Arrowhead School District v. James A. Kylap (2003 Mont. LEXIS 750)

Supreme Court of Montana

Plaintiff school district brought suit against defendant teacher to enforce a liquidated damages clause in the parties’ contract when the teacher informed the school that he would not be returning for the next school year, as he had accepted another teaching position. The District Court of the Sixth Judicial District, Park County, Montana, awarded judgment in favor of the school, finding the clause was enforceable. The teacher appealed.

In his appeal, the teacher contended the trial court erred in concluding the damages clause in the contract was an enforceable liquidated damages term rather than an unenforceable penalty. Recognizing a disparity in Montana’s case law on the enforceability of liquidated damages clauses, the supreme court analyzed the history and development of liquidated damages and concluded that the proper way to resolve inconsistencies was to analyze liquidated damages clauses from the perspective of whether or not the clause was unconscionable as indicated by the nature of the bargaining process between the parties.

As applied to the instant case, the supreme court determined that, although the teacher had no meaningful choice regarding the liquidated damages provision, the clause itself was still not unconscionable, because the contract’s 20 percent of salary liquidated damages was within the teacher’s reasonable expectations as a teacher familiar with the employment needs of the school and the damages the school would suffer upon breach of the contract. Accordingly, the trial court correctly determined that the liquidated damages provision was enforceable.

The defendant is challenging whether the district court erred in concluding the damages clause in the contract was an enforceable liquidated damages term rather than an unenforceable penalty. Kylap asserts the clause is a penalty which must be stricken from the contract by this court. In support of his position, Kylap raised a number of the arguments commonly offered against enforcement of liquidated damages.

The Supreme Court affirmed the decision by the District Court.

Here, the Court does not “square away” inconsistent lines of authority. It does not, as it indicates at PP 19 and 46, resolve the disparities in our case law on liquidated damages. Instead, the Court leaves the liquidated damages statute and our liquidated case law behind, and creates an entirely new approach to liquidated damages by incorporating case law from other contract settings, “cases from other jurisdictions and academic writing on the subject.”

Although the school testified it had an intent to secure performance and avoid the above damages by reason of the clause, such an intent does not turn a liquidated damages clause into a penalty unless the amount is unreasonable large and therefore not within reasonable expecations. Given that Klyap would understand the important of a teacher committing to employment for at least the duration of a school year in order to give students continuity and given that the school’s probable damages were within Klyap’s reasonable expectations, we conclude that the 20% of salary figure was within Klyap’s reasonable expectations as an estimation of damages the School would incur.

Therefore, because as a teacher Klyap would know teachers are typically employed for an entire school year and would know how difficult it is to replace equivalent services at such a small rural school, it was within Klyap’s reasonable expectations to agree to a contract with a 20% of salary liquidated damages provision for a departure so close to the start of the school year.

In sum, although Kylap had no meaningful choice regarding the liquidated damages provision, the clause itself is still not unconscionable because the 20% amount was within Klyap’s reasonable expectations as teacher familiar with the employment needs of the School and the damages the School would suffer upon breach of the contract. Accordingly, we hold the District Court correctly determined that the liquidated damages provision was enforceable.

This decision although the ruling was in favor of the school, should also be an eye opener for business. If there are issues going on within the business, and there is more than likely other individuals lined up for positions with the company, a careful evaluation of the contract in effect should be evaluated. If the person in irreplaceable, enforce the contract with the court.

Management is probably satisfied with the decision in that they received something out of it, not as much as they would have liked which was the 40%.