Arrowhead Sch. Dist.# 75, Park Co. v. Klyap, 01-332.

Citation79 P.3d 250,318 Mont. 103,2003 MT 294
Decision Date28 October 2003
Docket NumberNo. 01-332.,01-332.
PartiesARROWHEAD SCHOOL DISTRICT NO. 75, PARK COUNTY, Montana, Plaintiff and Respondent, v. James A. KLYAP, Jr., Defendant and Appellant.
CourtUnited States State Supreme Court of Montana

For Appellant: James A. Klyap, Emigrant, Montana (pro se).

For Respondent: Tara Depuy, Park County Attorney, Livingston, Montana.

Justice JAMES C. NELSON delivered the Opinion of the Court.

¶ 1 Appellant James Klyap (Klyap) appeals a judgment of the Sixth Judicial District Court, Park County, ordering him to pay liquidated damages under his contract with Arrowhead School District No. 75. We affirm.

¶ 2 We address the following issue on appeal: Did the District Court err in concluding the damages clause in the contract was an enforceable liquidated damages term rather than an unenforceable penalty?

I. FACTUAL AND PROCEDURAL BACKGROUND

¶ 3 Arrowhead School District No. 75 (District) is located in Park County south of Livingston. The District consists of one school, Arrowhead School (School). As the District and the School are essentially the same entity for purposes here, the remainder of this Opinion will refer to both as the School in order to avoid confusion.

¶ 4 For the 1997-98 school year, the School employed about eleven full-time teachers and several part-time teachers. During that school year, the School employed Klyap as a new teacher instructing math, language arts, and physical education for the sixth, seventh, and eighth grades. In addition, Klyap, through his own initiative, helped start a sports program and coached flag football, basketball, and volleyball.

¶ 5 During that same year, the teachers of the School considered forming a union. Because of this development, the Board of Trustees decided to delay offering teaching contracts until a decision on unionization was made. After the teachers voted not to unionize, the School offered Klyap a contract for the 1998-99 school year on or about June 15, 1998, which he accepted by signing on or about June 30, 1998.1 This contract provided for a $20,500 salary and included the liquidated damages clause at issue here. The clause calculated liquidated damages as a percentage of annual salary determined by the date of breach; a breach of contract after July 20, 1998, required payment of 20% of salary as damages.2 Klyap also signed a notice indicating he accepted responsibility for familiarizing himself with the information in the teacher's handbook which also included the liquidated damages clause.

¶ 6 Despite this contract, Klyap continued to look for other employment. According to his testimony at trial, Klyap looked for other work in part because he felt the School might not honor the contract. However, at an interview with another school, he told that school he was already under contract.

¶ 7 At any rate, on or about August 5, 1998, Dome Mountain Ranch offered Klyap a position. Klyap decided to accept the position. On August 12, he informed the School that he would not be returning for the 1998-99 school year even though classes were scheduled to start on August 26. As a result of Klyap's decision not to teach at the School, the School sought to enforce the liquidated damages clause in Klyap's teaching contract for the stipulated amount of $4,100, 20% of the $20,500 salary. Klyap gave a check to the School administration but asked that it not be deposited as there were insufficient funds in the account. Later, after consulting with family, Klyap stopped payment on the check as he did not believe the liquidated damages clause was enforceable.

¶ 8 After Klyap resigned, the School attempted to find another teacher to take Klyap's place. Although at the time that Klyap was offered his contract the School had 80 potential applicants, only two viable applicants remained available. Right before classes started, the School was able to hire one of those applicants, a less experienced teacher, at a salary of $19,500.

¶ 9 Finally, as a result of Klyap's stop payment, the School brought suit against Klyap to enforce the liquidated damages clause. After a bench trial, the District Court determined the clause was enforceable because it was agreed to by the parties as demonstrated by the signed contract and because the damages suffered by the School qualified under § 28-2-721, MCA, as impractical and extremely difficult to fix. Specifically, the court found the School suffered damages because it had to spend additional time setting up an interview committee, conducting interviews, training the new, less experienced teacher, and reorganizing the sports program. The District Court also found that all these activities took away from the other school and administrative duties that had been scheduled for that time and that the new teacher missed all the staff development training earlier that year. Finally, the court found that such clauses are commonly used in Montana and that the School had routinely and equitably enforced the clause against other teachers. After concluding that the School took appropriate steps to mitigate its damages, the court awarded judgment in favor of the School in the amount of $4,100. The court did not, however, award attorney fees, court costs, or interest. Klyap now appeals. Further facts are discussed below.

II. STANDARD OF REVIEW

¶ 10 As discussed in detail below, this case presents an opportunity to clarify the law regarding liquidated damages in Montana. We begin by setting out the applicable standard of review, which we have applied in the past, but never explicitly stated. Accordingly, whether a stipulated damages provision in a contract constitutes enforceable liquidated damages or an unenforceable penalty is question of law. Lake River Corp. v. Carborundum Co. (7th Cir.1985), 769 F.2d 1284, 1290. Therefore, when the underlying facts are not in dispute, this determination is a conclusion of law which we review for correctness.

III. DISCUSSION

¶ 11 Did the District Court err in concluding the damages clause in the contract was an enforceable liquidated damages term rather than an unenforceable penalty?

A. The Parties' Positions

¶ 12 Klyap asserts the clause is a penalty which must be stricken from the contract by this Court. In support of his position, Klyap makes a number of the arguments commonly offered against enforcement of liquidated damages. First, Klyap argues that under Weber v. Rivera (1992), 255 Mont. 195, 841 P.2d 534, there must be specific evidence of negotiation regarding damages when a party seeks to enforce a liquidated damages provision in a form contract because the absence of negotiation implies the clause is a penalty. He then points to the fact that the parties did not specifically negotiate the liquidated damages clause at issue here so as to reasonably estimate damages upon breach because no one in the School's administration told him or any of the other teachers about the liquidated damages clause before offering the contracts.

¶ 13 Next, Klyap asserts the clause is a penalty because the testimony of Druska Kinkie (Kinkie), a trustee on the school board, indicated that the purpose of the clause was to "prevent losing a teacher at a late period of time." Klyap argues this testimony of intent constitutes a judicial admission of fact which is dispositive in this case because Kinkie admitted to the School's intent to impose a penalty.

¶ 14 In addition, Klyap asserts the "no actual damages" defense in arguing the School did not suffer any damages because a new teacher was hired for a lower salary before the start of the school year. Finally, Klyap makes a policy argument that a liquidated damages provision such as the one at issue here should be considered a penalty because the damages are unreasonably oppressive in a profession that is already very low paying.

¶ 15 In contrast, the School presents arguments that are commonly offered in support of enforcement of liquidated damages provisions. For example, the School points out that while this Court has not had the opportunity to address a liquidated damages clause in a teacher's contract, a number of other jurisdictions have found such provisions valid without addressing or requiring any specific evidence of negotiation. Citing Arduini v. Board of Educ. (1981), 93 Ill.App.3d 925, 49 Ill.Dec. 460, 418 N.E.2d 104, 109 (Arduini I), rev'd on other grounds by Arduini v. Board of Educ. (1982), 92 Ill.2d 197, 65 Ill.Dec. 281, 441 N.E.2d 73 (Arduini II)

, the School argues the contract clause at issue here is not a penalty because the use of a percentage of the breaching teacher's salary allows for damages properly relative to the skills of the teacher. In addition, citing Unified Sch. Dist. v. DeWerff (1981), 6 Kan.App.2d 77, 626 P.2d 1206, 1208, the School asserts the clause is not a penalty because it provides for different damages depending on the time of breach. As a result of these methods of determining damages, the School asserts the liquidated damages clause is for payment of a sum in lieu of performance rather than a penalty imposed to secure performance.

¶ 16 In response to Klyap's position on the School's intention to insert the clause as a penalty, the School asserts that Kinkie's characterization of the clause as a penalty is not a judicial admission because she was giving a lay person's opinion on a conclusion of law. Further, the School points out that Kinkie testified the clause had two purposes: to encourage teachers to "think twice" before signing a contract in June and to prevent teachers from quitting at a late period of time.

¶ 17 In response to Klyap's "no actual damages" argument, the School points out that it suffered damages that are impractical or extremely difficult to fix, as required by the statute and as found by the District Court. Finally, the School argues that the reasonableness of stipulated damages must be viewed at the time of contracting,...

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