*1 ARROWHEAD SCHOOL DISTRICT NO. 75, COUNTY, MONTANA,
PARK
Respondent,
Plaintiff and
A. KLYAP, JR.,
JAMES
Appellant.
Defendant
No. 01-332.
Submitted on Briefs November
2001.
Decided October
For James Appellant: Klyap, (pro A. Respondent: County For TaraDepuy, Attorney, Livingston. Park Opinion JUSTICE NELSON delivered of the Court. Appellant Klyap appeals James a of (Klyap) judgment the Sixth Court,
Judicial District Park County, ordering pay liquidated him to damages under his contract with School No. 75. Arrowhead District We affirm. following appeal: We address the issue on Did the District Court in concluding
err clause in the contract enforceable was an liquidated term penalty? rather than an unenforceable FACTUAL PROCEDURAL BACKGROUND
I. AND (District) No. 75 is located in Park Arrowhead School District school, County Livingston. The District consists south (School). As the and the Arrowhead School District School here, essentially entity purposes the same the remainder of this for refer to the School in to avoid confusion. Opinion will both as order year, employed the 1997-98 school the School about eleven full- ¶4 For part-time During year, and that school time teachers several teachers. math, employed instructing as a new Klyap the School teacher seventh, arts, sixth, physical eighth and for and language education addition, initiative, through helped his a grades. Klyap, start own football, basketball, sports flag volleyball. and and program coached During year, the teachers of the School considered same development, Board of forming a union. Because of this Trustees delay teaching a on offering contracts until decision decided unionize, was After the teachers voted not unionization made. year Klyap a for the school on or about School offered contract 1998-99 15,1998, by 30,1998.1 June accepted signing June which he on or about $20,500 provided salary a and included This contract for damages clause at issue here. The clause calculated breach; salary as determined the date percentage annual July required payment of 20% breach of contract after indicating he damages.2 signed accepted also Klyap notice because, Court, Klyap after District asserted that no contract was formed 1 Inthe contract, signed copy he did not return a of the contract him which the School resignation. gave he notice As his both was executed School before “[Tjhere concluded, Klyap the School executed the contract. the District Court teaching dispute can no that a contract was entered into between Arrowhead be argument, Klyap.” simply Klyap’s no merit in the contract We note here that we see it, copy signed or back whether not the executed was sent was formed when School Klyap. Klyap’s clause in 1998-99contract reads: 2Thefull text of discharge teaching facing may discipline released from his/her Ateacher not payment following provided to the makes the teacher prior schedule. The date the School District to release on School controlling requesting is the date on receives the letter release District teacher’s provide following minimum of calendar The teacher shall two schedule. Any requesting his/her to be released from individual weeks notice. teacher (10%) *4 through July percent teaching pay ten the 20 will contract from June liquidated damages. salary pursuant to contract as that teacher would earn Any requesting teacher contract after be released their individual teacher to (20%) pay twenty salary July per that teacher would earn 20 will cent the pursuant The teacher and liquidated damages. to that contract as agree costs that Trustees the School District incurs Board of extremely [sic] impractical difficult fix when a teach breaches or are to extremely Liquidated damages impractical difficult are to cover the contract. responsibility familiarizing for himself with the information in the liquidated damages teacher’s handbook which also included the clause. contract, Despite Klyap this continued to look for other employment. testimony trial, Accordingto his at for Klyap looked other in part might work because he felt the not contract. School honor the school, at an with interview another he told that school he already was under contract. any rate, August At on or about Dome Mountain Ranch position. Klyap Klyap
offered decided accept position. On August he informed School that he would returning not year though the 1998-99 even school classes were scheduled start on August 26. As a result of Klyap’s School, decision not to teach at the sought School to enforce the Klyap’s clause in teaching contract for stipulated $4,100, amount of 20% of the $20,500 salary. Klyap gave a check School administration but asked that it be deposited as there were insufficient funds in the Later, account. consulting family, Klyap after with stopped payment on the check as he did not believe the clause was enforceable. Klyap resigned, After attempted School to find another teacher take Klyap’s place. Although at the time that Klyap was offered his
contract the School potential had 80 applicants, two viable applicants Right remained started, available. before classes the School was able to hire one applicants, experienced teacher, of those a less $19,500. Finally, Klyap’s stop as a result of payment, brought School against Klyap suit to enforce the damages clause. After trial, bench determined the District Court the clause was enforceable agreed by because it was as demonstrated signed contract and qualified because the suffered the School 28-2-721, MCA, under as impractical extremely § difficult to fix. Specifically,the court found the Schoolsuffered because it had spend setting up committee, conducting additional time an interview interviews, new, training experienced teacher, reorganizing less the sports program. The District Court also found that all these
to fix costs. provision Jurisdiction and enforcement the individual contract District, through teacher reasonable Montana, County, Livingston, Park 6th Judicial with the being schedule, costs, interest, all liable for fees under above court attorney fees of the other School District and actions the court deems appropriate. jurisdiction any The on Court also has to award interest amount due appropriate. and other actions the court deems *5 away duties from the other school and administrative
activities took new teacher had for that time and that the missed that been scheduled year. Finally, court development training all earlier that the the staff in the commonly used Montana and that found that such clauses are against the other routinely equitably School enforced clause had appropriate steps After took concluding teachers. that the School in damages, judgment favor ofthe School mitigate its court awarded however, not, attorney $4,100. in The did award the amount of court costs, facts are fees, Klyap appeals. or now Further court interest. discussed below.
II. STANDARD OF REVIEW below, presents opportunity in this case an As discussed detail ¶10 clarify liquidated damages begin in regarding Montana. We law review, applied by setting applicable out the standard of which we have a explicitly Accordingly, past, in the but never stated. whether damages in a constitutes enforceable stipulated provision Lake penalty question an oflaw. liquidated damages or unenforceable (7th 1985), 769 F.2d Corp. River v. Carborundum Co. Cir. Therefore, underlying dispute, not in this when the facts are a of law review for correctness. determination is conclusion which we
III. DISCUSSION concluding damages clause Did the District Court err an liquidated contract was enforceable penalty? term rather than an unenforceable A. The Parties’ Positions penalty is a must be stricken Klyap asserts the clause which makes a support position, Klyap In of his
the contract this Court. arguments commonly against enforcement number of the offered First, under v. Rivera damages. Klyap argues that Weber liquidated specific there must be evidence a to enforce a when seeks negotiation regarding in a form contract because absence provision penalty. points He then to the fact implies the clause is a negotiation negotiate did specifically that the damages upon estimate breach reasonably here as to clause at issue so any told him one in the School’sadministration because no offering before other teachers about contracts. testimony Next, penalty the clause is a because Klyap asserts board, (Kinkie), Kinkie Druska a trustee on school indicated that purpose “prevent losing a at a clause was teacher late
period of Klyap argues testimony time.” of intent constitutes judicial dispositive of fact admission which this case because impose penalty. Kinkie admitted the School’s intent addition, damages” Klyap asserts the “no actual defense arguing any damages the School did not suffer because new teacher was hired year. for a lower before the start the school Finally, Klyap policy argument makes a provision such as the issue here should be considered a unreasonably oppressive in a profession already that is *6 very paying. low contrast, In presents arguments
¶15 School are commonly that in support offered of enforcement of provisions. For example, points the School out that while this Court has not had the opportunity liquidated to address a damages clause a teacher’s contract, a jurisdictions number of other provisions have found such addressing any valid requiring specific without or evidence of Educ. (Illl. negotiation. Citing 1981), Arduini v. Board App. Ct. of (Arduini 104, 109 I), N.E.2d grounds by rev’d on other Arduini Board Educ. (Ill. (Arduini 1982), II), argues N.E.2d 73 the School of at penalty clause issue here not a because the use of a percentage breaching of the damages teacher’s allows properly addition, to relative the skills of the teacher. In citing Unified (Kan. 1981), Sch. Dist. v. 626 P.2d the School DeWerff asserts the not penalty provides clause is it because for different damages depending on the of time breach. As a result of these methods of determining damages, the School asserts the clause is for payment performance a sum in lieu of rather than a penalty imposed to performance. secure response Klyap’s In to position on the School’s to insert intention a penalty, as the School asserts that Kinkie’s judicial
characterization the clause as a not a admission giving lay opinion because she was on person’s conclusion law. Further, points the School that out Kinkie testified the clause had two purposes: encourage signing teachers to “think twice” before prevent contract in June and period teachers from at a quitting late of time. response Klyap’s
¶17 damages” argument, “no actual the School points impractical extremely out that suffered that are fix, required by difficult to as as statute and found the District Finally, stipulated Court. argues School that the reasonableness of fact, contracting, time of not after the
damages must be viewed having logical due to the between estimate reasonable conflict being time in a situation where are and at same Therefore, extremely difficult fix. the School asserts impractical or properly stipulated damages clause as the District Court enforced striking penalty. the clause as a liquidated rather than arguments presented these to the We note here that findings of fact and conclusions of law. proposed District Court in their specifically the District Court did not address these already findings arguments other than its and conclusions above, present do determinations detailed we not District Court’s again. Liquidated Damages The the Law of
B. State of case, on precedent the instant our review of the addressing Before law disparity there is in our case on the this issue indicates apparent it is enforceability clauses. into disparity requires of this that we delve that reconciliation damages. history development To that law inquiry we now turn.
1. Freedom of Contract law tenet of modern contract is freedom The fundamental contract; mutually agree governing to terms their parties are free public do conflict with laws. private long as those terms conduct Pawnbrokers, Inc., 302, 22, MT See, B B e.g., ¶ Lewis v. & 82, 22, presumes This tenet ¶ Mont. ¶ in their own interest. to make decisions position the best court, by a the court interpretation of contract Normally, the course *7 in parties to the order to simply gives agreement effect the between Fritz, 251, MT Ophus v. 2000 private ¶ enforce the law of the contract. 1192, 447, 23, party one breaches 23, 301 P.3d 23. When ¶ ¶ Mont. contract, of the contract ensures the judicial enforcement the damages, compensation equal nonbreaching expectancy party receives See, performed.3 if party receive the contract were to what that would Canton, 309, 24, II, MT v. e.g., ¶ Riverview Homes Ltd. 24; Nierenberg, MT Conagra, Inc.
517, 24, 38 P.3d ¶ ¶ 27-1-311, By 55, 69, 369, 69. MCA. See also ¶ ¶ § Mont. ¶ damages damages than additional awarding expectancy rather only damages still suffered after the case where the 3Expectancy contract include damages, reasonably attempts mitigate nonbreaching party to this replacement a teacher. School hired punish breaching party intended to for perform the failure to the contract, court of private supports theory enforcement contracts the words, In party efficient breach. other if it is more efficient a a expectancy damages breach contract and a pay in order to enter contract, superior by requiring breaching courts will not interfere the party pay more than was due under their contract. Patton v. (7th Sys., 1988), Mid-Continent Inc. Cir. 841 F.2d are, Liquidated an theory, extension of these principles. breach, Rather than wait until parties occurrence of to a agree contract are free to a specific damage advance on amount paid upon LORD, CONTRACTS, to be breach. 24 RICHARDA. WlLLISTONON (4th 2002) (hereinafter CONTRACTS). 65:1 § ed. WlLLISTON ON This amount predetermine intended to expectancy damages. Ideally, predetermination agreement is intended make between parties more efficient. Rather a requiring post-breach inquiry than into breaching between the parties, party pays simply nonbreaching party stipulated amount. way, in this liquidated damages parties clauses allow to estimate that are impractical or prove, difficult expectancy courts cannot enforce proof. without sufficient However, theory when, reality clashes with after breach contract, parties ofthe believes the clause is far afield from nonbreaching party what the would be entitled to under damages.4 normal expectancy Consequently, when one of the judicial seeks determination stipulated damages on whether the clause in the penalty, constitutes courts forced into a simple different role than interpretation private and enforcement ofthe Instead, law of the step contract. must in and court decide whether will already agreed not it rewrite the contract parties by striking stipulated damages doing, penalty.5 clause as so they court its judgment initially substitutes for that ofthe when entered the contract. above, point. Klyap 4The case at bar is a As noted asserts School did case any damages
not suffer because was able find another teacher a lower before classes started. 5Originally, equitable powers courts exercised to strike receiving damages prevent clauses in order to in excess ofthe loss suffered Scott, Liquidated Damages, breach of contract. See Charles J. & Robert E. Goetz Compensation Principle: an Penalties the Just Some Notes on Model Enforcement (1977) Theory Breach, n.1,4 and a 77 COLUM. L. REV. 554-55 & of Efficient (hereinafter Goetz).
112 Damages Liquidated Enforcement of Judicial judicially rewriting foreign principle a is to the Because contract interpretation of of and to the court’s normal role of freedom contract damages, the law of expectancy and enforcement of history. Indeed, in Montana’s disparity a has somewhat tortured as only examples, numerous apparently case is of law inconsistencies. See subject many Kenneth on the note commentators Damages Sense Liquidated v. Penalties: or al., et W. Clarkson Clarkson) (hereinafter (“The Nonsense?, L. ablest WIS. Rev. they judges declared that felt themselves embarrassed have [distinguishing ascertaining principle on which the decisions Ruggles, penalties]... quoting founded.” liquidated damages from were (N.Y. 1854), Talmage 551); Goetz, J. in Cotheal v. N.Y. 554 & n.2. to a clause should be declared In order determine whether liquidated of attempt to measure the penalty, courts reasonableness obviously damages language Because of the clause clause. beyond analyze the contract to reasonableness. controlling, courts look 28-2-721, by damages, liquidated As indicated Montana’s statute on § 65:1, WlLLISTONONCONTRACTS, MCA,6 by including treatises § (1965) (hereinafter (SECOND) of RESTATEMENT OF CONTRACTS § 356), indicator of reasonableness RESTATEMENT threshold § impractical that damages type of are whether the situation involves prove. parties to the contract will extremely or difficult to When the damages, can assume there was a prove a court suffer difficult clause, because, as adding reasonable motive for mentioned, quantify damages can that a court could stipulated damages However, difficulty proof.7 because the not otherwise award lack of MCA, fixing liquidated damages 28-2-721, provision “When 6Section entitled valid,” reads: (1) damage paid Every by or other of to be which amount obligation is compensation anticipation a breach of an determined to be made for void, expressly provided except extent thereof is that (2). subsection (2) may agree upon amount shall be therein an which The to a contract when, damage presumed thereof amount of sustained a breach be an extremely case, impracticable difficult to fix the or the nature would damage. actual MCA, 28-2-721, are 7According language § extremely prove. impractical are or difficult allowed in a situation where consequently adopted the Field Code and in 1895 from Civil this section was any agree type principle situation can does not reflect the modem Goetz, & n. 22. freedom contract. See 559-60 a matter of below, qualifies Because, as a situation where the instant case as we discuss potential extremely prove, impractical not address this difficult to we need reasonableness, proof does not itself demonstrate *9 the of damages. courts must look further to amount treatises, damages According to RESTATEMENT 356 and other § damages parties anticipated be in to the must reasonable relation the in damages the was or relation to actual when executed resulting However, of value from the breach. these tests are limited for First, the anticipated damages a number of reasons. reasonableness of because, mentioned, can be difficult to determine the parties are usually Hence, damages prove. in a situation where are to difficult question subjective: of reasonableness becomes somewhat circular and can one meet a to proof anticipated how burden of demonstrate damages yet are reasonable and and at impractical prove difficult may same time? this proof theoretically possible, inevitably While be grounds provides disagreement fertile the parties. between Second, regarding damages the relation between actual and stipulated damages, already usually are before court party disparity because one asserts the great place. is too the first breaching argues stipulated The party damages often should not be nonbreaching any enforced because the did not party suffer actual damages. See, e.g., (1898), 484-85, Dyer 477, 52 P. O’Keefe (clause suffered). 196, 199 part because no actual Consequently, guidance provides rule little courts because a comparison stipulated damages of actual conclusory ignores prove damages. Finally, difficult because the language of 356 “or” anticipated uses to indicate either § actual RESTATEMENT reasonableness, can parties argue be used to determine over apply instance, which of the tests should to their case. For if a clause was contracting reasonable the time of but after unreasonable fact, upheld by must it be court penalty? as enforceable or struck as a Larry DiMatteo, See Theory Penalty: Eliminating A. A of Efficient (2000-01) 633, Liquidated Damages, Law 38 Am. Bus. L.J. (hereinafter DiMatteo) (noting proposed liquidated damages reforms the Uniform to satisfy Commercial Code Article 2 allow either test reasonableness). As a of clarity, inquire result this lack courts often into the 28-2-721, however, problem law intended to general statutory with § MCA. note that much of our We regarding contract is taken from the Code and as such Field Civil these statutes Debating codify generally al., See et common law. Andrew P. Morriss (2000). Late, Civil
Field Code 105 Years 61 Mont. L. Rev. 371 But see Deuninck v. West (1903), 261-62, Irrigation (damages Co. Mont. must Gallatin P. impractical fix); v. Willson 132 P. Clifton contracting intent of the at the time of in order to determine 65:11. Specifically, reasonableness. See WlLLISTON § CONTRACTS, ON parties negotiated courts look to whether at issue attempted in order parties actually whether estimate voluntary. if there bargaining process to determine was lack specific negotiation is often a of evidence of on the predrafted liquidated clause. form contracts with present special problem under this test because there is always negotiation. strike all simply a lack evidence Courts cannot stipulated lack damages clauses form contracts based on negotiation widely used, the because such contracts are terms are often reasonable, necessary provide and the contracts efficiencies to the everyday Consequently, the conduct of business. intent test has limited usefulness well. intent, there is evidence of courts look to whether one
¶28 When parties specifically penalize intended to the other for breach provide for an performance simply order to secure their rather than *10 designed properly compensate for failure perform. amount rule, unfairly Under this clauses declared in terrorem for Goetz, However, forcing performance. See as WlLLISTON ON out, points Contracts contract, nature, [D]amages by induce for breach of their undertakings.... performance [Mjerely of contractual because damages provision performance of a contract liquidated induces penalty; only it is it induces does not make the clause a when performance illegitimately, when amount is as reasonably anticipated disproportionately large relative to the (or probable damages jurisdictions, in some relative to the actual suffered) making performance by so that is coerced unreasonably costly. breach Therefore, parties usually 65:1. because § CONTRACTS, WlLLISTON ON damages, courts
prefer performance payment of a contract over legitimate liquidated as use of simply cannot strike in terrorem performance to induce when evidence demonstrates Rather, performance. other evidence of intended secure above, show a unreasonableness, is needed to such that discussed penalty. clause is a example of the good are a particularly Personal service contracts declaring only on intent.
shortcomings of a clause in terrorem based performance induce Liquidated personal in a service contract if the by compensation employer to an employee by predetermining an clearly by employer performance employee prefers leaves. hire. The specific employee because that was chosen for employee in the rule performance person for is reflected preference specific assignable. not personal service contracts are personal specific performance, are not service contracts enforceable Kramer, 11, 16, Reier Co. 2003 MT ¶¶ ¶¶ Broad. v. 11, 16, 16, liquidated damages appropriate are an ¶¶ way employers protect for their interests. See United States Martin (C.D. 1989), 271, 275 F.Supp. (liquidated damages personal Cal. involuntary monetary service servitude but Therefore, compensation damages). declaring for contract such a clause legitimate in terrorem can remove an employer’s efforts secure performance by specific employee. Finally, operates courts also look to how the clause as an indicator For example, reasonableness. courts look at whether
provides for regard materiality the same without to the penalizes delay payment. breach or whether the clause mere (1889), 154, 164-66, Wibaux v. Grinnell Live-Stock P. Co. Mont. (no provision partial converts breach a penalty); Comphealth, Highland Outpatient Surgical Inc. v. View (substantial Ctr. 366, 369, 783 1385, 1388 P.2d rather compliance than full provisions with cancellation to prevent sufficient however, award of damages). Again, failings these tests have as well in that clauses be penalties. reasonable can declared See DiMatteo, (discussing 657-706 the inefficient results under the various tests). end The result of these may rule variations is that a clause test,
reasonable under one but under unreasonable another. oftentimes, Consequently, bar, parties disagree in the case apply addition, about what tests to the contract at issue. In dispute proof who has the burden of question even whether the direction, one of fact or law. To add to the lack of tend to courts discuss the test under which the clause in that case is held to abe *11 penalty, assessing rather than perspective. the clause under each In sum, these various tests and others result in law inconsistencies liquidated damages exception. of and is To jurisprudence Montana’s no illustrate, we turn subject. now to Montana’s case law on the Liquidated Damages
3. Montana Case Law on addressing liquidated damages While our first case dates back to 1868, (1868), 133, seeBautz v. the first modern case Kuhworth thoroughly discussing analyzing liquidated damages length and at Montana, Morgen Big Sky Co. & Oswood Constr. Inc. of Morgen P.2d 1017.8 a contract for the Mont. involved Upon Morgen’s construction of condominiums near a ski resort. construction, Big Sky payment held from the final completion back day delay agreed completion per after the $500 per Morgen payment contract terms. refused this final and sued date as at P.2d at 1022. price. Morgen, for the full contract Big holding by In clause was enforceable Sky, essentially discussed we set out a rule that embodies all tests above. We stated: provided provision imposed penalty, forfeiture
Whether the damages, language be from the and liquidated determined contract, subj parties and ect matter ofthe the evident intent ofthe all facts and circumstances under which the contract was facts to considered are whether the important made. The most be ascertain, stipulated whether the damages were difficult to damages probable amount is a reasonable estimate of or is damage at reasonably proportionate to the actual sustained time of the breach. omitted). (citation
Morgen,
¶36
made,” including
difficulty
proof,
under which the contract was
the
anticipated
compared
the amount of
actual
liquidated damages,
negotiation
the evidence of actual
and intent ofthe
parties,
bargaining process
and the nature of the
between
two
parties,
holding Morgen represent
the facts and
ideal
liquidated damages under the
principle
freedom of contract. The
parties Morgen
negotiated
predetermined
with full information and
damage
by
upheld
amount which was
the courts.
The next
addressing
damages,
brief,
two cases
while
Morgen
consistent with
even
Morgen
though
is not cited. Erickson v.
(1985),
350, 359,
1332,
First Nat’l Bank
1338,
Mont.
697 P.2d
default,
addressed a
for deed
provided
upon
any
which
payments already made under
the contract
would
considered
liquidated damages for
upholding
reasonable rental value. In
clause,
“If,
stated,
fact,
we
liquidated damages approximate those
actually suffered,
Erickson,
the amount is reasonable.”
if the tenants did not vacate a date upon by Again, upon parties. we held clause was reasonable and enforceable because it amounted to than actual as shown less agreed the market value annual lease as between the parties, agreement property because the detailed what use of the for, pay
holdover rent
intended to
and because
terms reflected
was
parties’
bargaining.
actual
intent as demonstrated
Following Morgen, Erickson,
Ruegsegger,
precedent
our
took
turns,
away
Morgen Daugherty
first
Co. v.
two dramatic
Cattle
(1992),
General Constr. Co.
then back
again in
P.2d
Weberv. Rivera
which
Daugherty,
we addressed another contract for deed
*13
already made under the contract to be considered
required payments
Citing
liquidated damages
upon
rental
default.
reasonable
value
Erickson,
buyer argued
the
actual
in
form of
that
the
to
in order to determine
reasonable rental value had
be considered
$385,447.50
$857,000.00
in
principal payments
whether the
in
and
buyer
already paid during
approximately
years
interest
the
ten
the
was
a
possession
penalty
in
should be considered
relative to the contract
$1,195,000.00. However,
Morgen’s
in
on
price of
contrast
reliance
difficulty
proof,
anticipated damages,
evidence of
actual and
intent,
summary
Daugherty
grant
district court’s
affirmed the
necessary to
judgment. Specifically,Daugherty held that it was not
hear
in
evidence on the reasonable rental value
order to determine whether
Regarding
the
clause was reasonable.
Erickson’s
damages, Daugherty stated the rule
comparison
reliance on a
to actual
mandatory
judicial
require
was not
because Erickson “does not
a
forfeited was a reasonable rental
determination
amount
Daugherty,
at
P.2d at 564.
[value].”
Daugherty
Morgen.
did not cite or discuss
the facts set forth
Daugherty recognize
negotiation
in
between
both that there was actual
parties’
relatively equal bargaining power.
and that the
had
parties
upheld
statements that
Daugherty also
the district court’s
language of the
inquire into the actual
would defeat the
summary
upheld a
point,
Daugherty
contract. More to the
because
genuine
held that there are no
judgment ruling,
opinion
in effect
in
a
fact involved
the determination
whether
issues of material
a
penalty.
should be declared
Weber,
sharply departed
Only
later in
we
three months
Weber,
a
citing
discussing it. In
we considered
Daugherty without
provided for
purchase
which
form contract used to memorialize land
damages. Citing the “all the
price
purchase
10% of the
made” rule from
circumstances under which the contract was
facts and
there was no
provision
penalty
was a
Morgen, we held the
reasonably
damages.
anticipated
estimate
attempt by
parties
was used and both
Specifically,
noted that because form contract
we
purchase price
testified that no one knew how 10% of the
was
chosen,
negotiation
evidence
there was no
of actual
between
attempt
damages.
estimate
We also held
reasonably
there was no
so
provision
the sellers to the same
because it entitled
Weber,
they attempted mitigate
whether
or not.
amount
200-01,
Wendy’s
Larsen
"[A]ny relationship between the amount of actual merely suffered and amount specified provision fortuitous coincidence and not the result of a reasonable estimate advance might to determine what the be. The fact that the liquidated damage provision may approximate case suffered, actual damages is insufficient create a itself to valid liquidated damages provision. Our decision in ... makes it Morgen clear that factors other must also be considered.” Weber, Therefore, 255 Mont. at by rejecting P.2d at *14 test, damages actual proposition Weberstands for the evidence that of bargaining required actual the between for form contracts. Weber, damages After next liquidated holding Story the occurred in City 207, 227-28, 856 202, 214-15, P.2d of Bozeman involving another a delay damages case liquidated construction issue, provision. substantively Rather than consider the clause at this provision penalty purely Court disallowed the as a matter a as proof. party seeking burden of Because the to clause enforce the failed present any that proof damages extremely to were difficult or impracticable damages to ascertain or that provision the the were light anticipated damages, reasonable in of either or actual we held the penalty. Story, clause was a at P.2d at 215. Therefore, Story Daugherty Morgen also contrasts with and because simply relying language Daugherty rather than on the contract like considering bargaining process the the parties nature between Morgen, Story any like holds that into a inquiry beyond requires language evidence the of the contract. virtually requirement guarantees genuine that of material issues preclude summary judgment contrary holding fact would to Daugherty9. demonstrates, required As this both precedent discussion our has ignored damages type that be of difficult to completely proof
and ascertain; proof damages has relied on actual to show rejected proof damages and it has of actual show reasonableness reasonableness; bargaining only one it has considered actual factor finally, bargaining required; considered and it has held actual be damages penalty/liquidated it has considered the issue as that interpretation. and that is on requires evidence also one based sum, precedent liquidated on has numerous our application that make of a uniform rule elusive inconsistencies best. Yet, and presented provide in order to resolve the issue direction to contracting disparities we must resolve the in our case law. To parties, that task turn. we now Unconscionability consider, represent requirements The cases that above courts degrees, difficulty damages, anticipated
varying proof negotiation intent or actual between the damages, actual evidence of parties. bargaining process nature of the parties, between above, However, already discussed when actual difficult requiring proof of actual to demonstrate prove, nonbreaching in an unfair and puts reasonableness untenable Further, requiring proof efficiency having such position. defeats Story, Indeed, by any place. such a clause in the first rule from automatically requiring from clause are lost gained efficiencies may any proof. Further, there evidence actual extensive due use of negotiation to the common form between addition, anything, proof than of actual contracts. In more simply way to be convenient and comfortable for court end seems the clause regarding damages provision the debate expectancy damages normally that a court approximates the would time, same the idea Daugherty represents At the anyway. enforce language parties. simply the court enforce the contract between ignores presented issue approach simply such an a court. clauses, Story, Yellowstone 9Since two cases have considered *15 41, 223, 70, Co., II, 70, Group, ¶ MT ¶ v. First Am. Title Ins. 2001 II Dev. Inc. Canton, 309, 21, 755, ¶ 2001 MT 307 and Riverview Homes Ltd. v. ¶ 20 P.3d 517, 21, of these are relevant to the ¶ P.3d neither cases ¶ Mont. issue here because both interpretation straightforward cases in which the are respective language simply interpreted the contract to see if and how the the court provisions applied. even cases, reviewing jurisdictions After these cases from other writing subject, way academic on the we conclude that proper analyze liquidated damages resolve above inconsistencies is to clauses from perspective or not the clause whether as indicated bargaining process unconscionable the nature of the parties. Unconscionability between the prong involves a two determination: whether the clause fits the doctrine of contract of adhesion such that the bargaining party meaningful weaker had no regarding choice acceptance of the provisions and whether unreasonably drafter, contractual terms are usually favorable to the party superior bargaining power. Direct, with Iwen v. U.S. West 27-31, MT 27- ¶¶ ¶¶ 27-31. ¶¶ unreasonably Whether or not the clause is favorable to the drafter in turn inquiry involves an into whether the clause is within the expectations reasonable party unduly ofthe weaker oppressive party. Iwen, the weaker persuaded 27. We are unconscionability ¶ that analysis provides proper framework for a number of reasons. First, above, as outlined principle of freedom of contract holds that position themselves are in the best to determine the terms of a contract get because the are free to information and bargain private law of the contract in their own interest. Under unconscionability, only a court will strike a contract term if the bargaining process itself had some actually inherent unfairness that prevented freely the contract from being negotiated and thus defeated the principle Indeed, of freedom of contract. modem commentators on subject of liquidated damages unconscionability assert that should exception to court enforcement of DiMatteo, 733; Goetz, clauses.10 594; Brizzee, See Liquidated David Damages Penalty Reassessment, and the Rule: A 1991 BYU L. Rev. (hereinafter Brizzee). 1613, 1631-32 providing In addition to clear precedent contracting parties, for point the commentators out that a presumption inevitably of enforcement proper damages will award nonbreaching fulfill efficiency the promise will that bring. DiMatteo, 655-706, 733; Goetz, can See 579- 94; Clarkson, 357-78; Brizzee, Using analysis, 1617-31. economic leading authors also assert that appropriate way enforcement is the provide for impractical or difficult to fix. Id. Given presumption enforcement, unconscionability looks at whether 10This, course, assumes that courts also not will enforce contracts void illegality public contradiction laws. *16 bargaining warped a of the
“[ojppression disparity power” and step the that a court should negotiation process between such v. disputed in and the contract term. Estate Michael Glacier reform of (1994), 272, P.2d 275. If Co. Gen. Assurance found, grounded declaring is a a oppression unfair court is then well penalty. a clause to be Second, approach is unconscionability analysis proper the because
¶50
initially
liquidated damages.
fact
the
of
Courts
already
it in
mirrors
law
damages
equitable power
exercised
to strike
clauses when a
set
that
and
powerful party
power
more
used its
terms
were unfair
Goetz,
parallel
penalties
That
recovery.
allowed double
554-55.
between
unconscionability
today’s
lives on in
case law. When courts look at
negotiation
ofintent and actual
between two
to decide
evidence
looking
courts
at whether the
penalty,
simply
if a clause
a
bargaining process
the weaker
oppressive
was free or
whether
party
meaningful
negotiate
a
terms. Whether
opportunity
had
damages
prove,
negotiation
actual
would be difficult to
whether
occurred,
approximate
anticipated
and whether or not actual
simply
bargaining process
are all
evidence ofwhether the
was
principle
with the
of freedom of contract such that the term
consistent
party.
expectations
the
of the weaker
was within
reasonable
inconsistent,
above,
show
seemingly
The cases discussed
while
also
¶51
unconscionability analysis
is at the heart
the law of
that
underlying
each of those cases demonstrate an
Daugherty, though
Even in
bargaining process.
concern with the
damages,
did not hear evidence on the issue
actual
trial court
apparent
make it
contract itself was
facts of
case
negotiated
sophisticated parties, neither of which could
between two
establishing
also,
advantage
the contract terms. See
take
other
30-2-320,
30-2-718, MCA, and
MCA.
§
§
Third, by
perspective
approaching liquidated
rely
our
unconscionability,
questions
future
can
on
on form
unconscionability jurisprudence. Specifically, precedence
contracts,
in the case
personal
present
service
issues both
contracts and
bar,
on
fairness of the
guidance
this Court with
provide
See,
&
e.g.,
Piper, Jaffray Hopwood,
Inc.
bargaining process.
Chor
omitted)
(citation
143, 150, 862 P.2d
(“Contracts
agreement,
a standardized form
of adhesion arise when
bargaining power, is
usually
party having superior
drafted
reject
accept
to a
choice is either
presented
party, whose
terms.”)
negotiate
its
opportunity
contract without
bargaining process,
Finally, by focusing on the fairness
likely
debate,
courts will less
be drawn into an “after the fact”
frequently
liquidated damages
situation which
occurs with
clauses.
And, mentioned,
inherently
enforcement of
fair
in fact
contracts will
provide
impractical
prove.
that are
Accordingly,
today,
under the rule
adopt
we
presumed
clauses are
party seeking
enforceable.
to avoid
proving
clause has the burden of
the clause is
unconscionable. As
result,
Story,
we overrule
is an issue of here as a to facts and not issues of law. DeMars v. the School clause asserts Kinkie’s characterization of the binding judicial is not on tms Court because admissions are limited (1997), 334, 338, 948 285 Mont. P.2d Carlstrom 246, 249 making holding note in this that it is not intended to We also 28-1-104, MCA,12 issue, address forfeiture under because that § deed, properly in contracts for is not us. particularly presented before See, (1913), e.g., Cook-Reynolds Chipman Co. v. 133 P. clause considered struck down (liquidated enforceable but statute.) anyway under anti-forfeiture Arrowhead-Klyap Teaching
C. The Contract Having unconscionability guide determined that will our review of issues, address the case at bar. Unlike we now claims employee wage liquidated damages, Region for Stewart v. II see 88, 94, Family Child & Servs. 39-3-407, MCA, 39-3-206, MCA),
(citing
have never
we
§
§
personal
addressed a
clause in a
service contract
Accordingly,
analogous
Montana.
we
consider
clauses that have
will
jurisdictions.
DeWerff,
been addressed in other
See
interpreted
require
remand to the District Court because the contract
at issue here is a form contract
negotiation
and there was no evidence of
parties.
unconscionability
between the
require
does not
automatically
Rather,
form contracts are
unacceptable.
such contracts
if
unconscionable
the terms are not within the reasonable
expectation
negotiate.
who had no opportunity to
Accordingly,
second,
difficult,
we turn to the
question
and more
whether the
Klyap’s
clause in
contract was within
Klyap’s
expectations
reasonable
unduly oppressive
or was
to Klyap.
This inquiry incorporates
damages inquiry into whether
or not the clause is in
performance
terrorem to force
rather
than
acceptable damages,
fix,
estimate
whether
were difficult
whether the
approximated
damages.
actual
See
(La.
Salon,
Jay
1983),
John
Esthetic
Inc. v.
App.
Woods
Ct.
435 So.2d
($25,000.00 liquidated damages
for hairdresser
struck as
employer
advantage
“vastly superior bargaining
took
power”
figure
to set
so “unrealistic and unreasonable
that it cannot be
good
pre-estimate
considered a
faith
probable damages.”)
Our
jurisdictions
review of cases from other
indicates that such
teaching
always
clauses in
contracts have almost
been enforced as
(clause
DeWerff,
required payment
reasonable. See
126 (Fla. ($100 1972), County Lee Bd. Pub. Instruction 260 So.2d negotiated stoppage); of end to liquidated damages part as work (4% 1979). 1, 418 fact, salary Arduini at 106 In our $716 N.E.2d a clause struck down as research found one case which was (Iowa 1923), Independent Dudley Sch. v. 192 N.W. unreasonable. Dist. (clause salary that amounted to or 25% of struck as $200 1923). penalty in unconscionable teaching the Schoolin this case introduced other contracts
¶64 in Montana with clauses to show the clauses are teachers in Montana. These expectations within the reasonable clause, teaching contracts included an Ashland contract with a 15% clause, and a Creek teaching Havre contract with a 10% Willow contract with a clause. Schoolstaff also testified that the clause $350.00 of a was included in the Arrowhead contract the recommendation representative of the Montana School Board Association who also testimony regarding specific testified. there was no how figure of was chosen. 20% As is evident from the above cases and the other Montana evidence,
contracts introduced as none of the enforced salary. contrast, damages provisions go high of a teacher’s In 20% Therefore, Dudley penalty. case struck a clause as 25% Klyap’s spectrum falls in the we must determine where 20% clause expectations. reasonable so, governing employer the normal rule doing In we note that by employee employer an is that an is entitled to for breach under obtaining equivalent promised
the cost of other services to those (Ill. Noffsinger App. the contract. Med+Plus Neck & Back Pain Ctr. v. contrast, 2000), if it is more efficient for an Ct. 726 N.E.2d a contract in order to take other employee teacher breach breach, nothing employment, fulfilling principle thus of efficient Educ. doing Handicapped that teacher from so. See Children’s prohibits (efficient (Wis. 1983), 332 N.W.2d breach Bd. Lukaszewski (Mo. teacher); App. Myers-Goldberg Neckwear Co. v. Grossman (defendant reason that he 1912), quit 151 S.W. “for the sole concern.”). higher employment at a rate another was offered expectations to Klyap’s within reasonable Consequently, was obtaining School for the costs of a teacher who would compensate the Klyap’s to his own. It was also within provide equivalent services would agree that he to a contract that expectations reasonable pay a sum certain in reasonably economically feasible to breach and to end the contract. order case, we hold that while reviewing After the facts of this most, definitely
20% clause is harsher than it is Klyap’s expectations unduly still within reasonable and is not First, oppressive. pointed during testimony, as the School out at such a small part depending schoolteachers are chosen in on how their skills *20 Therefore, compliment finding those ofthe other teachers. someone who provide equivalent would services Klyap at such a late date would be virtually impossible. difficulty This was born out when two applicants remained available and the School hired a teacher who was teacher, less experienced Klyap. than As a especially one with experience teaching very School, at Klyap that would have be aware of the problem finding equivalent pose. services would Second, services, equivalent besides the loss of ¶69 the Schoollost time preparation for for other activities in order to attempt equivalent to find noted, services. As the District Court the Schoolhad to spend additional time setting up an interview conducting committee and interviews. Further, the new teacher missed all the staff development training year earlier that so training individual required. finally, was And because Klyap sports was essential to the program, the School had to spend reorganizing additional time sports program sport as had to be eliminated Klyap’s with loss. These away activities all took the other school and administrative duties that had been scheduled for that concluded, time. as the District Court equivalent loss of services and lost time are types damages impractical and difficult to quantify. Again, because Klyap was a teacher and because he initiated parts sports of the program, it was his expectations within reasonable to know the School types would suffer these prove difficult to departure. as result of his Finally, although the ¶70 School testified it had an intent to secure performance and damages by clause, avoid the above reason of the above, discussed such an intent does not turn a clause into a unless the amount is unreasonably large and therefore expectations. not within reasonable Klyap Given that would importance understand the committing employment of a teacher for year least the duration of a give school in order to students continuity given probable damages the School’s were within Klyap’s expectations, salary reasonable we conclude that the 20% figure Klyap’s was within expectations reasonable as an estimation of damages the School would incur. Therefore, Klyap because as a teacher would know teachers are
typically employed year for an entire school and would know how replace school, difficult it is to equivalent services at such a small rural it was within Klyap’s expectations agree reasonable to a contract so liquidated provision departure
with 20% year. close to the start of the school sum, although Klyap meaningful regarding had no choice damages provision, the clause itself is still not Klyap’s
unconscionable because 20% amount was within reasonable expectations employment as a teacher familiar with the needs of the School and the suffer upon School would breach determined Accordingly, correctly contract. hold the we District Court provision that the was enforceable.
IV. CONCLUSION correctly Because the District Court determined the Klyap clause of the contract and the School was between enforceable liquidated damages provision, we affirm. COTTER, JUSTICES RICE and REGNIER concur. TUCKER, specially
DISTRICT COURT JUDGE LOREN concurring. I concur in the result reached the Court but not in all of the
reasoning. *21 By statute, liquidated damages are authorized in situations in
¶75 liquidated which actual are difficult to determine. The bring certainty provision designed is to uncertain parties position circumstances. The to the contract are in the best contracting party that determination. Neither a nor the Court make uncertainty by should allowed to recreate after the fact second guessing agreed terms. agreement a contract of an issue Whether adhesion is
¶76 agreed damages. separate liquidated from whether the have analyzed every liquidated damages in case. It This issue need not be only by pleadings. should be considered raised when reasons, by majority. For I concur the result reached these with ¶77 part dissenting part. in concurring CHIEF JUSTICE GRAY and dissent, respectfully I concur in the result the Court reaches. I ¶78 however, by appeal. the Court to resolve this approach from the used past sets forth our appreciate I the care with which Court Moreover, fully support I liquidated decisions in the arena. years “square away” inconsistent or this Court’s efforts in recent authority ongoing difficulties parallel lines of which cause by generally, properly, and trial courts. and do so practitioners We why authority preferable overruling line of and other analyzing See, e.g., cases, part, are inconsistent therewith. in whole or which Elec., 29, 193, 64 Quantum Schaeffer, v. 2003 MT 314 Mont. P.3d Inc.
129 252, 139, 900; 1026; Hardaway, v. MT 36 P.3d In State 2001 307 Mont. 178, Bradshaw, 92, 211; MT 24 305 Mont. P.3d State re Estate 2001 288, view, Montoya, 180, my 1999 MT Mont. 937. In v. 295 983 P.2d we in the approach present should continue that case. Here, “square away” inconsistent lines of Court does
authority. not, 46, and It does as it indicates at 19 resolve the ¶¶ Instead, liquidated damages. in our on the Court disparities case law the liquidated damages statute and our case leaves behind, entirely an and creates new approach law incorporating settings, case law from other contract “cases jurisdictions subject[.]” writing other and academic on agree. party argued I cannot this approach Neither or briefed either the District I stated many Court or Court. As have times before, I believe it is and inappropriate unwise for this Court to create is, an apply approach new issue in a vacuum-that without full ¶ See, State, argument e.g., 32, parties. 35, from the Mallak v. 2002 MT 314, 794, C.J., 32, 308 Mont. 42 (Gray, dissenting); P.3d 32 ¶ ¶ re Parenting of J.N.P., 120, 30-33, 30-33, 351, 2001 MT 305 Mont. ¶¶ ¶¶ 953, (Gray, C.J., LaMere, 27 P.3d 30-33 State v. dissenting); ¶¶ 2000 45, 79-82, 358, 79-82, 204, MT 298 Mont. 2 (Gray, ¶¶ P.3d 79-82 ¶¶ ¶¶ J., specially concurring); Worrall, 55, 61-64, v. MT State ¶¶ 439, 968, 61-64, (Gray, J., Mont. concurring 976 P.2d 61-64 ¶¶ ¶¶ dissenting); Schell, 40, 47-50, Craig 323, v. 1999 MT 293 Mont. ¶¶ ¶¶ 47-50, 820, J., 975 P.2d (Gray, dissenting). 47-50 For this Court to ¶¶ proceed ignores such a fashion not whose case is ignores us on appeal, before fact findings also and conclusions of law entered the trial courts we are supposed whose work to be reviewing. refusing How can we issue theory reconcile to address an raised
by party appeal-see, Bryan for the first e.g., time on Yellowstone Co. 2, 264, 19, 257, 19, Elem. Sch. Dist. No. MT 312 Mont. 60 P.3d ¶ ¶ 19; 381, McKittrick, 250, 31-32, Bekkedahl v. 2002 MT ¶ ¶¶ 31-32, 175, 31-32; Bradshaw, In re ¶¶ Estate ¶¶ 33, 305 33, 24 211, 33; Virginia MT Mont. P.3d Pearson v. ¶ ¶ ¶ Ass’n, 57-58, 57-58, City Ranches 2000 MT ¶¶ ¶¶ *22 688, 379, 30, 303 507, 57-58; Stewart, P.2d State v. 2000 MT Mont. ¶¶ ¶ Co., 30, 391, 30; P.3d and Engineering 16 Arrow Tank ¶ ¶ Baldauf v. 81, 48, 107, 166, 48; 48, v. 1999 MT 294 Mont. 979 P.2d State ¶ ¶ ¶ 468, 133, 19-20, 294 509, 19-20, Brown, 1999 MT Mont. 982 P.2d ¶¶ ¶¶ 18, 19-20; Barrett, 594, 18, 254, 1999 MT 295 Mont. Johnson v. ¶¶ ¶ ¶ 925, 18; Sattler, 57, 47-48, MT 288 Mont. ¶¶ 983 P.3d State v. 1998 ¶ 130 79, 47-48, 54, 47-48; Easley, 956 P.2d Industries v. 1998 ¶¶ ¶¶ Unified 145, 15-18, 255, 15-18, 100, 15-18;
MT 289 961 P.2d Mont. ¶¶ ¶¶ ¶¶ 31, (1997), 25, 955, 958-59; State v. 284 Mont. 943 P.2d Jones v. Adams 341, (1996), 347, 9, 13; City Billings 279 Mont. 927 P.2d Buhr v. (1994), 237-38, 381, County 223, Flathead Mont. 886 P.2d 389- 268 raising entirely approach question 90-with an new to a of law ourselves applying pending appeal? and then to a How can we reconcile authority requiring arguments appeal to advance their on arguments supported-see, g., e. refusing and to consider not so Rule 23(a)(4), Inc., 31, 14, v. Winter MT M.R.App.P.; Sports, ¶ Saari 2003 212, 1038, ¶ 14; 14, Strauss, 195, Mont. 64 MT 314 P.3d State v. 2003 ¶ 51, 1, 51, 1052, 51; Marriage Clark, 317 In re Mont. 74 P.3d ¶ ¶ ¶ of 25; 25, 327, 168, 25, 1228, MT 316 P.3d In ¶ 2003 Mont. 71 re ¶ ¶ McMahon, 198, 5-6, 5-6, Marriage 175, 2002 MT 311 Mont. 53 ¶¶ ¶¶ 5-6; 304, 20, re MT 1266, Spencer, P.3d 2002 313 Estate ¶¶ ¶ 40, 20, 1160, 20; Mont. 59 P.3d ex rel. Mazurek v. District ¶ State ¶ Court, 266, 31, 166, 31; 31, 39, Mont. 22 P.3d 2000 MT 302 State ¶ ¶ ¶ 60, 490, 21, 983, Anderson, 21, 293 21; MT 977 v. 1999 Mont. P.2d ¶ ¶ ¶ Court, 344, 35, 371, ex v. MT 292 Mont. ¶ State rel. Booth District 1998 35, 325, 35; 69, 76, (1997), 972 v. Sol 282 Mont. 936 P.2d P.2d State ¶ ¶ 307, 311; (1997), v. Mont. Rieman Anderson P.2d (1997), 1122, 1126-27; 159, 163, v. Small Good P.2d (1997), 449, 461, 1260; 948 P.2d State Carter ignoring arguments and parties’ supported striking 1180-with then simply on “new law? I improved” approach out our own and trial having apply cannot understand rules and courts to the kinds of rules. refusing and to hold ourselves same obligation filed in on “[I]t is our to decide cases this Court argument parties.” raised State v. Zabawa basis the issues 307, 318, (Nelson, J., specially Mont. case, just I do I would concurring). present In the would that. line reinvigorate Morgen line of cases as the better reasoned case, it to relating liquidated damages, apply precedent Thus, dissenting from the District Court on that basis. while affirm rationale, Court’s I concur in the result reached. concurring. specially
JUSTICE NELSON majority Opinion properly The asserts the fails resolve dissent authority approach and raises a new our lines inconsistent taken for five presented on This criticism is well question appeal. reasons. strongly First, approach appeal. Klyap Klyap did raise this on
urged this Court consider clause “oppressive” because it is and because it is “more line unenforceable agreement.” eighteenth century an indentured servitude with Unconscionability simply proper legal is term used to characterize argument that contract term should be stricken a court due to process. bargaining Accordingly, fundamental unfairness carefully Opinion actually considers or not the clause is whether unconscionable. Second, apparent Opinion, as is from the lack of discussion findings trial court made minimal of fact and conclusions of law Rather,
regarding presented. simply the issue trial court made conclusory statements that the contract clause did violate the reasoning why statute. The court failed to as to it articulate drew the it conclusions of law reached. the District Court did not Therefore, address the in our disparity Opinion way case law. no ignores or fails to review the District Court’s conclusions of law. Third, explain the dissent does not how the reached result is applicable Morgen under Specifically,
correct line of cases. as Klyap Weber, argues, under the clause at issue here should be stricken is a no form with evidence entered as to how the Yet, amount of the Opinion 20% of was chosen. discusses at length, encouraging performance legitimate is a use of a by an employer. Accordingly, clause wish School’s encourage performance by contracting enough teachers is not reason Rather, length, alone strike the clause. as the at Opinion considers we have to consider encourages performance whether unfairly by taking advantage a superior bargaining position. Fourth, I approach. disagree. the dissent this is a new believes
Rather, approach way our issue simply discussing that our reasoning practitioners reveals trial courts, presenting rather than a result-oriented decision that continues disparity in our case law. Fifth, provides exactly our resolution the kind of clear direction contracting parties conducting in Montana need business law, regardless regarding liquidated damages present clauses. Our case statute, confusing inconsistent and best.