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The Penalty Rule Does Not Apply To Marital Settlement Agreements

July 16, 2019

MARGARITA ROMANOVA reports on a recent published decision from the Superior Court of New Jersey, Appellate Division.

More often than not, voluntarily-executed divorce settlement agreements are perceived to be strictly contractual in nature and defined by the “four corners” of the document. However, the matrimonial setting has significant implications on the Court’s interpretation and enforcement of those agreements. The Courts recognize that former spouses may decide to breach the divorce agreement solely to inflict emotional or economic harm on the former spouse that cannot be compensated under traditional contract principles. In a recent published decision, the Appellate Division reaffirmed that the policies underlying general contract principles do not apply with equal force in the divorce context.


After a five-year marriage, the parties divorced after having reached an agreement on all issues raised in their divorce. The resulting “Memorandum of Understanding” was voluntarily executed by both spouses and adjudicated binding and enforceable in their Judgment of Divorce. The parties’ agreement provided for, inter alia, “a per diem penalty of $150.00 for every day that husband fails to comply with [the] agreement.” The enforceability of this clause reached the Appellate Division when, after the Husband failed to meet his obligations under the parties’ agreement and accumulated $18,450 in “penalties,” the trial court required him to pay the full amount demanded by the wife.


The husband’s breach involved a failure to pay off the loan on the wife’s vehicle by a date certain and to timely transfer clear title to her. The evidence conclusively showed that the Husband was a multimillionaire at the time of the divorce, and he did not dispute having waited to pay off the loan. The breach fell far short of the $18,450 penalty and did not impair the Wife’s ability to use the vehicle at any time.


The Appellate Division swiftly concluded that, under traditional contract principles, the $150.00 per day “penalty” provision would be an unenforceable liquidated damages clause. Nonetheless, recognizing that this provision was sought to be enforced in the post-divorce context, the Court declined to apply the penalty rule to matrimonial settlement agreements to invalidate this provision. Instead, the Court specifically noted that, in a matrimonial setting, enforcing the penalty rule would deprive a non-breaching spouse (the wife in the case) of adequate compensation for “idiosyncratic value,” which is subjective and not otherwise compensable.


The decision is yet another reminder that the Family Court is specifically empowered to adjudicate disputes with an eye towards assuring equity and preventing unconscionability. Of course, all matrimonial agreements are subject to continuous review by the Family Court post-judgment, and divorcing parties should negotiate all terms keeping in mind that the Court places an undeniable premium on post-divorce peace.


Please contact Margarita Romanova if you have any questions or need assistance in connection with this subject.