Liquidated damages provisions in California Business and Real Estate contracts are an attempt to establish ahead of time what the damages for breach would be. Rather than have to prove to a judge what the damages are, the parties agree to what they would be. There are specific statutory restrictions for residential real estate contracts, but other agreements are governed by a more general rule that any penalty must bear a proportional relationship to the damages the might actually result from a breach. In addition, they must be reasonable under the circumstances that existed at the time the contract was entered. Any provision by which money or property is forfeited without regard to the actual damages would be an unenforceable penalty. Sacramento real estate and business attorneys see the issue pop up often in settlement agreements that require future performance – the plaintiff wants leverage to force the defendant to perform. In one decision it was clear that the plaintiff went too far, and the court found the leverage to be an unenforceable penalty provision.
In Greentree Financial Group, Inc. v. Execute Sports, Inc., Greentree Financial had a contract to provide financial advisory services to Execute Sports. Greentree sued because Execute failed to pay $45,000 in fees. Execute claimed prior breach of the contract by Greentree. On the day of trial they filed a notice of settlement.
The Stipulation for Settlement provides that Execute would pay Greentree a total of $20,000, in two installments. If Execute defaulted on either one of its installment payments, Greentree would be entitled to “immediately have Judgment entered against [Execute] for all amounts prayed as set forth in [Greentree]’s Complaint in the above-entitled action, including interest, attorney fees and costs, less any amounts already paid by [Execute]”