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COURTSIDE: A Damaging Lesson.

FOR THE 1997-98 school year, the Arrowhead School District, which is in southwestern Montana, employed James Klyap as a new teacher at its single school, which serves grades 1-8 and at the time had 11 full-time teachers and various part-timers. Klyap taught math, language arts, and physical education for grades 6-8. He also helped initiate a sports program and coached flag football, basketball, and volleyball.

During that same year, the teachers considered forming a union. The school board delayed offering teaching contracts until the teachers decided whether to unionize; state law would have required the board to collectively bargain with the teachers. The vote, however, was against unionization.

On or about 15 June 1998, the school district offered Klyap a contract for the next school year. On June 30, he accepted the offer by signing the contract and sending it back. The contract, which was a standard form with blanks to be filled in on an individual basis, provided for a salary of $20,500 and included a "liquidated damages" (also known as "stipulated damages") clause. The clause explained that, if a teacher breaks a contract, the district incurs costs that are impractical or extremely difficult to calculate; thus the amount the teacher would owe the district would be fixed in relation to the date of requested release from the contract. More specifically, the contract required the teacher to provide two weeks' notice for any requested release and to pay 10% of his or her salary as damages if the request was before July 20 and 20% if the request was after July 20. Klyap also signed a form acknowledging responsibility for reading the teachers' handbook, which included the same liquidated damages clause.

Despite signing the contract, Klyap continued to seek other employment opportunities in the area. At interviews he was forthcoming about his signed status but also explained that the district had not yet given him the finalized contract, and, based on what he perceived as a lack of support and security during the past year, he was not sure that Arrowhead could be trusted to send it back.

On or about August 5, Klyap received an offer for what he considered his "dream job," serving as co-manager with his wife of a nearby 5,000- acre resort ranch that offered guests hunting, fishing, and horseback riding. With limited time for this "life decision," he decided to accept the offer. On August 12, he informed Arrowhead officials that he would not be returning. Knowing that the school year was scheduled to start on August 26, he offered to work the first few weeks and to help in the process of finding and orienting a replacement teacher. Arrowhead insisted on enforcing the liquidated damages clause, and Klyap duly submitted a check for the stipulated amount of $4,100, which was 20% of the stated salary. However, he requested that Arrowhead's administration not deposit the check right away because his account did not have sufficient funds to cover that amount. Shortly thereafter, upon consulting with family members who advised him that the liquidated damages clause was not enforceable, he stopped payment on the check.

Arrowhead first attended to filling the vacancy caused by Klyap's departure. Although the district had had 80 applications on file at the time of offering Klyap the contract, only two viable applicants remained available in August. The district was able to hire one of them, a brand-new teacher, at a salary of $19,500, just before the start of classes.

Next, in response to Klyap's stop payment, on 26 February 1999 the district filed suit in state court to enforce the liquidated damages clause. On 12 March 2001, after a trial at which a school board member testified that the purpose of the clause was to "prevent losing a teacher at a later period of time," the judge ruled that the clause was enforceable because the damages met the state statutory standard of being impractical or extremely difficult to fix and because the district had enforced the clause routinely and equitably against other teachers. As to the underlying damages, the court found that district officials had had to forgo other administrative activities for the start of the school year in order to arrange and conduct interviews; train the new, less-experienced teacher; and reorganize the sports program. Moreover, the new teacher had missed the staff development training earlier in the year.

On 4 April 2001, Klyap appealed, pro se (i.e., without an attorney), to Montana's highest court.

On 28 October 2003, the Montana Supreme Court affirmed the lower court's decision.1 As the first part of a comprehensive and thorough analysis, the court traced the "somewhat tortured history" of the law of liquidated damages. Such situations put the court in the position of deciding "whether or not it will rewrite the contract by striking the stipulated damages clause as a penalty." The court observed: "The test of reasonableness becomes somewhat circular and subjective: how can one meet a burden of proof to demonstrate anticipated damages are reasonable and yet difficult and impractical to prove at the same time?"

Next, the court examined Montana law on the subject, finding that the statutory standard for liquidated damages was an outdated codification of the common law developments across the country and that Montana case law, starting with a construction contract related to the Big Sky ski area, reveals inconsistencies and disparities rather than a detectable and defensible rule.

Finally, the court adopted an unconscionability test that determines 1) whether the liquidated damages clause constitutes a "contract of adhesion," meaning that "the weaker bargaining party had no meaningful choice regarding acceptance of the provisions," and, if so, 2) whether the contractual terms are unreasonably favorable to the drafting party, meaning "whether the clause is within the reasonable expectations of . . . or is unduly oppressive to the weaker party." The court further explained that, under its approach, the rebuttable presumption is that the clause is enforceable, the burden of proof is on the breaching party, and the relevant sources of evidence are various, including but not limited to the parties' intent, the presence or absence of negotiations, and the relationship of the contractual terms to actual damages.

Applying this approach, the court first determined that the clause in question here did constitute a contract of adhesion. The school board was the more powerful bargaining party, as evidenced by the teachers' lack of a union, the many applicants for Klyap's position, and the form contract with a blank for the salary.

Second, pointing out that this determination did not end the analysis, the court moved to the difficult step of determining reasonable expectation or undue oppression, which more specifically consists of deciding "whether the clause is [intended] to force performance rather than estimate acceptable damages, whether damages were difficult to fix, and whether the liquidated damages approximated actual damages." After canvassing the pertinent case law from other jurisdictions and the corresponding contracts from other Montana districts, the court concluded that, "while the 20% liquidated damages clause is definitely harsher than most, it is still within Klyap's reasonable expectations and is not unduly oppressive." The supporting factors consisted of 1) the difficulty of finding a teacher who could provide the same services as Klyap in such a small school and at such a late date and 2) the lost time in terms of interviews, staff development, and reorganizing the sports program. The court explained that "loss of equivalent services and lost time are types of damages impractical and difficult to quantify."

TARA Depuy, who, as county attorney, represented the district in this case, offers the cautious conclusion that the decision is probably generalizable to other jurisdictions to the extent that Montana's highest court formulated its two-part test on the pertinent court decisions from around the country.

James Klyap, who represented himself on the appeal, suggests, with obvious sincerity, that the controlling criteria in the formulation or application of such analytical approaches should be basic reasonableness and fairness. He explains:

I can certainly see the need for retention, especially in rural districts where the pay does not attract a large supply of experienced teachers, but is 20% of the salary that has not yet been paid a fair figure under the circumstances? For all the sports I coached diligently, the district paid me $500. Given my honesty with them and with other employers, my offer to help with the transition, and their salary savings for the replacement teacher, is $4,100 a reasonable amount? Moreover, is it a prudent way to retain teachers, who should want to teach for you?

Either way, this case presents a costly lesson for teachers and for districts that include a liquidated, or stipulated, damages clause in their teacher employment contracts. Although the court enforced the clause in this case, in this well-reasoned recent decision and in most of the much older, canvassed case law from other jurisdictions,2 the answer to the question of the enforceability of liquidated damages clauses in teacher contracts is "it depends."

First, it depends on the jurisdiction in terms of its specific approach to such clauses. For example, although this decision was impressively well reasoned, it pointed out the lack of a uniform rule in the common law of the various states. Moreover, the seven participating members of the court were not unanimous; one judge did not agree that the first, adhesion-contract question was an essential element of the applicable approach, and another objected to this two-pronged, unconscionability approach because neither party raised it in the first place.

Second, the answer depends on the context. For example, in this case the court emphasized that the teachers were not unionized and that the school was small and rural. If the clause were in a collective bargaining agreement, the case would involve more equal bargaining power, a negotiated rather than a take-it-or-leave-it provision, and public sector labor law, such as binding arbitration of grievances.

Last and not least in these overlapping contingencies are the specific facts of the case, which included the particular teacher's service, the number of other applicants, and the statements of school board members. Here, for example, Klyap's experience and his initiatives in the sports program ironically worked against him.

In sum, despite the continuing low level of teacher salaries, contractual provisions that provide for liquidated damages warrant careful attention by both the employer and the employee. In the words of Montana's highest court, the question ultimately is not whether such clauses are oppressive but whether they are "unduly oppressive."

1. Arrowhead Sch. Dist. No. 75 v. Klyap, 79 P.3d 250 (Mont. 2003). I obtained supplementary information via telephone interviews on 17 February 2004 with attorney Tara Dupuy, who represented the district, and James Klyap, who represented himself on the appeal.

2. Compare Nat'l Educ. Ass'n v. Lee County Bd. of Pub. Instruction, 260 So.2d 206 (Fla. 1972) (upheld clause for $100 as part of work stoppage); Arduni v. Bd. of Educ., 418 N.E.2d 104 (Ill. Ct. App. 1981), rev'd on other grounds, 441 N.E.2d 73 (Ill. 1982) (upheld clause for 4% of salary or $716 in 1979); Unified Sch. Dist. v. DeWerff, 626 P.2d 1206 (Kan. Ct. App. 1981) (upheld clause for lump sum of $400 plus $75 per month for remaining period in 1978-79 school year); Bottineau Pub. Sch. Dist. v. Zimmer, 231 N.W.2d 178 (N.D. 1975) (upheld clause for $500 in 1973); and Bowbells Pub. Sch. Dist. v. Walker, 231 N.W.2d 173 (N.D. 1975) (upheld clause for 4% of salary or $252 in 1973), with Indep. Sch. Dist. v. Dudley, 192 N.W.2d 261 (Iowa 1923) (struck down clause for 25% of salary or $252 in 1923).

PERRY A. ZIRKEL is University Professor of Education and Law, Lehigh University, Bethlehem, Pa.
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Author:Zirkel, Perry A.
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Geographic Code:1USA
Date:May 1, 2004
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