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Penalties

Another Court of Appeal opinion in California reaffirmed the rule that penalty provisions in settlement agreements are not enforceable. In a settlement agreement entered in Purcell v. Schweitzer, the plaintiff agreed to accept payments totaling $38,000, but provided that in the event of a default, judgment in the full amount of $85,000 could be entered. Evidently hoping to make such a judgment enforceable, the settlement agreement also recited that the $85,000 “is an agreed upon amount of monies actually owed . . . and is neither a penalty nor is it a forfeiture.” Further, the agreement set forth a host of reasons why an $85,000 judgment was reasonable, and barred the defendant from appealing or otherwise contesting this amount.

No dice, said the Court of Appeal. The additional amounts over and above the damages and interest resulting from breach of the settlement agreement, could not be justified, and the contractual language attempting to characterize these amounts as something other than a penalty was swept aside as contrary to public policy.

It is understandable that parties that agree to accept payment plans are interested in whatever measures they can impose to incentivize the paying party to make all of the payments on time. I expect they will continue asking for such provisions. Paying parties can feel fairly safe making those agreements first in the hope that they will actually be able to make all the payments on time, but second in the comfort of knowing that such penalties will probably be held unenforceable.

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