The highest courts of two states recently adopted Sections of the Restatement of the Law Second, Contracts. Summaries of those opinions follow.
In Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 393 P.3d 449 (Ariz. 2017), the Supreme Court of Arizona adopted Restatement of the Law Second, Contracts § 356(1). That case involved a dispute over the legality of a five percent late-fee provision in a promissory note, which obligated a commercial borrower to pay nearly $1.4 million when it was late in submitting a balloon payment on a loan. The trial court granted partial summary judgment to the lender, finding that the late fee was enforceable; the court of appeals reversed that portion of the judgment. Vacating the opinion of the court of appeals and reversing and remanding the trial court’s grant of summary judgment, the Supreme Court of Arizona held that the late fee was an unenforceable penalty. The court adopted § 356(1) of the Restatement “to test the enforceability of a stipulated damages provision,” and, applying that test, explained that, here, “. . . the late fee neither reasonably forecasted anticipated damages for the losses identified in the late fee provision nor reasonably approximated the actual losses”; moreover, “the difficulty of proving [the lender’s] loss as identified in the late fee provision was slight.” The court explained its adoption of § 356(1), saying “. . . the test best accommodates the goal of compensating the non-breaching party for a loss rather than penalizing the breaching party. Under the Restatement Second test, courts have flexibility to respect the parties’ right to stipulate to damages for a breach but, when appropriate, prevent imposition of a penalty.”
In Roach v. BM Motoring, LLC, 155 A.3d 985 (N.J. 2017), the Supreme Court of New Jersey adopted Restatement of the Law Second, Contracts § 241. In that case, two used-car buyers who had disputes with the same used-car dealer, and who attempted to comply with the terms of a dispute-resolution agreement (DRA) in their purchase agreements by filing their claims with the American Arbitration Association (AAA), were unable to proceed with their claims when the dealer failed to respond to the AAA’s requests for filing fees related to the first buyer’s dispute, causing the AAA to refuse to “accept for administration any disputes involving [the dealer].” When the buyers then filed a complaint in New Jersey state court against the dealer, the trial court dismissed their claims for failure to arbitrate; the court of appeals affirmed. Reversing and remanding the matter for further proceedings, the Supreme Court of New Jersey held that “defendants’ knowing refusal to cooperate with plaintiffs’ arbitration demands, filed in reasonable compliance with the parties’ agreement, amount[ed] to a material breach of the DRA and, as such, bar[red] the breaching party from later compelling arbitration.” The court adopted § 241 of the Restatement and, “keep[ing] in mind the Second Restatement’s ‘flexible criteria’ for assessing a material breach,” concluded, among other things, that “[a] failure to advance required fees that results in the dismissal of the arbitration claim deprives a party of the benefit of the agreement. Therefore, the failure to advance fees ‘goes to the essence’ of the DRA and amounts to a material breach.”
The Institute is currently working on the Restatement of the Law of Consumer Contracts, which draws on the Restatement Second of Contracts, the Uniform Commercial Code, and court opinions in cases involving disputes between businesses and consumers. Visit the projects page to learn more.