Security and the law
August 1, 2006
A recent California case discussed the applicability of a liquidated damage clause contained in a cable Internet providerâ€™s service agreement. Liquidated damages are a specified amount of damages that are included in a contract in case one side breaches, or does not fulfill, its side of the contract.
The defendant in the lawsuit was a cable Internet provider who had approximately 500,000 customers in the area. An advocacy group alleged that the late fee liquidated damage provision in the providersâ€™ service agreement was illegal because the amount of liquidated damages was set by the provider and was not the result of mutual negotiations between the provider and individual subscribers. The Superior Court in the State of California for the County of Los Angeles entered a summary judgment in favor of the defendant cable Internet service provider.
The Superior Court held that there was a two-part test for determining whether a liquidated damage provision was valid. The first tracked the statutory language or way in which the law was written: fixing the amount of actual damages had to be impractical or extremely difficult. The second was a judicially crafted requirement: the amount selected had to represent a reasonable endeavor by the parties to estimate their compensation for the loss sustained.
The court held that the reasonable endeavor test did not require both parties to a form contract to expressly negotiate the amount of liquidated damages. The law revision commission did not state that the parties had to actually sit down with individual subscribers and make a reasonable endeavor to estimate actual damages. Instead, the report basically said that the liquidated damages amount just needs to be in the reasonable range of what the court would expect if both parties actually did discuss the matter.
The advocacy group appealed and again alleged that the late fee liquidated damage provision was illegal because the amount of liquidated damages was unilaterally set by the provider and was not negotiated between the provider and individual subscribers. The Court of Appeals affirmed the judgment of the Superior Court.
In discussing the case, the court pointed out that businesses with a half-million customers use standardized form contracts that include a liquidated damages provision for a late fee whose amount is conceded to be reasonable. The question then was whether that provision was invalid simply because the businesses did not negotiate the late fee amount individually with each customer.
The trial court ruled that where a liquidated damage clause was included in the preprinted form contract, the law applicable to contracts for the sale of consumer goods and services does not require both parties to actually negotiate the amount of liquidated damages. Instead, as long as the party who presented the form contract had made a reasonable endeavor to determine the amount of such damages, the provision was valid.
The court, then citing a number of additional cases in the State of California, upheld the decision of the Superior Court in favor of the cable Internet company.