Stipulated Damages, Exculpatory Clauses and Unconscionability

On re-reading Discover Bank v. Superior Court (Cal. 2005) I found myself getting hung up on a conceptual problem you might be able to help me with.  The Discover Bank court considered the validity of class action arbitration waivers. Holding such waivers unconscionable as a matter of law, the court halted (that is, until Concepcion) arbitration’s inexorable conquest of consumer litigation.  The court reasoned was that such waivers presented issues of both procedural and substantive unconscionability.  Procedural, the waivers were default-forcing “bill stuffers” and consequently not meaningfully chosen.  Substantively, “they may operate effectively as exculpatory contract clauses . . . because . . . damages in consumer cases are often small . . and the class action is often the only effective way to halt and redress [wrongdoing.]”

The question I have is what distinguishes “exculpatory clauses” – typically thought to be against public policy – from ordinary “stipulated damages” clauses, which are subject to reasonableness review. I unaware of any scholarship that tries to define exactly what stipulated damages are (and are not). Consider two possibilities:

  • To the extent that stipulated clauses are broadly defined, so as, for example, to include bespoke procedure, courts’ permissive treatment of stipulated damage clauses would seem to then imply vastly more private-party control over remedies than the traditionally-narrow scope that the term stipulated damage implies.
  • But perhaps such clauses are narrowly defined – that is, the stipulation must relate only to damages flowing from the contract (i.e., a term that limited parties’ ability to seek specific performance would not count as a stipulated damages clause, nor would a waiver of damages for a tort). In that case the Discover Bank court’s categorical move is more defensible, but it’s not obvious that the line between damage and remedy makes sense analytically.

A third possibility is that stipulate damage reasonableness review is limited to scenarios where some remedies remain on the table, regardless of whether the remedy arises out of a claim related to the contract or not; the categorical public policy bar from Discover Bank applies when all remedies are precluded.  Discover Bank is, again, a bad case for that claim, since not all contract remedies were precluded, only those which would deter future harms.

Anyway, it’s a puzzle.  Thoughts?

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1 Response

  1. Jim Fischer says:

    Liquidated damages provisions present difficult issues because the history of such provisions have usually involved overcompensatory provisions relative to the actual losses sustained by the other contracting party. In this setting (overcompensation) thinking in terms of penalties for non-performance makes some sense. The problem arises when the liquidated damages provison is undercompensatory relative to the other party’s actual losses from non-performance. Here it is conceptually difficult to see the issue in terms of a penalty. The operative effect of the provision is similar to garden variety limited remedies, such as those found in security system contracts, contracts to process film, etc. I distinguish between a liquidated damages provision and a limited remedy based on the presence of a true breach. In my opinion, a true liquidated damages provision allows for alternative avenues of performance. A contracting party who pays liquidated damages does not breach the contract; rather, that party elects one of two alternative forms of performance. A true limited remedy, on the other hand, does involve a breach. I realize that most decisions adhere to the concept of breach when discussing liquidated damages provisons, but I believe this is unnecessary and confusing.
    Exculpatory provisions are, in my view, entirely different from liquidated damages provisions. Exculpatory provisions negate the existence of a legal wrong. Again, case law might not always recognize this in describing the legal relationships, but the practical effect of a valid exculpatory provision is to exonerate the party of legal responsibility for the loss as if the loss never happened.