Utility Consumers' Action Network, Inc. v. AT&T Broadband of Southern Cal., Inc.

case, it would be impracticable or extremely difficult to. fix the actual damage.” (§ 1671(d).) It is undisputed that the contracts at issue here qualify as consumer services contracts under section 1671(d).

Because the current law governing liquidated damages in consumer contracts is a continuation of prior law on the subject, decisions interpreting former section 1671 apply with equal force here. Those cases developed a two-part test for determining whether a liquidated damages provision was valid. The first tracks the statutory language: fixing the amount of actual damages had to be impracticable or extremely difficult. The second is a judicially crafted requirement: the amount selected must “represent a reasonable endeavor by the parties to estimate fair compensation for the loss sustained.” (Rice v. Schmid (1941) 18 Cal.2d 382 , 385-386 [ 115 P.2d 498 ] (Rice).) Determining whether a reasonable endeavor was made depends upon both (1) the motivation and purpose in imposing the charges, and (2) their effect. If the amount selected is designed to substantially exceed the damages suffered, and its primary purpose is to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss, then the purported liquidated damages provision is an invalid attempt to impose a penalty. (Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731 , 739 [ 108 Cal.Rptr. 845 , 511 P.2d 1197 ] (Garrett).) Because decisions such as Rice state that the selected amount of liquidated damages must result from a reasonable endeavor by the parties, UCAN contends that a sum selected by only one party in that party’s preprinted form contract is invalid. The decisions cited by the Commission’s report when discussing the reasonable endeavor requirement convince us that UCAN is wrong.

In the following section, we analyze the Commission’s Report and the California cases on which it relied to reach the conclusion that mutual negotiation is not required in this setting. Neither the California nor out-of-state authorities on which UCAN relies actually support its position, nor does a Commission study prepared by a law professor from the University of California at Berkeley.

2. The Commission’s Report

The Commission’s Report was adopted by the Legislature without change. (Guthman v. Moss (1984) 150 Cal.App.3d 501 , 510 [ 198 Cal.Rptr. 54 ].) We therefore give that Report substantial weight when interpreting section 1671(d). (Hong v. Somerset Associates (1984) 161 Cal.App.3d 111 , 115, fn. 6 [ 207 Cal.Rptr. 597 ].) The introduction to the Commission’s Report notes the language of former section 1671 and its requirement that fixing the amount of damages be impracticable or extremely difficult. (Report, 13 Cal. Law

Revision Com., supra, p. 1739.) The Report then mentions the reasonable endeavor requirement: “In addition, the courts have developed a second requirement that the provision must reflect a ‘reasonable endeavor’ to estimate actual damages.” (Ibid.) In a footnote to that sentence, the Commission cited two cases—McCarthy v. Tally (1956) 46 Cal.2d 577 , 584 [ 297 P.2d 981 ] (McCarthy) and Better Food Mkts. v. Amer. Dist. Teleg. Co. (1953) 40 Cal.2d 179 , 187 [ 253 P.2d 10 ] (Better Food)—as direct authority for the reasonable endeavor requirement. Using the citation signal “see also,” the Report also cited Garrett, supra, 9 Cal.3d 731 , and Clermont v. Secured Investment Corp. (1972) 25 Cal.App.3d 766 [ 102 Cal.Rptr. 340 ] (Clermont). (Report, supra, p. 1739, fn. 3 .)

We find it significant that the Commission did not state that the parties must make a reasonable endeavor to estimate actual damages. Instead, its Report said that the liquidated damages provision “must reflect” a reasonable endeavor to do so. Its omission of the “by the parties” language is explained by the Commission’s citations to Better Food, supra, 40 Cal.2d 179 —where the Supreme Court held that the reasonable endeavor requirement was satisfied even though the liquidated damages provision at issue was part of a standardized form contract—and to McCarthy, supra, 46 Cal.2d 577 , 585, footnote 4—where the court stated that the validity of a liquidated damages provision depended upon its proportional relation to the damages that might be caused by a breach of contract. We continue our analysis with the cases upon which the Commission principally relied.

A. The Better Food Decision

The plaintiff in Better Food was a grocery company that contracted with the defendant to install a burglar alarm system, then monitor that system, and notify the police if the alarm were triggered. After the plaintiff lost more than $35,000 to burglars, it sued the defendant for breach of contract because the defendant failed to notify the police that the store’s burglar alarm had gone off. The plaintiff appealed from a directed verdict for the defendant, and the Supreme Court reversed, holding that there were factual questions which, if resolved in plaintiff’s favor, could support a judgment for the plaintiff.

The Supreme Court also held that any recovery for plaintiff would be limited to $50, pursuant to the contract’s liquidated damages provision. In upholding the validity of that provision, the court considered the plaintiff’s contention that the amount agreed upon did not represent a reasonable endeavor to estimate the probable damages because the liquidated damages provision was found in a form contract used by the alarm company with all of its subscribers. The court said that the amount of liquidated damages “must represent the result of a reasonable endeavor by the parties to estimate a fair

B. Rice v. Schmid

The first time the term “reasonable endeavor” appears in our liquidated damages jurisprudence is in Rice, supra, 18 Cal.2d 382 . The plaintiff in that case was a wholesale flour merchant who sued a bakery owner for breach of a contract to buy flour. The sales contract included a liquidated damages provision. At trial, the plaintiff was awarded his actual damages, but appealed because he believed the trial court erred by not awarding him liquidated damages instead. The Supreme Court held that the liquidated damages clause was invalid because it would not have been impracticable to determine the amount of the plaintiff’s actual damages.

In their cross-appeal, the defendants also challenged the provision because it was part of a standard form contract. Because the court believed the provision was invalid on other grounds, it expressly refrained from reaching that issue. Even so, the court mentioned the issue, citing Dyer Bros., supra, 182 Cal. at page 593, for the proposition that “[a] valid liquidated damage clause must, of course, represent a reasonable endeavor by the parties to estimate fair compensation for the loss sustained.” (Rice, supra, 18 Cal.2d at p. 386.) The Rice court noted that the contract before it was a standard form widely used in sales between flour manufacturers and flour buyers, and that its use had been approved by the courts of other states. However, the Rice court declined to decide whether those decisions might apply when the contract was used in a sale between a flour merchant and a flour buyer. (Id. at pp. 386-387.)

C. The Meaning of Dyer Bros, and Rice

In Dyer Bros., supra, 182 Cal. 588 , there was no indication of how the amount of liquidated damages was determined, or who took part in that determination. Nowhere did that court mention the need for a reasonable endeavor by the parties in fixing the amount of liquidated damages. Instead, without citation to authority, the Dyer Bros, court held that there was “an intent to estimate a just compensation for the loss sustainable” from a breach, and found that intent based on the “entire agreement, its scope, purpose, and subject matter, and considering the result of a breach and the reasonableness of the sums agreed to be paid therefor . . . .” (Id. at p. 593.) In short, the intent to estimate a fair amount as liquidated damages was based in large part on whether the amount selected was reasonable in light of the nature of the breach and the harm caused.

Rice, supra, 18 Cal.2d 382 , cited Dyer Bros, for the proposition that the validity of a liquidated damages clause turned in part on whether it represented “a reasonable endeavor by the parties to estimate fair compensation for the loss sustained.” (Id. at p. 386.) This statement was dicta and came as part of an

acknowledgement that courts in other states had approved liquidated damages provisions in form contracts. More noteworthy, however, are the other authorities cited by Rice to support its statements concerning the reasonable endeavor requirement. These included 3 Williston, Contracts (1936) p. 2192, section 779 (Williston), Restatement section 339, and a law review article. (Arndt, Liquidated Damages in California (1921-1922) 10 Cal. L.Rev. 8 , 14 (Arndt); Rice, at p. 386.) All three sources demonstrate that the focus had been more on the amount of liquidated damages, and not the process by which that amount was derived.

• At the page cited by Rice, the Arndt article describes how Dyer Bros. clarified the test for determining whether the parties intended to liquidate damages or prescribe a penalty. According to Arndt, “[t]he important element in determining intent... is the reasonableness of the stipulated sum. If there is an intent to fix liability ‘without any reference to the actual damage to be sustained,’ the stipulated sum is a penalty, but if there is an intent ‘to establish a just compensation for the loss sustained,’ it is enforceable as liquidated damages.” (Arndt, supra, 10 Cal. L.Rev. at p. 14.) On the preceding page, Arndt made clear that “intent” in this context meant “legal intent” that would be imputed to the parties based on the language used, and not their actual intention at the time of contracting. (Id. at pp. 13-14.) While earlier cases focused on whether the contract used the term “liquidated damages” or “penalty” to determine what was intended, later cases changed that focus, “and the rule laying special emphasis upon the reasonableness of the agreed sum is now well established in California.” (Id. at p. 14.)

Section 779 of Williston also focused on the overriding importance of the reasonableness of the sum selected in a liquidated damages provision. “To be sure, under the decisions of the most authoritative courts, the primary question seems to be whether the parties honestly endeavored to fix a sum equivalent in value to the breach. But as has been seen, the chief, almost the only, means of determining whether the parties in good faith endeavored to assess the damages is afforded by the amount of damages stipulated for, and the nature of the breach upon which the stipulation was agreed to become operative. This is but saying in other words that the reasonableness or unreasonableness of the stipulation is decisive.'’'’ (Williston, supra, § 779, p. 2192, italics added.)

Restatement section 339 also focused on the amount selected. Under that rule, liquidated damages provisions were not enforceable unless “the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach” (Rest., § 339 (l)(a)), and it would be very difficult to accurately estimate the amount of damages. (Rest., § 339 (l)(b).) The Restatement is silent as to how or by whom that forecast is made.

Based on the facts and issues presented by Rice and Dyer Bros, and the authorities they relied upon, we believe the reasonable endeavor test they prescribed had more to do with the result and effect of a liquidated damages provision and nothing to do with whether both parties to the contract negotiated the amount of liquidated damages. When Better Food relied on those decisions to validate the use of a form contract’s liquidated damages provision, it must have had that rationale in mind. The same is therefore true for McCarthy, supra, 46 Cal.2d 577 .

4. Negotiation by Both Contracting Parties Is Not Required by the Reasonable Endeavor Test

Returning to our starting point—the Commission’s Report that was the basis for section 1671(d)—we conclude that the reasonable endeavor test does not require both parties to a form contract to expressly negotiate the amount of liquidated damages. First, as noted earlier, when the Report describes the test, it omits the “by the parties” language. Second the omission appears deliberate. The two decisions cited in the Report as direct authority for the reasonable endeavor test were McCarthy, supra, 46 Cal.2d 577 , and Better Food, supra, 40 Cal.2d 179 . The Commission’s reliance on those two decisions shows that their standards were imported into the Commission’s Report. (Perlin, supra, 209 Cal.App.3d at pp. 1297-1299.) Better Food held that the use of a form contract could satisfy the reasonable endeavor requirement. McCarthy cited Better Food when discussing that requirement. Both Better Food and McCarthy cite decisions such as Dyer Bros, and Rice, which in turn rely on other authorities that focused primarily on the reasonableness of the sum of liquidated damages to determine whether a reasonable endeavor to estimate a fair compensation was made, not on the presence of bilateral negotiations. (See McCarthy, at p. 585, fn. 4 [the difference between a reasonable endeavor to ascertain damages and a penalty is a penalty’s lack of a proportion relation to potential actual damages]; Arndt, supra, 10 Cal. L.Rev. at p. 14 [“[t]he important element in determining intent... is the reasonableness of the stipulated sum”]; Williston, supra, p. 2192 [“the chief, almost the only means, of determining whether the parties in good faith endeavored to assess the damages is afforded by the amount of damages stipulated for . . .”].)

Even Garrett, supra, 9 Cal.3d 371 , which is now considered the leading case on the reasonable endeavor test (see Perdue v. Crocker National Bank (1985) 38 Cal.3d 913 , 931, fn. 16 [ 216 Cal.Rptr. 345 , 702 P.2d 503 ]), and which was also cited by the Commission’s Report, sets a standard that differs little from the one announced in Dyer Bros. Garrett was a class action brought on behalf of more than 5,000 home loan borrowers who contested the fairness of a late charge provision in their promissory notes. Under that provision, if the borrower defaulted, a late charge of 2 percent of the unpaid principal

Nor was Better Food the only court to endorse nonnegotiated liquidated damages clauses. The court in Lowe v. Massachusetts Mut. Life Ins. Co. (1976) 54 Cal.App.3d 718 [ 127 Cal.Rptr. 23 ] (Lowe), considered the validity of a liquidated damages clause in an action by a developer to recover a $94,000 standby deposit retained by the defendant lender pursuant to the terms of the lender’s loan commitment letter to finance a $4.7 million project. The liquidated damages provision was part of the plaintiff’s written application, and stated that the required deposit would be returned if the loan were completed, but would be retained as liquidated damages if the plaintiff did not go through with the loan. The deposit amount was later increased as part of the application approval and loan commitment letter prepared by the defendant. When the plaintiff failed to complete the loan transaction, the defendant kept the deposit. The trial court found for the defendant and refused to order the return of the plaintiff’s deposit.

On appeal, the Lowe court affirmed the validity of the liquidated damages provision, rejecting the plaintiff’s contention that it was a penalty. Although the plaintiff characterized the loan commitment letter as an adhesion contract, the court held that it was not necessary for the parties to bargain over the amount of liquidated damages so long as the amount agreed upon was reasonable under all the circumstances.

Synthesizing Dyer Bros., Rice, Better Food, and other decisions, the Lowe court held that it “was not necessary for the prospective lender to review all of its possible damages with the applicant. There is no evidence to show that the [plaintiff] was not aware of the circumstances making it desirable to provide for some compensation to the financial institution if the loan were not taken. The evidence shows that the sum bears a reasonable relationship to the expenses and damages the lender would incur. In the exercise of its business judgment the applicant . . . accepted the terms offered by the financial institution. There is sufficient evidence of agreement.” (Lowe, supra, 54 Cal.App.3d at pp. 735-738; see Perlin, supra, 209 Cal.App.3d at pp. 1297-1300, and Feary v. Aaron Burglar Alarm, Inc. (1973) 32 Cal.App.3d 553 , 557-558 [ 108 Cal.Rptr. 242 ], both following and applying Better Food, supra, 40 Cal.2d 179 .)

We recognize that Better Food, Feary, and Perlin all involved burglar alarm monitoring contracts with liquidated damages clauses that closely resembled limitations on liability. Lowe, however, was not a burglar alarm contract case. Most important, when the Commission’s Report cited to Better

5. UCAN’s Contrary Authorities Are Not Persuasive

A. California Appellate Court Decisions

The primary decisional authority for UCAN’s position is United Sav. & Loan Assn. v. Reeder Dev. Corp. (1976) 57 Cal.App.3d 282 [ 129 Cal.Rptr. 113 ] (Reeder), where the court held a liquidated damages provision was invalid because both parties had not negotiated the amount. The plaintiff in Reeder was a savings and loan association that agreed to sell land to a developer for $243,000. Their contract included a provision that allowed the seller to keep the buyer’s $20,000 deposit as liquidated damages if escrow did not close. The parties stipulated to the following facts: the sales contract was drafted by the plaintiff’s lawyer; the liquidated damages provision was not suggested by the defendant and was not discussed with the defendant; the defendant’s representative read the agreement before signing; and all parties were sophisticated and knowledgeable in such transactions.

On appeal from a judgment for the plaintiff, the Reeder court reversed, holding that the liquidated damages provision was unenforceable because both parties did not take part in the effort to determine the amount of liquidated damages. Although the savings and loan believed it was impracticable to fix the amount of damages from a breach, “it was purely a determination made by [the savings and loan], with no discussion between [the savings and loan] and Reeder as to how the $20,000 figure for liquidated damages was calculated.” (Reeder, supra, 57 Cal.App.3d at pp. 300, 302.)

Reeder cited Dyer Bros., Rice, and other decisions. As demonstrated, ante, Dyer Bros, and Rice do not stand for the proposition that both parties must negotiate the amount as a prerequisite to the validity of a liquidated damages clause. Instead, our courts’ most significant decisions on the reasonable endeavor test, along with the treatises and academic interpretations they relied on, all point to the conclusion that it is the end result which counts, not the number of parties who took part in reaching that result. Reeder did not discuss those authorities or otherwise analyze Rice or Dyer Bros. Although Reeder acknowledged the existence of Better Food, supra, 40 Cal.2d 179 , it did so through nothing more than its use of the citation signal “but see,” thereby failing to analyze that decision as well. (Reeder, supra, 57 Cal.App.3d at p. 300.) Finally, Reeder involved an individually drafted agreement, not a standardized form contract. We therefore conclude that Reeder was wrongly decided and is inapplicable.

In addition to Reeder, UCAN relies on two decisions that appear to have followed it: Westinghouse Electric Corp. v. County of Los Angeles (1982) 129 Cal.App.3d 771 [ 181 Cal.Rptr. 332 ] (Westinghouse), and Barbera v. Sokol (1980) 101 Cal.App.3d 725 [ 161 Cal.Rptr. 843 ] (Barbera). At issue in Westinghouse was the validity of a liquidated damages clause in a 1973 public construction contract. Although former sections 1670 and 1671 presumed that liquidated damages provisions were void, that rule did not apply to public works contracts, the court held. (Westinghouse, at pp. 782-783.) When discussing the requirements of former sections 1670 and 1671, the Westinghouse court cited Reeder for the proposition that both parties had to endeavor to determine the amount of liquidated damages, but stated that Better Food announced a different rule “where the impracticability of fixing actual damages appeared as a matter of law.” (Westinghouse, at p. 782.) The court held that because actual damages could not have been determined as a matter of law, the rule of Better Food applied, making the liquidated damages provision valid. (Id. at p. 783.) Frankly, we do not know what to make of the Westinghouse decision. Although it cited Reeder for the mutual endeavor requirement, that does not appear to have been an issue in the case. Its interpretation of Better Food is at best incomplete and fails to touch on the issue before us. In any event, because we hold that Reeder is unsound, so too is Westinghouse to the extent it depends on Reeder.

As for Barbera, it involved a negotiated construction subcontract that was, in part, standardized, and in part typewritten. A late fee for construction delays was included in the typewritten portion. Citing to Reeder, the appellate court reversed a judgment refusing to enforce that provision, holding that the evidence concerning whether the parties actually negotiated that provision was in conflict, thus bringing into play the presumption against the validity of a liquidated damages clause. (Barbera, supra, 101 Cal.App.3d at pp. 732-734.) We believe this case too is distinguishable. First, to the extent it uncritically followed Reeder, it was wrongly decided. Second, at issue was a negotiated contract between contractors, with the liquidated damages provision found in the nonstandardized portion of the agreement. Therefore, Barbera is also factually inapplicable.

UCAN also relies on two other decisions which we believe are likewise distinguishable and inapplicable: Bondanza v. Peninsula Hospital & Medical Center (1979) 23 Cal.3d 260 [ 152 Cal.Rptr. 446 , 590 P.2d 22 ] (Bondanza), and Vath v. Hallett (1916) 31 Cal.App. 290 [ 160 P. 1065 ]. In Bondanza, the court invalidated a liquidated damages provision that did not specify any amount, but instead permitted the defendant to recover its “reasonable” expenses for collecting on unpaid accounts. In that context, the court held that the parties had failed to agree to the amount of collection costs. (Bondanza, at p. 266.) In Vath, the defendant borrowed $6,000 to start a liquor store. As part of the agreement, the defendant promised to buy his liquor from the

Second, regardless of the effect to be given the Sweet article, it ultimately did not differ from our interpretation of the law. When discussing the process by which the stipulated amount of damages is determined, Sweet acknowledged that Better Food and McCarthy were the leading cases. (Sweet, 11 Cal. Law Revision Com., supra, p. 1283.) After summarizing other decisions, including some which ostensibly called for negotiations by both parties, Sweet also acknowledged that the selection process did not live up to the articulated test. (Id. at pp. 1283-1284.) Instead, as the use of form contracts continued to rise, Sweet predicted that “we can expect even fewer stipulated damages that are actually a jointly determined estimate of actual damages.” (Id. at pp. 1284—1285.) He concluded his thought by stating that even though the case law called for a reasonable endeavor by the parties, “it really does not matter what process is used to select liquidation amounts as long as the amount selected is within the realm of reason.” (Sweet, 11 Cal. Law Revision Com., supra, pp. 1283-1285.)

Elsewhere, Sweet recommended that despite the potential for abuse in adhesion contracts, “we should not automatically deny even the dominant party ... the power to control damages. Rather, we should scrutinize liquidation clauses in adhesion contracts with great care to determine their fairness, with the burden of showing fairness being upon the proponent of the clause—in most cases, the stronger party.” (Sweet, 11 Cal. Law Revision Com., supra, p. 1291, fn. omitted.) That is precisely the effect of section 1671, as amended by the Legislature in response to the Commission’s Report: liquidated damage clauses in consumer contracts are presumed void, placing the burden on the proponent of the clause to rebut that presumption. (Garrett, supra, 9 Cal.3d at p. 738.)

Because the Commission’s Report stated that “the limitations of existing law should be retained and additional protection provided” where the parties have unequal bargaining power (Report, 13 Cal. Law Revision Com., supra, at p. 1741), UCAN also believes the Report, and, ultimately, the current version of section 1671, must have intended to provide additional protections in the form of the mutual negotiation requirement. Once more, UCAN is wrong. First, UCAN fails to point to any portion of section 1671 or the Report which specified any additional protections. Second, the portion of the Report quoted by UCAN is found in the Report’s introduction. In the section where it actually made its recommendations, the Commission merely said that “in order to continue the protection now given to significantly weaker and less experienced contracting parties, the rule expressed in [former sections] 1670 and 1671 should continue to apply where the contract is a consumer contract . . . .” (Report, supra, at p. 1742.) Third, as the Commission’s own comment to section 1671 makes clear, the law under former sections 1670 and

1671 continues to apply to consumer contracts. (§ 1671, subds. (c), (d); Cal. Law Revision Com. com., 9 West’s Ann. Civ. Code (1985 ed.) foil. § 1671, pp. 497-498.) As explained at length, ante, that law does not require mutual negotiations for standardized adhesion contracts.

Finally, UCAN points to the Report’s failure to mention Lowe, supra, 54 Cal.App.3d 718 , as proof that the Commission did not intend to endorse that decision. Although true, the Report also failed to mention Reeder, supra, 57 Cal.App.3d 282 . It did, however, cite directly to Better Food and McCarthy as authority for the reasonable endeavor requirement.

C. Decisions from Other States

UCAN also contends that decisions from North Dakota and South Dakota support its interpretation of the reasonable endeavor requirement: Hofer v. W. M. Scott Livestock Co. (N. D. 1972) 201 N.W.2d 410 (Hofer) and Anderson v. Cactus Heights Country Club (1963) 80 S.D. 417 [ 125 N.W.2d 491 ]. Anderson involved a statute similar to former sections 1670 and 1671, and cited Better Food for the proposition that a reasonable endeavor by the parties was required. We believe Anderson is inapplicable for two reasons: (1) because it involved what appears to have been a mutually negotiated contract to design and supervise the construction of a golf course; and (2) because the validity of the disputed liquidated damages provision turned solely on whether the amount selected was disproportionate to the actual damages that could have resulted, not on whether both parties negotiated that amount. (Anderson, at pp. 420-422.)

The same is true of Hofer, supra, 201 N.W.2d 410 , which involved a land sales contract and also turned on whether the liquidated damages amount set forth in the contract was disproportionate and therefore punitive under a statute similar .to ours. (Id. at pp. 413-414.) Further, to the extent UCAN relies on North Dakota’s inteipretation of California law to support its arguments, it has overlooked a far more recent decision by North Dakota’s Supreme Court—City of Fargo v. Case Development Co. (N. D. 1987) 401 N.W.2d 529 . In upholding the validity of a liquidated damages provision in a public construction contract, the court considered and rejected the contention that California law required a reasonable endeavor by both parties when determining the amount of liquidated damages. Citing to Better Food, supra, 40 Cal.2d 179 , the City of Fargo court said that “California has liberally construed its ‘reasonable endeavor’ requirement and does not require face-to-face negotiations of the amount of liquidated damages . . . .” (City of Fargo, at p. 533.)

DISPOSITION

For the reasons set forth, ante, the summary judgment in favor of respondents, and the order denying UCAN’s motion for summary judgment, are affirmed. Respondents to recover their costs on appeal.

Cooper, R J., and Flier, J., concurred.