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Commercial Real Estate Inv. v. Comcast of Utah II, Inc. - 2012 UT 49, 285 P.3d 1193 (Sup.Ct.)

Rule:

Liquidated damages clauses are not subject to any form of heightened judicial scrutiny. Instead, courts should begin with the longstanding presumption that liquidated damages clauses are enforceable. Liquidated damages clauses should be reviewed in the same manner as other contractual provisions. Persons dealing at arm's length are entitled to contract on their own terms without the intervention of the courts for the purpose of relieving one side or the other from the effects of a bad bargain. It is not a court's prerogative to step in and renegotiate the contract of the parties. Instead, unless enforcement of a liquidated damages clause would be unconscionable, a court should recognize and honor the right of persons to contract freely and to make real and genuine mistakes when the dealings are at arms' length. Courts should not interfere except when sharp practice or most unconscionable results are to be prevented. Courts should invalidate liquidated damages clauses only with great reluctance and when the facts clearly demonstrate that it would be unconscionable to decree enforcement of the terms of the contract. Reviewing liquidated damages clauses for unconscionability still preserves challenges to penalty clauses. Even Utah's cases purporting to apply the penalty approach conclude that penalties are unenforceable because they are unconscionable. Furthermore, Utah's case law employing the penalty approach looks at the circumstances surrounding the parties at the time of the contract's execution—the same inquiry courts engage in for claims of unconscionability. 

Facts:

A lease agreement was drafted by an agent of defendant tenant's predecessor in interest, for a long time lease of a building. The lease agreement required continuous operation of the building and contained a liquidated damages provision. When the tenant's predecessor ceased operations at the building and vacated the premises,  plaintiff landlord filed suit for breach of the parties' commercial lease contract. The parties disputed the validity of the liquidated damages provision. The district court granted partial summary judgment and awarded the landlord approximately $1.7 million in liquidated damages, plus approximately $2 million in interest, based on the tenant's breach of contract. On appeal, defendant-appellant tenant challenged the enforceability of the liquidated damages clause in its contract with plaintiff-appellee landlord. 

Issue:

Did any grounds exist to invalidate the liquidated damages clause in the parties' contract?

Answer:

No

Conclusion:

The Supreme Court of Utah affirmed the district court's grant of partial summary judgment in the landlord's favor and remanded for further proceedings. The court reviewed Utah's case law on liquidated damages clauses, observing that it reflected several competing approaches. The court concluded that liquidated damages clauses should be reviewed in the same manner as other contractual provisions. Thus, liquidated damages clauses were not subject to any form of heightened judicial scrutiny and were presumed enforceable. A party could challenge the enforceability of a liquidated damages clause only by pursuing a general contractual remedy such as mistake, fraud, duress, or unconscionability. Because the lease contract had been drafted by the tenant's predecessor and the liquidated damages provision was not oppressively one-sided or unreasonable, the provision was not unconscionable. The tenant failed to meet its burden to present evidence of how the landlord could have further mitigated its damages.

As for the standard of review applicable to summary judgment, the Court explained that an appellate court reviews a district court's decision to grant summary judgment for correctness, granting no deference to the district court. The appellate court may affirm a district court's entry of summary judgment if it is sustainable on any legal ground or theory apparent on the record.

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