OLR Bill Analysis

sHB 6897 (as amended by House “A” and “B” and Senate “A”)*

AN ACT CONCERNING LIQUIDATED DAMAGES PROVISIONS IN CONTRACTS, REQUESTS FOR MORTGAGE PAYOFF STATEMENTS AND THE REPOSSESSION OF MOTOR VEHICLES IN BANKRUPTCY CASES.

SUMMARY:

Under this bill, no provision in a contract to purchase or lease goods or services entered into, renewed, or extended on or after October 1, 2007 primarily for personal, family, or household purposes that provides for the payment of liquidated damages in the event of a breach is enforceable unless:

1. the contract contains a statement in boldface type at least 12 points in size immediately following the provision stating “I ACKNOWLEDGE THAT THIS CONTRACT CONTAINS A LIQUIDATED DAMAGES PROVISION,” and

2. the person against whom the provision is to be enforced signs his or her name or writes his or her initials next to the statement.

This requirement does not apply to (1) contracts between a consumer and an agency of the federal government, the state or any political subdivision of the state; (2) negotiable instruments; and (3) contract provisions for late fees, prepayment penalties, or default interest rates.

The bill specifies that it does not validate a clause that is a penalty clause or is otherwise invalid under state law.

Current law requires the mortgagee, upon written request of the mortgagor or the mortgagor's attorney or other authorized agent, to provide a payoff statement in writing to the person requesting the payoff statement on or before the date specified in such request, if the request date is at least 10 business days after the date the mortgagee received the written request. If the request for a payoff statement is made in connection with a default on the mortgage, the bill authorizes the mortgagor's attorney to make the written request directly to the mortgagee, if it contains a representation that the person requesting the payoff statement is the mortgagor's attorney and that the mortgagor has authorized the request.

*House Amendment “A” specifies certain types of contracts that the liquidated damages requirement does not apply to, requires the liquidated damages statement be at least 12 instead of 10 points in size, changes what the statement must specify, and provides that it does not validate a penalty clause or one that is otherwise invalid under state law.

*House Amendment “B” reestablishes the requirement that the request date be at least 10 business days instead of eight after the date the request was received.

*Senate Amendment “A” changes the effective date of the liquidated damages provision from October 1, 2007 to July 1, 2008. It eliminates the provision of the bill that specifies that the filing of a petition in bankruptcy under Chapter 7 of Title 11 of the United States Code by the retail buyer of a motor vehicle, or such retail buyer's status as a debtor in bankruptcy is not by itself a default or a ground for the retaking of the motor vehicle.

EFFECTIVE DATE: October 1, 2007 except the liquidated damages provision is effective on July 1, 2008

BACKGROUND

Liquidated Damages

“Liquidated damages” is an amount of money agreed upon by both parties to a contract that one will pay to the other upon breaching (breaking or backing out of) the contract or if a lawsuit arises due to the breach.

Common Law

Currently, there is both common law (judge-made) law and statutory law in Connecticut that affects the enforceability of liquidated damages contract clauses. Under Connecticut common law, a contract provision that fixes liquidated damages for breach of contract is enforceable if (1) the damage that was to be expected as result of a breach of contract was uncertain in amount or difficult to prove; (2) the parties had the intent to liquidate damages in advance; and (3) the amount stipulated was reasonable because it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss that would be sustained in the event of a contract breach (American Car Rental, Inc. v. Comm'r of Consumer Protection, 273 Conn. 296, 306-307, 869 A. 2d 1198 (2005)).

Related Statutes

Under Connecticut's commercial code provisions dealing with the sale of goods, damages for breach by either party may be liquidated in the contract but only at an amount that is reasonable in the light of (1) the anticipated or actual harm caused by the breach, (2) the difficulties of proof of loss, and (3) the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy (CGS 42a-2-718). A similar statute exists for the leasing of goods (CGS 42a-2A-710(a)).

Other statutes impose certain limits or requirements on liquidated damages provisions in funeral service contracts, the involuntary liquidations of the businesses and property of foreign banks, and transfers of structured settlements (CGS 33-213, 36a-428n, 42-202(e), 52-225 (13) and (19), 52-225h).

COMMITTEE ACTION

Judiciary Committee

Joint Favorable Substitute

Yea

40

Nay

0

(04/13/2007)