The Court of Appeal affirmed that the judg­ment was an unenforceable penalty. California Civil Code section 1671 states, "A pro­vision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circum­stances existing at the time the contract was made." The liquidated damages clause, which set the liquidated damages at the amount of the originally liability, was an unenforceable penalty.

When Schweitzer was late in making a settlement payment, Purcell filed the stipulation for entry of judgment and obtained a default judgment for approximately $59,000, representing the difference between $85,000 (the full amount of the stipulated debt) and Schweitzer's settlement payments. Schweitzer moved to vacate the judgment, asserting that the $59,000 judgment constituted an unlawful penalty under California law (see California Civil Code section 1671, subdivision (b) which provides that liquidated damages are enforceable unless the party seeking to invalidate the provision shows that the provision was unreasonable under the circumstances existing at the time the provision was made). The trial court set aside the judgment, holding that the damages sought by Purcell violated California's prohibition against liquidated damages because the $59,000 judgment did not bear any rational relationship to the damages Purcell would actually suffer as a result of Schweitzer's breach of the settlement agreement.

First, it does not apply “in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.” Cal. Civ. Code § 1671(a). Second, a different rule obtains when the liquidated damages are sought to be recovered from either: (1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party’s personal, family, or household purposes; or(2)A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.

California Civil Code Section 1671(b) provides that “a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made”. There are several key exceptions to this standard.

Ms. Taub quotes several other law professors on the subject, but fails to mention that California has a statute that, with certain exceptions, generallyvalidatesliquidated damage provisions in contracts. Cal. Civ. Code § 1671(b). The statute further requires that a party seeking to invalidate a liquidated damages provision establish the provision was unreasonable under the circumstances existing at the time the contract was made.

Taub quotes several other law professors on the subject, but fails to mention that California has a statute that, with certain exceptions, generally validates liquidated damage provisions in contracts. Cal. Civ. Code § 1671(b). The statute further requires that a party seeking to invalidate a liquidated damages provision establish the provision was unreasonable under the circumstances existing at the time the contract was made.

Wahl brought a single cause of action under California’s Unfair Competition Law (UCL) for alleged “unlawful” and “unfair” practices. The plaintiff based his unlawful UCL claim upon an alleged violation of California’s Automatic Renewal Law governing the notice and consent requirements that must be offered to consumers in recurring contracts and California’s liquidated damages statute (Cal. Civ. Code § 1671) governing such contractual remedies. Breaking down the X’s and O’s, plaintiff claimed that: Rivals violated the Automatic Renewal Law by “failing to present the automatic renewal offer terms…in a clear and conspicuous manner before the subscription is fulfilled and in visual proximity to the request for consent to the offer” and by failing to obtain plaintiff’s consent to the terms containing the automatic renewal offer.

The Second Appellate District of the California Court of Appeal recently issued a decision in Constellation-F, LLC v. World Trading 23, Inc. finding that a holdover provision in a commercial lease providing for significantly increased rents during the holdover period is not an unenforceable penalty under California Civil Code section 1671. While this decision directly implicates holdover provisions in commercial leases, its broad language focusing on the contracting parties' respective bargaining powers may implicate other contractual relationships.

Otherwise, the security deposit is susceptible to a re-characterization as prepaid rent. Since the landlord retains other rights under the lease for a tenant default (unlawful detainer and damages actions, for example), it is typically not viewed as liquidated damages and therefore not subject to the reasonableness and other requirements of California Civil Code Sections 1671 to 1681.Impact of Prohibitions on Evictions and Security DepositsIn the current COVID-19 crisis, there are restrictions that have been imposed on commercial evictions in many jurisdictions by state or local order. However, these restrictions have not generally to date restricted commercial landlords from applying security deposits in the event of a tenant’s failure to timely pay installments of rent or perform other obligations under the tenant’s lease.

In Honchariw v. FJM Private Mortgage Fund, LLC, et al., the appellate court reversed the trial court’s refusal to overturn an arbitrator’s decision that the plaintiffs failed to establish that their lender’s imposition of default interest was an unlawful penalty under California Civil Code section 1671. The appellate court found that the mere fact that default interest was being charged on the entire loan balance prior to full maturity was, in and of itself, a violation of public policy.In Honchariw, the plaintiffs took out a nonconsumer loan secured by a first-lien deed of trust on real property. After the plaintiffs defaulted on their Sept. 1, 2019, monthly payment, their lender charged a one-time late fee equal to 10% of the overdue payment and imposed default interest of 9.99% per annum assessed against the total unpaid principal balance of the loan (collectively, the late fee), as provided in the loan agreement. Plaintiffs filed a demand for arbitration, alleging, among other things, that the late fee was an unlawful penalty in violation of section 1671. The arbitrator found that the late fee did not violate section 1671 and denied the demand for arbitration. Plaintiffs petitioned to vacate the arbitrator’s decision and the trial court denied the petition. Plaintiffs appealed.S