A stipulated judgment constituted an unenforceable penalty under Civil Code §1671(b) where the stipulated judgment for $2.8 million bore no reasonable relationship to the range of actual damages the parties could have anticipated from a breach of their agreement to settle a dispute for $2.1 million. (This is established law under Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977.
In Red & White Distribution v. Osteroid Enterprises, a stipulation provided for entry of judgment for $700,000 more than the settlement amount to be paid plus interest and attorneys’ fees. The Appellate Court held that the judgment with the additional $700,000 was an unenforceable penalty under section Civil Code 1671. There were some unusual issues in this case including the debtor alleging it had paid most of the settlement amount in gold and had a receipt.
The appellate court stated it is publishing this case to remind parties how to properly provide for an incentive for prompt payment, e.g. a carrot not a stick!
The court citing with approval Jade Fashion & Co., Inc. v. Harkham Industries, Inc. (2014) 229 Cal.App.4th 635 at 649, that “it is permissible under section 1671 for the parties to agree to a discount for timely payment of an admitted debt. (Jade Fashion, supra, 229 Cal.App.4th at p. 649.) Thus, based on Jade Fashion, if the parties stipulate that the debt is a certain number, they may agree that it may be discharged for that number minus some amount. They may also agree that in the event the debtor does not timely make the agreed payments, a stipulated judgment may be entered for the full amount.”
Red & White Distribution v. Osteroid Enterprises – filed Aug. 9, 2019, Second District, Div. Four
Cite as 2019 S.O.S. 3888 (B291188)