Liquidated damages will be upheld unless unreasonable. It is so when it “bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach.” Ridgley v. Topa Thrift & Loan Assn., 17 Cal.4th 970, 977 (Cal. App. 1998).
In a recent case, lenders lent $1.8 million to borrowers, who defaulted. The parties settled all contractual and other claims for $2.1 million. The parties also executed a stipulation for entry of judgment which the lender could file ex parte in the event of any failure by the borrower to timely cure any non-payment. However, this stipulation also stated that in the event of default, the borrowers would be liable to pay $2.8 million plus interest to the lender. The California appellate court found that $700,000, which corresponded to six months’ interest on the entire principal loan, bore no reasonable relationship to the range of actual damages the parties could have anticipated from a breach of the settlement agreement and was thus unenforceable.
The case is Red & White Distribution, LLC., et al. v. Osteroid Enterprises, LLC, et al., 2019 WL 3759458.