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Case Summary: In re Bubble Up Delaware, Inc., 684 F.2d 1259 (C.A.9 (Cal.) 1982)

Category : Case Summaries, Contract

Key Holding: Ninth Circuit held that Courts will not construe contractual stipulations as conditions precedent unless required to do so by the plain, unambiguous language of the contract.

Background: Bubble Up Delaware, Inc. (‘Bubble Up’) filed for bankruptcy in 1970. The US Dept. of Labor (“DOL”) filed a proof of claim for damages arising from breach of contract in the amount of $700,000. The contract in question required DOL to provide Bubble Up with $1,000,000 in exchange for Bubble Up’s employment of 300 unemployed residents of Los Angeles, CA for a period of nine months.

A liquidated damages term was included in the contract which stated:

“[T]he Contractor (Bubble Up) shall refund to the government (US Dept. of Labor) for each employment opportunity short of 300, the sum of Twenty Five Hundred Dollars ($2,500); PROVIDED, HOWEVER, that no such refund shall be required by the Contractor unless the number of persons certified by CEP…is at least three (3) for each of the 300 employment opportunities the Contractor has agreed to provide hereunder as its aforesaid facility.”

Bubble Up claimed that the DOL was not entitled to liquidated damages because the DOL failed to satisfy a condition precedent to Bubble Up’s performance; namely, the DOL did not certify three persons for each of the employment opportunities that Bubble Up was required to supply. The DOL, however, argued that the provision was a valid liquidated damages clause and that the certification requirement was not a condition precedent to Bubble Up’s performance.

The bankruptcy court disallowed DOL’s claim, finding that the certification requirement was a condition precedent and further holding that the liquidated damages provision was an unenforceable penalty because it did not reasonably forecast the harm DOL suffered as a result of Bubble Up’s breach. The District Court reversed the Bankruptcy Court on both points and Bubble Up appealed.

Issues: Was the damage provision a valid liquidated damages clause or an unenforceable penalty? Was the DOL precluded from recovering liquidated damages because the certification requirement was a condition precedent to recovery?

Standard of Review: Whether a contract contains a condition precedent is a matter of contract interpretation that constitutes a matter of law and is subject to de novo review. In re Beverly Hills Bancorp, 649 F.2d 1329, 1334 (9th Cir. 1981).

Analysis: The Ninth Circuit found that the liquidated damages were reasonable because they were proportionate to the number of employees not hired for the requisite period. The Court held that a more precise measurement of damages was not required where “the parties have bargained for a period of employment and where the value of less than full performance is questionable and difficult to calculate.”

The Ninth Circuit further held that the Bankruptcy Court committed reversible error in holding that DOL’s certification of three individuals for each job was a condition precedent to Bubble Up’s performance. The Court reasoned that the clause would be “senseless” as it would require DOL to certify three persons regardless of whether Bubble Up had any job opportunities. “[W]here one interpretation makes a contract unreasonable or such that a prudent person would not normally contract under such circumstances, but another interpretation equally consistent with the language would make it reasonable, fair, and just, the latter interpretation would apply.” (quoting Elte, Inc. v. S. S. Mullen, Inc., 469 F.2d 1127, 1131 (9th Cir. 1972)). Moreover, the Court reasoned that “[c]onditions precedent are not favored and the courts will not construe stipulations as conditions unless required to do so by plain, unambiguous language. Lockwood v. Wold Corp., 629 F.2d 603, 610 (9th Cir. 1980).

Holding: The Ninth Circuit affirmed the District Court’s award of liquidated damages to the DOL against Bubble Up, finding that the liquidated damages provision was valid and that the certification requirement was not a condition precedent to Bubble Up’s performance.

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