No Liquidated Damages for Missing Settlement Payment

Michele Trausch
April 27, 2014

If you settle a case with payments over time, you will want to be aware of the ruling in Purcell v. Schweitzer.

Defendant owed $85,000 on a promissory note. Plaintiff sued. The parties settled with defendant agreeing to pay a total of $38,000 in 24 installments. The settlement provided that if defendant failed to make a payment on time, the entire $85,000 would be due. A stipulated judgment to this effect was part of the settlement. The stipulated judgment asserted that a judgment of $85,000 would be neither a penalty nor a forfeiture. Defendant waived the right to appeal from the stipulated judgment as well as any right to contest or set it aside.

Defendant missed a payment. Plaintiff obtained a default judgment for the entire amount, less the payments defendant had actually made.

On motion, the court set aside the default judgment, holding that the amount of the judgment bore no reasonable relationship to the amount of damages plaintiff actually suffered as a result of defendant’s breach. The agreement as drafted violated public policy. The relevant breach at issue was breach of the settlement agreement, not the breach of the original promissory note. Allowing entry of judgment for the higher amount was effectively a liquidated damages clause and, as such, an unenforceable penalty under Civil Code section 1671.

Query: Would the stipulated judgment have been effective if plaintiff hadn’t tried to assert that it was some sort of liquidated damages provision? Greentree v. Execute Sports (2008) 163 CA 495, 500 seem to answer the question negatively. Under Civil Code section 1671(b) a liquidated damages clause constitutes an unenforceable penalty “ if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach.”