful choice regarding acceptance of the provisions. Iwen, ¶ 31. This rule incorporates the liquidated damages inquiry into whether or not the parties actually negotiated the clause and whether the parties attempted to estimate anticipated damages. In this case, the School, like most employers, is the more powerful bargaining party. This is demonstrated by the fact that the teachers did not unionize, by the fact that there were 80 applicants for Klyap’s position, and by the fact that the School presented Klyap with a form contract with his salary inserted into a fill-in-the-blank space. But cf. Ryan v. Orris (N.Y. App. Div. 1983),
¶60 Further, there is nothing of record to indicate Klyap had a meaningful choice regarding acceptance of the 20% of salary liquidated damages provision. Indeed, it appears that this provision was inserted on a take it or leave it basis. As discussed above, an employer offering a personal services contract usually prefers performance over contract damages because the particular employee’s performance is the whole point of the contract. This is especially true with a teaching contract. “Resignations that are submitted by teachers and that are to be effective during the academic year obviously present severe problems for school administrators. They impose instructional problems for students and vexing difficulties for the administration in obtaining qualified replacements.” Arduini II,
¶61 We note at this point that our holding in Weber could be interpreted to require remand to the District Court because the contract at issue here is a form contract and there was no evidence of negotiation between the parties. However, unconscionability does not require that form contracts are automatically unacceptable. Rather, such contracts are only unconscionable if the terms are not within the reasonable expectation of the party who had no opportunity to negotiate.
¶62 Accordingly, we turn to the second, and more difficult, question of whether the liquidated damages clause in Klyap’s contract was within Klyap’s reasonable expectations or was unduly oppressive to Klyap. This inquiry incorporates the liquidated damages inquiry into whether or not the clause is
¶63 Our review of cases from other jurisdictions indicates that such clauses in teaching contracts have almost always been enforced as reasonable. See DeWerff,
¶64 Further, the School in this case introduced other teaching contracts in Montana with liquidated damages clauses to show the clauses are within the reasonable expectations of teachers in Montana. These contracts included an Ashland teaching contract with a 15% clause, a Havre teaching contract with a 10% clause, and a Willow Creek contract with a $350.00 clause. School staff also testified that the clause was included in the Arrowhead contract at the recommendation of a representative of the Montana School Board Association who also testified. However, there was no testimony regarding how the specific figure of 20% was chosen.
¶65 As is evident from the above cases and the other Montana contracts introduced as evidence, none of the enforced liquidated damages provisions go as high as 20% of a teacher’s salary. In contrast, the Dudley case struck a 25% of salary clause as a penalty. Therefore, we must determine where Klyap’s 20% clause falls in the spectrum of reasonable expectations.
¶66 In doing so, we note that the normal rule governing employer damages for breach by an employee is that an employer is entitled to the cost of obtaining other services equivalent to those promised under the contract. Med+Plus Neck & Back Pain Ctr. v. Noffsinger (Ill. App. Ct. 2000),
¶67 Consequently, it was within Klyap’s reasonable expectations to compensate the School for the costs of obtaining a teacher who would provide services equivalent to his own. It was also within Klyap’s reasonable expectations that he agree to a contract that would be reasonably economically feasible to breach and pay a sum certain in order to end the contract.
¶68 After reviewing the facts of this case, we hold that while the
20% liquidated damages clause is definitely harsher than most, it is still within Klyap’s reasonable expectations and is not unduly oppressive. First, as the School pointed out during testimony, at such a small school teachers are chosen in part depending on how their skills compliment those of the other teachers. Therefore, finding someone who would provide services equivalent to Klyap at such a late date would be virtually impossible. This difficulty was born out when only two applicants remained
¶69 Second, besides the loss of equivalent services, the School lost time for preparation for other activities in order to attempt to find equivalent services. As the District Court noted, the School had to spend additional time setting up an interview committee and conducting interviews. Further, the new teacher missed all the staff development training earlier that year so individual training was required. And finally, because Klyap was essential to the sports program, the School had to spend additional time reorganizing the sports program as one sport had to be eliminated with Klyap’s loss. These activities all took away from the other school and administrative duties that had been scheduled for that time. Further, as the District Court concluded, loss of equivalent services and lost time are types of damages impractical and difficult to quantify. Again, because Klyap was a teacher and because he initiated parts of the sports program, it was within his reasonable expectations to know the School would suffer these types of difficult to prove damages as a result of his departure.
¶70 Finally, although the School testified it had an intent to secure performance and avoid the above damages by reason of the clause, as discussed above, such an intent does not turn a liquidated damages clause into a penalty unless the amount is unreasonably large and therefore not within reasonable expectations. Given that Klyap would understand the importance of a teacher committing to employment for at least the duration of a school year in order to give students continuity and given that the School’s probable damages were within Klyap’s reasonable expectations, we conclude that the 20% of salary figure was within Klyap’s reasonable expectations as an estimation of damages the School would incur.
¶71 Therefore, because as a teacher Klyap would know teachers are typically employed for an entire school year and would know how difficult it is to replace equivalent services at such a small rural school, it was within Klyap’s reasonable expectations to agree to a contract with a 20% of salary liquidated damages provision for a departure so close to the start of the school year.
¶72 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.
IV. CONCLUSION
¶73 Because the District Court correctly determined the damages clause of the contract between Klyap and the School was enforceable as a liquidated damages provision, we affirm.
Notes
In the District Court, Klyap asserted that no contract was formed because, after he signed the contract, the School did not return a copy of the contract to him which was executed by the School before he gave notice of his resignation. However, both Klyap and the School executed the contract. As the District Court concluded, “[Tjhere can be no dispute that a teaching contract was entered into between Arrowhead and Klyap.” We simply note here that we see no merit in Klyap’s argument, as the contract was formed when the School signed it, whether or not the executed copy was sent back to Klyap.
The full text of the liquidated damages clause in Klyap’s 1998-99 contract reads: Ateacher not facing discipline or discharge may be released from his/her teaching contract provided the teacher makes payment for liquidated damages to the School District prior to release on the following schedule. The date the School District receives the teacher’s letter requesting release is the date controlling on the following schedule. The teacher shall provide a minimum of two calendar weeks notice. Any teacher requesting to be released from his/her individual teaching contract from June 20 through July 20 will pay ten percent (10%) of the salary that teacher would earn pursuant to that contract as liquidated damages. Any teacher requesting to be released from their individual teacher contract after July 20 will pay twenty per cent (20%) of the salary that teacher would earn pursuant to that contract as liquidated damages.
The teacher and the Board of Trustees agree the School District incurs costs that are impractical or are extremely difficult to fix when a teach [sic] breaches contract. Liquidated damages are to cover the impractical or extremely difficult to fix costs.
Jurisdiction and enforcement of this provision in the individual contract is through the 6th Judicial District, Park County, Livingston, Montana, with the teacher being liable for all fees under the above schedule, court costs, interest, reasonable attorney fees of the School District and other actions the court deems appropriate. The Court also has jurisdiction to award interest on any amount due and other actions the court deems appropriate.
Expectancy damages only include contract damages still suffered after the nonbreaching party reasonably attempts to mitigate damages, as in this case where the School hired a replacement teacher.
The case at bar is a case in point. As noted above, Klyap asserts the School did not suffer any damages because it was able to find another teacher at a lower salary before classes started.
Originally, courts exercised equitable powers to strike liquidated damages clauses in order to prevent a party from receiving damages in excess of the loss suffered by breach of contract. See Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 COLUM. L. REV. 554, 554-55 & n.1,4 (1977) (hereinafter Goetz).
Section 28-2-721, MCA, entitled “When provision fixing liquidated damages valid,” reads:
(1) 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).
(2) 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.
According to the language of § 28-2-721, MCA, liquidated damages are only allowed in a situation where damages are impractical or extremely difficult to prove. However, this section was adopted in 1895 from the Field Civil Code and consequently does not reflect the modem principle that parties in any type of situation can agree to liquidated damages as a matter of freedom of contract. See Goetz, 559-60 & n. 22. Because, as we discuss below, the instant case qualifies as a situation where damages are impractical or extremely difficult to prove, we need not address this potential problem with § 28-2-721, MCA. We note however, that much of our general statutory law regarding contract is taken from the Field Civil Code and as such these statutes are intended to codify common law. See generally Andrew P. Morriss et al., Debating the Field Civil Code 105 Years Late, 61 Mont. L. Rev. 371 (2000). But see Deuninck v. West Gallatin Irrigation Co. (1903),
While there are a number of liquidated damages cases from 1869 to 1977, none of those cases add to the discussion here.
Since Story, two cases have considered liquidated damages clauses, Yellowstone II Dev. Group, Inc. v. First Am. Title Ins. Co.,
This, of course, assumes that courts will also not enforce contracts void for illegality in contradiction to public laws.
Because the question of whether a liquidated damages clause is unconscionable is an issue of law, the School correctly asserts Kinkie’s characterization of the clause here as a penalty is not binding on tms Court because judicial admissions are limited to facts and not issues of law. DeMars v. Carlstrom (1997),
Section 28-1-104, MCA, reads: Relief from forfeiture. Whenever by the terms of an obligation a party thereto incurs a forfeiture or a loss in the nature of a forfeiture by reason of his failure to comply with its provisions, he may be relieved therefrom upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.
Concurrence Opinion
concurring in part and dissenting in part. ¶78 I concur in the result the Court reaches. I respectfully dissent, however, from the approach used by the Court to resolve this appeal. ¶79 I appreciate the care with which the Court sets forth our past decisions in the liquidated damages arena. Moreover, I fully support this Court’s efforts in recent years to “square away” inconsistent or parallel lines of authority which cause ongoing difficulties for practitioners and trial courts. We generally, and properly, do so by analyzing why one line of authority is preferable and overruling other cases, in whole or in part, which are inconsistent therewith. See, e.g., Quantum Elec., Inc. v. Schaeffer,
¶80 Here, the Court does not “square away” inconsistent lines of authority. It does not, as it indicates at ¶¶ 19 and 46, resolve the disparities in our case law on liquidated damages. Instead, the Court leaves the liquidated damages statute and our liquidated damages case law behind, and creates an entirely new approach to liquidated damages by incorporating case law from other contract settings, “cases from other jurisdictions and academic writing on the subject[.]”
¶81 I cannot agree. Neither party argued or briefed this approach in either the District Court or this Court. As I have stated many times before, I believe it is unwise and inappropriate for this Court to create and apply a new approach to an issue in a vacuum-that is, without full argument from the parties. See, e.g., Mallak v. State,
¶82 How can we reconcile refusing to address an issue or theory raised by a party for the first time on appeal-see, e.g., Bryan v. Yellowstone Co. Elem. Sch. Dist. No. 2, 2002 MT 264, ¶ 19,
79, ¶¶ 47-48,
¶83 “[I]t is our obligation to decide the cases filed in this Court on the basis of the issues and argument raised by the parties.” State v. Zabawa (1996),
Concurrence Opinion
specially concurring.
¶84 The dissent asserts the majority Opinion fails to properly resolve our inconsistent lines of authority and raises a new approach to the question presented on appeal. This criticism is not well taken for five reasons.
¶85 First, Klyap did raise this approach on appeal. Klyap strongly urged this Court to consider the liquidated damages clause unenforceable because it is “oppressive” and because it is “more in line with an eighteenth century indentured servitude agreement.” Unconscionability is simply the proper legal term used to characterize this argument that a contract term should be stricken by a court due to fundamental unfairness in the bargaining process. Accordingly, the Opinion carefully considers whether or not the clause is actually unconscionable.
¶86 Second, as is apparent from the lack of discussion in the Opinion, the trial court made minimal findings of fact and conclusions of law regarding the issue presented. Rather, the trial court simply made conclusory statements that the contract clause did not violate the statute. The court failed to articulate reasoning as to why it drew the conclusions of law it reached. Further, the District Court did not address the disparity in our case law. Therefore, the Opinion in no way ignores or fails to review the District Court’s conclusions of law.
¶87 Third, the dissent does not explain how the result reached is correct under the applicable Morgen line of cases. Specifically, as Klyap argues, under Weber, the clause at issue here should be stricken because it is a form contract with no evidence entered as to how the amount of 20% of salary was chosen. Yet, as the Opinion discusses at length, encouraging performance is a legitimate use of a liquidated damages clause by an employer. Accordingly, the School’s wish to encourage performance by contracting teachers is not enough reason alone to strike the clause. Rather, as the Opinion considers at length, we have to consider whether the clause encourages performance unfairly by taking advantage of a superior bargaining position.
¶88 Fourth, the dissent believes this is a new approach. I disagree. Rather, our approach is simply a way of discussing the issue of liquidated damages that reveals our reasoning to practitioners and trial courts, rather than presenting a result-oriented decision that continues the disparity in our case law.
¶89 Fifth, our resolution provides exactly the kind of clear direction that contracting parties conducting business in Montana need regarding liquidated damages clauses. Our present case law, regardless of the statute, is inconsistent and confusing at best.
Concurrence Opinion
specially concurring.
¶74 I concur in the result reached by the Court but not in all of the reasoning.
¶75 By statute, liquidated damages are authorized in situations in which actual damages are difficult to determine. The liquidated damages provision is designed to bring certainty to uncertain circumstances. The parties to the contract are in the best position to make that determination. Neither a contracting party nor the Court should be allowed to recreate uncertainty after the fact by second guessing the agreed terms.
¶76 Whether the agreement is a contract of adhesion is an issue separate from whether the parties have agreed to liquidated damages. This issue need not be analyzed in every liquidated damages case. It should be
¶77 For these reasons, I concur with the result reached by the majority.