Law Lessons from DARA-ANN SCHEPS f/k/a PAPARAZZO VS. VICTOR PAPARAZZO, App. Div. (A-0717-08T1; Decided July 29, 2009):

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“The basic contractual nature of matrimonial agreements has long been recognized.” Pacifico v. Pacifico, 190 N.J. 258, 265 (2007). Although “‘the law grants particular leniency to agreements made in the domestic arena,’ thus allowing ‘judges greater discretion when interpreting such agreements[,]‘ . . . [a]s a general rule, courts should enforce contracts as the parties intended.” Id. at 266. Where the terms of a contract are unambiguous, “the court must enforce it as written.” County of Morris v. Fauver, 153 N.J. 80, 103 (1998).

“Settlement agreements in matrimonial matters, being ‘essentially consensual and voluntary in character, . . . [are] entitled to considerable weight with respect to their validity and enforceability’ in equity, provided they are fair and just.” Dolce v. Dolce, 383 N.J. Super. 11, 20 (App. Div. 2006) (quoting Petersen v. Petersen, 85 N.J. 638, 642 (1981)); see also Lepis v. Lepis, 83 N.J. 139, 153 (1980); Berkowitz v. Berkowitz, 55 N.J. 564, 569 (1970); Schlemm v. Schlemm, 31 N.J. 557, 581-82 (1960).

Separation agreements “‘are generally favored by the courts as a peaceful means of terminating marital strife and discord so long as they are not against public policy.’” Dolce, supra, 383 N.J. Super. at 20 (quoting Konzelman v. Konzelman, 158 N.J. 185, 193 (1999)); see also Weishaus v. Weishaus, 180 N.J. 131, 143 (2004). “And while incorporation of a PSA into a divorce decree does not render it immutable, nor its terms solely governed by contract law, nevertheless, if found to be fair and just, it is specifically enforceable in equity.” Eaton v. Grau, 368 N.J. Super. 215, 224 (App. Div. 2004).

Case law regarding consideration of liquidated damages is helpful in our analysis of the default interest rate in a PSA. “Liquidated damages is the sum a party to a contract agrees to pay” for breaching a promise. Westmount Country Club v. Kameny, 82 N.J. Super. 200, 205 (App. Div. 1964). When it is agreed upon in “a good faith effort to estimate in advance the actual damage that will probably ensue from the breach, [it] is legally recoverable as agreed damages if the breach occurs.” Ibid. A penalty, on the other hand, “is the sum a party agrees to pay in the event of a breach, but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach.” Ibid. “Parties to a contract may not fix a penalty for its breach[;] . . . such a contract is unlawful.” Ibid. (citing Suburban Gas Co. v. Mollica, 131 N.J.L. 61, 62 (Sup. Ct. 1943)).

Because stipulated damages “may constitute an oppressive penalty,” “[h]istorically, courts have closely scrutinized contract provisions that provided for the payment of specific damages upon breach.” Metlife Capital Fin. Corp. v. Wash. Ave. Assocs. L.P., 159 N.J. 484, 493 (1999) (citing Wasserman’s Inc. v. Middletown, 137 N.J. 238, 248 (1994)).

An agreement, made in advance of breach, fixing the damages therefore, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless (a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and (b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.
[Ibid. (citing Restatement of Contracts §339 (1932)). {The Restatement (2d) of Contracts §339 (1981) does not alter these principles.}]

“New Jersey adopted the Restatement method for evaluating stipulated damage clauses in [Westmount Country Club, supra, 82 N.J. Super. 200].” Ibid. However, since then, “[c]ourts began to treat the two-pronged Westmount test as a continuum; the more uncertain the damages caused by a breach, the more latitude courts gave the parties on their estimate of damages.” Id. at 494. “Reasonableness” is now “‘the standard for deciding the validity of stipulated damages clauses,’” and it is determined “‘under the totality of the circumstances.’” Id. at 495 (citing Wasserman’s Inc., supra, 137 N.J. at 249).

The court tacitly acknowledged this more flexible approach in a foreclosure case challenging an enhanced default rate, which increased the contract rate by 15%. Id. at 494 (citing Stuchin v. Kasirer, 237 N.J. Super. 604 (App. Div.), certif. denied, 121 N.J. 660 (1990)). “Despite reciting the strict two-pronged test of Westmount, [we] remanded the issue to the trial court to receive ‘appropriate evidence of the reasonableness or unreasonableness of the 15% rate increase[.]‘” Metlife Capital Fin. Corp., supra, 159 N.J. at 494-95 (citing Stuchin, supra, 237 N.J. Super. at 614).

In Wasserman’s Inc., supra, 137 N.J. at 249-54, our Supreme Court expressly addressed the proper method for evaluating stipulated damage clauses. The challenged clause provided that upon the cancellation of a lease of commercial property, the lessor would pay damages in the amount of 25% of the lessee’s gross annual receipts. Id. at 242. Citing the “principle of reasonableness,” the Court noted that the uncertainty or difficulty in calculating damages, the parties intent, the actual damages suffered, and the parties’ bargaining power, all affect the validity of a stipulated damages clause. Id. at 250-54. However, the Court did not find these factors to be dispositive, and remanded the case “leav[ing] to the sound discretion of the trial court the extent to which additional proof is necessary on the reasonableness of the clause.” Id. at 258.

In Metlife, the Court applied “‘[t]he overall single test of validity’” to determine whether a five percent late fee was “‘reasonable under the totality of the circumstances.’” Metlife, supra, 159 N.J. at 495 (quoting Wassenaar v. Panos, 331 N.W.2d 357, 361 (Wis. 1983)). The Court found “that under that ‘reasonableness’ test, the five percent late fee is a valid measure of liquidated damages.” Id. at 495-96 (observing that “liquidated damages provisions in a commercial contract between sophisticated parties are presumptively reasonable and the party challenging the clause bears the burden of proving its unreasonableness”).

“Default interest rates, like late fees, are presumed reasonable.” Id. at 501. However, in Metlife, supra, the Court noted that, while “[n]o reported case in New Jersey ha[d] directly addressed the validity of a fixed percentage late charge,” courts in other jurisdictions had determined invalid late charges that “involved unusually large percentages or explicit evidence of a coercive intent.” Id. at 498-99.

NOTE: This Blog/Blawg, NJ Family Issues, is managed by Paul G. Kostro, Esq., an attorney/lawyer/mediator in Linden, Union County, New Jersey.