Commercial Real Estate Investment, L.C. v. Comcast of Utah II, Inc.

Justice LEE,

concurring in part and concurring in the judgment:

{51 I concur in the court's decision upholding the enforceability of the liquidated damages clause at issue in this case, but write separately because I disagree with its basis for doing so. The court today makes a useful clarification of the legal standard that applies in evaluating the enforceability of liquidated damages provisions. But in my view it errs in going further-in repudiating the standard for assessing liquidated damages clauses set forth in the Restatement (First) of Contracts and repeatedly endorsed by this court.¹ I would affirm that standard (after clarifying it in the way the court does) instead of repudiating it in favor of an ill-defined inquiry into unconscionability.

152 On an important threshold point, I agree with the court's conelusion that our liquidated damages cases stand in need of clarification. Supra 120. As the court has ably explained, our liquidated damages precedents have employed a range of different standards. Prior to our adoption of the Restatement test in 19983, our cases seemed to be in conflict and no standard was uniformly employed. Supra 1120-83. We resolved much of the conflict in adopting the Restatement test, however. The problem that remained in our prior case law is one the court corrects today-the tendency to "evaluate the enforceability of liquidated damages clauses with the benefit of hindsight, rather than as of the time of contract formation." Supro 186. As the court notes, such post-hoe review is problematic for various reasons, supra " 86, not the least of which is its potential to inject arbitrariness and unpredictability into a field in which contracting parties need a sound basis for reliance.

T53 I am accordingly in full agreement with a threshold course-correction charted by the majority-its repudiation of the hindsight-based approach followed in some of our cases and clarification that the reasonableness evaluation must be made from the standpoint of the parties at the time they entered into the contract But I see no reason to take the additional step of abandoning the timeworn Restatement test in its entirety. That test, informed by a wealth of precedent in this state and the many others that have embraced it, provides needed predictability for contracting parties seeking to anticipate the likely enforceability of the terms of their agreement. We should reaffirm that standard (after clarifying it), as there is no good reason to abandon it.

154 The imprecisions in our liquidated damages cases are hardly grounds for discarding the Restatement test. The problem is not the Restatement test; it is the notion of post-hoc evaluation of reasonableness. But that approach pre-dates this court's express adoption of the Restatement test in 1993,² and the cases decided since then are uniformly consistent. Though few in number, each has relied on the Restatement test. And none has fallen into the error of hindsight-based evaluation of reasonableness.³ The problem seems comfortably behind us.

T55 Even before we embraced the Restatement standard in 1998, many of our cases still endorsed a "reasonable forecast" or similar test. Although those cases proceeded to engage in improper post-hoc weighing, some nonetheless appeared to start with the right premise-that the question is whether liquidated damages are "disproportionate to any possible loss that might have been contemplated." ⁴ These cases, therefore, do not demonstrate our court's preference for a different standard so much as they show a failure to apply accepted principles correctly.⁵ The proper reaction, then, is not to throw out the cases in their entirety, but to correct the error in application. The court has now done that, and we need not go further.

56 The supposed internal inconsistency in the Restatement standard, see supro 137, is also no reason to abandon it. The criticism put forward by the court on this seore rests on a misunderstanding of the law. Properly understood, there is no incompatibility between the two prongs of the Restatement inquiry.

T 57 The reasonable forecast inquiry is the core standard under the Restatement; the difficulty of estimation element is subsidiary and explanatory. Nothing about that latter element in any way renders the core legal inquiry "'cireular'" Supra 137 (quoting Arrowhead Sch. Dist. No. 75, Park Cnty. v. Klyap, 318 Mont. 103, 79 P.3d 250, 258 (2003)). Courts and commentators have long resolved any apparent difficulty in comprehending "how courts can evaluate the reasonableness of a forecast made when actual damages are nearly impossible to estimate at the time of contract formation," supra 1 37: When damages are difficult to estimate at the time of contract formation, a liquidated sum is more likely to be deemed reasonable (and vice-versa).⁶ That's the whole point of the Restatement's two-part inquiry; it's a sliding seale, with the degree of deference to the damages liquidated by contract depending on the degree of difficulty of estimating damages in advance. Thus, the Restatement test presents not a " 'Hobsou's choice," su-pro 137, but a helpful clarification of the standard that has long governed the enforceability of liquidated damages clauses in Utah and elsewhere.

4 58 I would thus retain that standard and apply it in this case, as neither the parties nor the court have identified any persuasive reason to abandon it. And even if I were of a mind to jettison this test, I would not replace it with the undefined standard of "unconscionability" adopted by the court today. Supra 139. I am, of course, on board with the general principle of freedom of contract. It's hard to argue with the "right of persons to contract freely and to make real and genuine mistakes when the dealings are at arms' length," much less with the notion that it is not the prerogative of the courts "'to step in and renegotiate the contract of the parties," supra 189 (quoting Peck v. Judd, 7 Utah 2d 420, 326 P.2d 712, 717 (1958)). But those general principles are subject to limited exceptions, which are nee-essary (as the majority itself acknowledges) to foreclose the availability of " 'punitive damages' " for breach of contract, supra "I 40, which would have the troubling effect of deterring efficient breach.⁷ So the question before us is not whether to recognize a general rule favoring the freedom of contract; it is how to define the exception to the general rule in the liquidated damages context.

159 The majority replaces the settled standard adopted in our cases with an undefined "unconscionability" inquiry into whether "the facts clearly demonstrate that it would be unconscionable to decree enforcement of the terms of the contract." Supra

1 39. Without some elaboration by the court, that standard strikes me as an invitation for arbitrariness in future cases.

T 60 The substantive unconscionability inquiry invites an evaluation of the reasonableness of the substance of the bargain entered into by the parties.⁸ If the reasonableness assessment is to be conducted from the standpoint of the parties at the time of formation-as the majority opinion demands, swpre 146-then perhaps the analysis will look much like the Restatement "reasonable forecast" inquiry. If that is what the majority has in mind, then today's decision rejecting that standard is at best perplexing. And if the majority has something else in mind (as we must suppose from the court's express repudiation of the Restatement), then the matter is even worse.

61 The majority never explains how the substantive unconscionability or fairness of a liquidated damages clause is to be evaluated going forward. It offers only its bottom-line conclusion that "the contractual amount of liquidated damages" is not "unreasonable as compensation for a breach of the contractual duty to continuously operate the building." Supro 146. That fuzzy fairness analysis is an invitation for arbitrariness in judicial deci-sionmaking.⁹ Contracting parties deserve more from the courts. They deserve a workable standard they can rely on and contract around.¹⁰ I see the Restatement standard as providing that predictability and workability. In rejecting it, the court revives the muddle it so helpfully resolved in the first part of its opinion. I therefore disagree with the adoption of an undefined unconscionability standard in a field where predictability and reliance are so crucial.

T 62 Under the Restatement standard that I would apply, the judgment entered by the majority would still obtain. As the party seeking to challenge the enforceability of the liquidated damages clause in this case, Com-cast bore the burden of demonstrating that the damages liquidated by the parties in this case were a reasonable forecast of the damages they anticipated at the time of the execution of the contract.¹¹ And Comcast utterly failed to carry its burden and thus should lose on that basis. Specifically, because Comcast failed to present any evidence of the nature of the damages anticipated by the parties or of the relationship the liquidated damages bore to those damages, its challenge to the liquidated damages clause in this case fails as a matter of law. I would affirm on that basis instead of altering our standard in a way that seems sure to undermine predictability in contracts in Utah and to inject arbitrariness into the judicial evaluation of liquidated damages clauses.

1 . This court first recognized the Restatement approach in Perkins v. Spencer, where we characterized it as in accord with our existing case law. 121 Utah 468, 243 P.2d 446, 450-51 (1952). Even then, however, a standard similar to the Restatement had already been in use for decades in Utah. See Mclntosh v. Johnson, 8 Utah 359, 31 P. 450, 453 (Utah Terr.1892) ("When the damages are of that nature that they cannot be reasonably ascertained by evidence, the amount named in the bond shall be taken as the true measure of damages(.]"); Dopp v. Richards, 43 Utah 332, 135 P. 98, 101 (1913) (indicating that enforceability of liquidation clauses depends on whether damages could "readily and accurately be ascertained" at the time of contract formation or whether "damages are uncertain in their nature" such that "the parties themselves are ... better able to compute the actual or probable damages").

2 . See Reliance Ins. Co. v. Utah Dep't of Transp., 858 P.2d 1363, 1366-67 (Utah 1993). The court denigrates the Reliance court's notion of "adoption" on the ground that the prior cases cited in Reliance did not themselves expressly adopt the Restatement. See supra T1 28-29. Whatever the state of the law prior to Reliance, however, it seems clear that the court recognized the adoption of the Restatement test in Reliance and has been employing it ever since.

3 . See Bair v. Axiom Design, L.L.C., 2001 UT 20, ¶ 24, 20 P.3d 388; Woodhaven Apartments v. Washington, 942 P.2d 918, 920-23 (Utah 1997); Reliance, 858 P.2d at 1367, 1369.

4 . Warner v. Rasmussen, 704 P.2d 559, 563 (Utah 1985) (emphasis added).

5 . See id. (applying the "reasonable forecast" standard by evaluating the forfeiture based on its "comparison to the actual damages"); Jacobson v. Swan, 3 Utah 2d 59, 278 P.2d 294, 298-99 (1954) (same); supra TN 24-25.

6 . MetLife Capital Fin. Corp. v. Washington Ave. Assocs., 159 N.J. 484, 732 A.2d 493, 498 (1999) ("Courts began to treat the two-pronged [Restatement] test as a cohtinuum; the more uncertain the damages caused by a breach, the more latitude courts gave the parties on their estimate of damages."); see Moore v. St. Clair Cnty., 120 Mich.App. 335, 328 N.W.2d 47, 50 (1982) ("And in proportion as the difficulty of ascertaining the actual damage by proof is greater or less, where this difficulty grows out of the nature of such damages, in the like proportion is the presumption more or less strong that the parties intended to fix the amount." (internal quotation marks omitted) (quoting Jaquith v. Hudson, 5 Mich. 123, 138 (1858))); see also Restatement (SEconp) or Contracts § 356 emt. b (1981) ("If the difficulty of proof of loss is great, considerable latitude is allowed in the approximation of anticipated or actual harm."); Luna v. Smith, 861 S.W.2d 775, 779 (Mo.Ct.App.1993) (same); Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Corum. L. Rev. 554, 559-60 (1977) ("[Als the uncertainty facing the contracting parties increases, so does their latitude in stipulating post-breach damages.").

7 . Thyssen, Inc. v. S.S. Fortune Star, 777 F.2d 57, 63 (2d Cir.1985) ("[Blreaches of contract that are in fact efficient and wealth-enhancing should be encouraged. ... The addition of punitive damages to traditional contract remedies would prevent many such beneficial actions from being taken."); E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 445-46 (Del.1996) (stating that expectation damages increase economic efficiency by incentivizing breach only when the benefits from the breach sufficiently compensate both parties; "Punitive damages would increase the amount of damages in excess of the promis-ee's expectation interests and lead to inefficient results."); RicHarp A. Poswsr, Economic Anatysis or Law, ch. 4 (4th ed. 1992).

8 . See Ryan v. Dan's Food Stores, Inc., 972 P.2d 395, 402 (Utah 1998) ("In determining substantive unconscionability, we consider ... whether there exists an overall imbalance in the obligations and rights imposed by the bargain...." (internal quotation marks omitted)); Sosa v. Paulos, 924 P.2d 357, 361 (Utah 1996) (substantive unconscionability "focus[es} on the contents of the agreement, examining the relative fairness of the obligations assumed" (internal quotation marks omitted)).

9 . See Evelyn L. Brown, The Uncertainty of U.C.C. Section 2-302: Why Unconscionability Has Become a Relic, 105 Com LJ. 287, 291 (2000) ("Common law definitions of unconscionability are ... so unclear and inconsistent that they provide little, if any, guidance as to what uncon-scionability really means.").

10 . See Morris v. Redwood Empire Bancorp, 128 Cal.App.4th 1305, 27 Cal.Rptr.3d 797, 804 (2005) ("An undefined standard of what is 'unfair' fails to give businesses adequate guidelines as to what conduct may be challenged and thus enjoined and may sanction arbitrary or unpredictable decisions about what is fair or unfair." (internal quotation marks omitted)).

11 . See Bair, 2001 UT 20, 1425-26, 20 P.3d 388 ("[The party attempting to avoid the liquidated damages provision .... has the burden of proving that the liquidated damages clause was not a reasonable forecast of actual damages."); Young Elec. Sign Co. v. United Standard W., Inc., 755 P.2d 162, 164 (Utah 1988) (same).