Penalty Provisions in Divorce Agreements

Most divorce matters are ultimately resolved with a Marital Settlement Agreement (MSA), sometimes also referred to as a Property Settlement Agreement (PSA). An MSA is a contract between divorcing spouses, wherein they agree amongst themselves how their lives will proceed post-divorce. It covers everything from child-related issues to finances. Many times, clients want to give "teeth" to their agreements by adding "penalty clauses" if one spouse doesn't comply. Typically, they are not enforced based on contract law principles. However, the New Jersey Appellate Division recenty decided MSAs differ from traditional contracts and as such, a penalty agreement in some circumstances may be viable.

The parties in Holtham v. Lucas divorced after five years of marriage. Their MSA required the husband to abide by various financial obligations, including paying off the the wife's auto loan and transferring title of the car to her by a certain date. The MSA included a provision for penalties, requiring the husband to pay $150 per day for every day he fails to comply with the MSA.

Despite his agreement to do so, the husband did not pay off the wife’s car loan or transfer title to her by the date established in the MSA. As a result, the wife filed a motion with the Court to force the husband to comply with his obligations and to pay $150 per day of non-compliance. Two weeks later, the husband delivered title of the car to the wife. In response to the wife’s motion, the husband claimed he should not pay the $150 per day penalty, as it was an unenforceable penalty under traditional contract law. He argued that enforcement of this provision would violate the “penalty rule,” which invalidates unreasonably expensive damages agreed to in a contract. He argued the wife did not incur $150 per day in damages, so enforcement of a penalty in that amount would be excessive compensation for her suffering.

The trial court didn't agree with the husband and enforced the penalty provision, ordering the husband to pay $150 per day (for a whopping total of $18,450) for shirking his responsibility under the MSA.

The husband appealed, but without success. The Appellate Division upheld the trial court’s decision. The Appellate Division agreed with the husband that under traditional contract law principles, payment of $18,450 would be an unenforceable penalty. However, it decided that the penalty rule does not apply the same way to MSAs as it does to typical contracts. There is a sentimental component to MSAs that does not exist in a non-divorce setting. Ensuring “post-divorce harmony and stability” is an important reason to enforce such a penalty provision, the Appellate Division held.

Additionally, enforcing such provisions deters former spouses from trying to harm the other by not complying with their MSA. In a typical contractual relationship, the parties are presumed to be rational. As almost anyone who has gone through a divorce can attest, divorcing spouses do not always behave rationally. The Appellate Division pointed out a person may violate her MSA for the purpose of inflicting emotional or financial harm on her ex-spouse. Enforcement of penalty provisions in an MSA may discourage such behavior.

There is one caveat, however. The Appellate Division noted the Family Court has the authority to modify a penalty provision in the interest of equity and fairness. Just as before, the Family Court can invalidate a penalty provision of an MSA if it is unconscionable or the product of fraud. The Appellate Division reiterated the importance of evaluating a penalty clause based on the totality of the circumstances. The Family Court may consider the size of the penalty in relation to the harm resulting from the MSA breach. Interestingly, this harm does not have to be financial and may include disturbing post-divorce peace.

In this case, the husband was a sophisticated businessman and multi-millionaire. His deliberate breach of the MSA disrupted the post-divorce peace. Although the wife did not suffer $18,450 worth of financial harm, the Appellate Division found no reason to disturb the Family Court’s decision to enforce the penalty provision of the MSA.

If you are going to spend the emotional and financial energy on drafting a divorce agreement, make sure it is done right. Many times, we meet with clients who were divorced by other attorneys, but need to enforce the terms of their MSAs. If the agreement is drafted well, it will not only reduce the likelihood of future litigation (which may be costly), but it will give you peace of mind (which is priceless).

If you think your former spouse has violated your MSA or if you want an MSA that will provide you with as much peace of mind as possible so you can confidently move on to the next chapter of your life, contact Ruvolo Law Group at 973-993-9960 to schedule a consultation.