Review case 10-4 below in conjunction with Chapter 10 below- The Law of Contracts and Sales II, and then address the
1. What evidence would Klyap have had to possess for him to prevail in this case?
2. Why might the court have not enforced the contract provisions in question if the liquidated damages provision
had been 40 percent, rather than 20 percent?
Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr.
Supreme Court of Montana 79 P.3d 250 (2003)
Arrowhead School District No. 75 is located in Park County, south of Livingston, Montana, and consists of one school,
Arrowhead School For the 1997–98 school year, the School employed about 11 full-time teachers and several part-time
teachers. During that school year, the School employed Klyap as a new teacher instructing mathematics, language arts,
and physical education for the sixth, seventh, and eighth 274275grades. In addition, Klyap, through his own initiative,
helped start a sports program and coached flag football, basketball, and volleyball.
The School offered Klyap a contract for the 1998–99 school year in June 1998, which he accepted. This contract provided
for a $20,500 salary and included a liquidated damages clause. The clause calculated liquidated damages as a percentage
of annual salary determined by the date of breach; a breach of contract after July 20, 1998, required payment of 20
percent of salary as damages. Klyap also signed a notice indicating that he accepted responsibility for familiarizing
himself with the information in the teacher’s handbook that also included the liquidated damages clause.
On August 12, Klyap informed the School that he would not be returning for the 1998-99 school year even though classes
were scheduled to start on August 26. The School then sought to enforce the liquidated damages clause in Klyap’s
teaching contract for the stipulated amount of $4,100.
After Klyap resigned, the School attempted to find another teacher to take Klyap’s place. Although at the time Klyap was
offered his contract the School had 80 potential applicants, only two viable applicants remained available. Right before
classes started, the School was able to hire one of those applicants, a less experienced teacher, at a salary of
The District Court determined that the clause was enforceable because the damages suffered by the School were
impractical and extremely difficult to fix. Specifically, the court found that the School suffered damages because it
had to spend additional time setting up an interview committee, conducting interviews, training the new, less
experienced teacher, and reorganizing the sports program. The district court also found that such clauses are commonly
used in Montana and that the School had routinely and equitably enforced the clause against other teachers. After
concluding that the School took appropriate steps to mitigate its damages, the court awarded judgment in favor of the
School in the amount of $4,100. Klyap appealed.
The fundamental tenet of modern contract law is freedom of contract; parties are free to agree mutually to terms
governing their private conduct as long as those terms do not conflict with public laws. This tenet presumes that
parties are in the best position to make decisions in their own interest. Normally, in the course of contract
interpretation by a court, the court simply gives effect to the agreement between the parties in order to enforce the
private law of the contract. When one party breaches the contract, judicial enforcement of the contract ensures [that]
the nonbreaching party receives expectancy damages, compensation equal to what that party would receive if the contract
were performed. By only awarding expectancy damages rather than additional damages intended to punish the breaching
party for failure to perform the contract, court enforcement of private contracts supports the theory of efficient
breach. In other words, if it is more efficient for a party to breach a contract and pay expectancy damages in order to
enter a superior contract, courts will not interfere by requiring the breaching party to pay more than was due under
Liquidated damages are, in theory, an extension of these principles. Rather than wait until the occurrence of breach,
the parties to a contract are free to agree in advance on a specific damage amount to be paid upon breach. This amount
is intended to predetermine expectancy damages. Ideally, this predetermination is intended to make the agreement between
the parties more efficient. Rather than requiring a post-breach inquiry into damages between the parties, the breaching
party simply pays the nonbreaching party the stipulated amount. Further, in this way, liquidated damages clauses allow
parties to estimate damages that are impractical or difficult to prove, as courts cannot enforce expectancy damages
without sufficient proof.
After reviewing the facts of this case, we hold 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. First, as the School pointed out
during testimony, at such a small school teachers are chosen in part depending on how their skills complement those of
the other teachers. Therefore, finding someone who would provide services equivalent to Klyap at such a late date would
be virtually impossible. [The anticipation of this] difficulty was borne out when only two applicants remained available
and the School hired a teacher who was less experienced than Klyap. As a teacher, especially one with experience
teaching at that very School, Klyap would have to be aware of the problem finding equivalent services would pose.
Second, besides the loss of equivalent services, the School lost time for preparation for other activities in order to
attempt to find equivalent services. As the District Court noted, the School had to spend additional time setting up an
interview committee and conducting interviews. Further, the new teacher missed all the staff development training
earlier that year so individual training was required. And finally, because Klyap was essential to the sports program,
the School had to spend additional time reorganizing the sports program as one sport had to be eliminated with Klyap’s
loss. These activities all took away from the other school and administrative duties that had been scheduled for that
Finally, although the School testified it had an intent to secure performance and avoid the above damages by reason of
the clause, such an intent does not turn a liquidated damages clause into a penalty unless the amount is unreasonably
large and therefore not within reasonable expectations.
Therefore, because as a teacher Klyap would know teachers are typically employed for an entire school year and would
know how difficult it is to replace equivalent services at such a small rural school, it was within Klyap’s reasonable
expectations to agree to a contract with a 20% of salary liquidated damages provision for a departure so close to the
start of the school year.
Accordingly, we hold the District Court correctly determined that the liquidated damages provision was enforceable.