Judiciary Committee

JOINT FAVORABLE REPORT

Bill No.:

HB-6897

Title:

AN ACT CONCERNING LIQUIDATED DAMAGES PROVISIONS IN CONTRACTS.

Vote Date:

4/13/2007

Vote Action:

Joint Favorable Substitute

PH Date:

3/12/2007

File No.:

SPONSORS OF BILL:

Rep. Taborsak, 109th District

REASONS FOR BILL:

Currently, the font for a contract that contains liquidated damages provisions is too small and individuals are assuming they understand what it states; however, there is a lack of clarity due to the size of the font and print.

SUBSTITUTE LANGUAGE:

Strikes everything and makes the provision to Section 1 applicable only to consumer contracts.

Adds Section 2, which merges HB 5399. Also merges HB 6070 into Section 3, which was previously in Section 2.

RESPONSE FROM ADMINISTRATION/AGENCY:

Rep. Taborsak, 109th District-I support this bill because it will bring much needed fairness and stability to business to business contracting in the state of Connecticut; specifically in the service contract context. This bill is directly aimed at eliminating the nondisclosure of liquidated damages provisions in contracts. Far too often small businesses in our state experience an "unfair surprise" when they learn for the first time that they are stuck in a service contract with a liquidated damages clause. Too often these provisions go unseen due to being buried in the fine print. I have also heard accounts of misleading statements by sales reps contributing to this problem. Whatever the cause may be, the reoccurring theme is that these harsh provisions invariably go unnoticed, and unread, by the people who need to understand them the most.

This bill goes a long way toward addressing this problem by requiring the purchaser of the services to sign or initial a disclosure in the contract stating that they ''understand this liquidated damages provision". The act of signing or initialing a specific provision in the contract will provide the necessary warning to the purchaser about the significance of that particular provision, which warning will in turn trigger a dialogue between the parties. This will go a long way toward insuring fair disclosure of these harsh contract provisions to Connecticut small business owners.

Attorney General Richard Blumenthal-This legislation requires a party potentially liable for liquidated damages to sign a statement stating that the party has read the provision and understands its meaning. Any such provision that is not signed cannot be enforced. This bill is consistent with current case law limiting the enforceability of liquidated damages provisions to situations where the court finds:

1. The value of the damage as a result of the breach is expected to be uncertain or difficult to prove.

2. There was intent on the part of the parties to agree to a liquidated damage amount.

3. The amount in the contract is reasonable and not disproportionate to the amount of loss presumed by the contractual parties.

Onerous liquidated damages are used to intimidate consumers. They may have unknowingly agreed to such amount and then have difficulty proving they did not agree to it. This legislation may help some consumers -- and some businesses -- by drawing special attention to the existence and extent of a liquidated damages provision.

NATURE AND SOURCES OF SUPPORT:

None submitted

NATURE AND SOURCES OF OPPOSITION:

Kevin R. Hennessy, Staff Attorney, Connecticut Business & Industry Association-Mandating that parties to a contract with a liquidated damages clause initial a clause that conspicuously states "this is a LIQUIDATED DAMAGES provision and I understand it" is unnecessary legislation. Moreover, the clause will likely be ignored and the signing party will dutifully initial where he or she is told. Therefore, it is unnecessary legislation that likely will not protect its targeted beneficiaries.

Currently, the law presumes that parties to a contract have read the terms and conditions to which they have agreed. Additionally, if a party to a contract does not agree to certain provisions, or the contract as a whole, they have the opportunity to negotiate language changes or choose not to become a party to the contract. Moreover, if a contract is unconscionable or a party has undue influence over another party, the validity of the contract can be challenged in court.

Liquidated damages clauses are already narrowly tailored by the court to ensure that they

are valid. Sweepingly changing contracting standards for everyone is a rash response to the argument that a few people have been handed. Businesses, both small and large, do not want to be told how to conduct their daily transactions. Altering how all parties contract is unnecessary and bad public policy.

Reported by: Sarah E. Kolb

Date: 04/26/2007