Plaintiff purchaser sought review of the decision of the Superior Court of Los Angeles County (California), which reversed the trial court's judgment for plaintiff in favor of defendant lender, holding that prepayment charge was not made invalid by conditioning waiver on lack of default, in plaintiff's action for breach of contract and fraud. After the conclusion of the parties closing statements, the jurors were presented with civil jury instructions.

Overview

Plaintiff purchaser sued defendant lender to recover charges assessed for late payment. Trial court ruled in favor of plaintiff and held that the prepayment provision was penalty for delinquency and unenforceable because it bore no relationship to potential damages defendant would incur for late interest payment. The appeals court reversed and held that charge was not made invalid by conditioning waiver on lack of default. The court reversed and held that liquidated damages clause was generally considered unenforceable if it bore no relationship to the range of actual damages that parties could have anticipated would flow from breach. The court held that an amount disproportionate to anticipated damages was termed penalty, and that if characterized as charge for late payment of interest it must be reasonable. The court held that however the provision was labeled, if sum taken from lender was designed to exceed damages suffered by lender, the provision for additional fees was invalid attempt to impose penalty inasmuch as its purpose was to compel prompt payment through threat of charges bearing no relationship to actual loss. The court remanded for review of plaintiff's appeal.

Outcome

The court reversed appeals court decision which reversed trial court's decision and held in favor of plaintiff purchaser. The court held that the charge of six months' interest on the entire principal, imposed for any late payment or other default could not be defended as a reasonable attempt to anticipate damages from default. The court held that no matter how defendant lender labeled the provision, it was an invalid attempt to impose penalty.

Procedural Posture

Appellant, the state department of parks and recreation, sought review of a decision of the Superior Court of San Diego County (California) that found appellant guilty of breach of the covenant of good faith and fair dealing in its negotiations with respondent concessionaire and awarded damages to respondent.

Overview

Respondent concessionaire and appellant, the state department of parks and recreation, were unsuccessful in negotiating modifications to a concession contract. When the negotiations broke down, respondent brought suit against appellant for breach of the implied covenant of good faith and fair dealing. After the trial jury rendered a verdict in favor of respondent and awarded damages, appellant sought review and asserted that there could be no breach of the covenant of good faith by a refusal to enter into a new contract. The court agreed and reversed the judgment of the trial court. The court held that appellant had no obligation to negotiate new terms of the concession contract, that its commencement and continuance of negotiations over a long period of time had no effect upon this lack of obligation, and that its assumption of an arbitrary stance at some point in the negotiations could not be a breach of any contract term, including implied contract terms of good faith and fair dealing. The court held that the implied covenant of good faith and fair dealing was limited to assuring compliance with the express terms of the existing contract.

Outcome

The court reversed the judgment in favor of respondent and directed the trial court to enter judgment notwithstanding the verdict in favor of appellant. The court held that the implied covenant of good faith and fair dealing was limited to assuring compliance with the express terms of the existing contract and did not apply to negotiations for contract modifications.