Brief Fact Summary. A stipulated damages clause in an employment contract was challenged as being invalid.
Synopsis of Rule of Law. In considering the validity of a stipulated damages clause, a court must determine "whether the clause is reasonable under the totality of circumstances."
Issue. Is the validity of a stipulated damage clause a question of law for the judge rather than a mixed question of law and fact for the jury?
• What test should be applied to determine whether a stipulated damage clause is enforceable?
Held. It is a question for the judge because it is a matter of public policy. Further, "[t]he trial judge, not the jury, determines these facts and inferences. In deciding whether a stipulated damages clause is valid, then, the trial judge should inquire into all relevant circumstances, including such matters as the existence and extent of the anticipated and actual injury to the nonbreaching party."
• The test that courts should apply is one of reasonableness. In other words, "whether the clause is reasonable under the totality of circumstances." The court then lays out various policies supporters and detractors of stipulated damages reply upon. As one commentator has observed, "[t]he reasonableness test strikes a balance between the two competing sets of policies by ensuring that the court respects the parties' bargain but prevents abuse." Certain factors help in assessing whether a given stipulated damage clause is reasonable: "(1) Did the parties intend to provide for damages or for a penalty? (2) Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the time of contract? and (3) Are the stipulated damages a reasonable forecast of the harm caused by the breach?" Over time, factor 1) has been criticized because it concentrates on the subjective intent of the parties. The court then analyzes the facts of the case before it based on factors (2) and (3). The court addresses the black letter law applying to how damages should be set when an employee is wrongfully discharged. The measure of damages are "the salary the employee would have received during the unexpired term of the contract plus the expenses of securing other employment reduced by the income which he or she has earned, will earn, or could with reasonable diligence earn, during the unexpired term." In some instates, however, this standard calculation may not be sufficient because the discharged employee may have suffered other damages. Those damages include "consequential damages, including permanent injury to professional reputation, loss of career development opportunities, and emotional stress." The use of a stipulated damage clause, allows parties to take into account types of damages the law does not provide for. The court first concludes that "the parties' estimate at the time of contract formation of anticipated damages was reasonable when consequential damages are taken into account." The court additionally concludes the "employer did not meet his burden of proof on the unreasonableness of the stipulated damages clause."
Discussion. This case offers an interesting discussion about the policies underlying stipulated damages clauses.