May 8, 2019

Background

The plaintiff, Amarjot Lamba (“AL”) is a real estate agent with his own Brokerage, Lamba Realty Group Inc. (“Lamba”). AL recruits newly licensed real estate agents and provides them with hands-on training pertaining real estate purchase and sales. AL recruits and trains the up-and-comers with the hope that they would develop their own clientele base; as such, AL reaps a benefit with new clients and the up-and-comer benefits from the hands-on training.

The defendant, Kamal Gurung (“KG”), is a newly licensed real estate agent who began working for Lamba, as a contractor, on January 17, 2012. KG entered into a contract with Lamba in which he agreed to commit to the brokerage for a period of no less than two years (“Contract”). This relationship, unfortunately, did not last – KG quit on September 19, 2012, about eight months after joining the Lamba team.

The Contract

As all good mentors do, AL commenced a legal proceeding against KG relying on Clause 11 of their executed Contract – Clause 11 reads as follows:

[9] I agree to commit a minimum of 24 MONTHS. Should this agreement be terminated prior to the 2 YEAR anniversary all current projects and clients become property of the AJ Lamba Team. If you terminate your membership within 2 YEARS your payment for training is agreed as follows:

1. Leaving the team within 6 months of joining $20,000 (Twenty-thousand dollars) will be payable on the release

2. Leaving the team between 6 months and 1 year of joining $15,000 (Fifteen thousand dollars) will be payable on release

3. Leaving the team between 1 year and 2 years of joining $10,000 (Ten thousand dollars) will be payable upon release.

Considering that KG resigned within eight months, AL was seeking damages amounting to a whopping $15,000.00. KG maintains the position that Clause 11 of the Contract is a “penalty clause” and therefore unenforceable in law.

Clause 11 – Penalty or Damage Pre-Estimate

The Court found that Clause 11 is a penalty clause and is not enforceable. The clause’s purpose is to penalize KG if he chose to resign and, in effect, kept him bound to AL’s brokerage.

How can we tell if a clause is a penalty clause?

The question to answer is whether the clause is a genuine pre-estimate of damages or a penalty. What’s the difference? Court’s consider the quantum specified in the clause, in other words, the amount; if the clause amount is “extravagant and unconscionable” compared to the “greatest loss that could conceivably be proved to have followed from the breach”, it will be found to be a penalty clause and therefore not enforceable in law.

[20] I must compare the quantum of damages provided in the contract with the greatest potential loss that might have been reasonably contemplated by the parties at the time of contracting. If the quantum of damages provided for in the contract is extravagant, excessive, having regard to the greatest potential loss reasonably contemplated by the parties, it will be classified as a penalty and unenforceable.

The court will look into how the quantum was reached – the court will not take issue with a quantum that reflects a genuine attempt by the contracting parties to pre-estimate the loss in the event of a breach. Contracting parties are free to ‘pre-determine’ damages in advance of a breach, so long as those damages are reasonable in the circumstances.

The pre-estimate of damages inquiry is analyzed at the time the contract was entered into. Accordingly, AL had the onus of proving that the $15,000.00 sought is a reasonable amount for training and support provided to KG at the time the Contract was signed.

[17] In cases where there is little or no evidence with respect to the methodology to quantify the calculation of damages, or any meaningful evidence adduced or lead in which the court can assess/determine the reasonableness of damages, let along how the quantum for damages is prescribed, the courts have found that such a clause is a “penalty clause” and have declined to enforce them.

Bad Training

The court found that the training AL provided was not impressive; it was found to have lacked ‘depth and quality’ and was not at all what KG had bargained for. Although Clause 11 is not enforceable, the court still has the power to grant relief for proved damages. It was found that there were dues owed to AL by KG for (i) membership fees, (ii) desk fees (overhead), (iii) lead generation, and (iv) office expenses.

Summary

Liquidated damages must be a genuine pre-estimate of the expected loss in the event of a breach to be determined based on the facts at the time the contract was entered into.

Penalty clauses are not a genuine pre-estimate of damages. They are inserted for the purpose of ‘compelling performance’ of contract obligations. Where such alleged damage estimate is so unreasonable and extravagant, the court will intervene in order to prevent oppression and/or injustice.

Note to Up-and-Comers

To the ‘junior’ professionals - no one wants to be in a ‘forced’ relationship. Read your agreements carefully prior to signing anything.

To the ‘seasoned’ professionals – don’t be a mentor who sues their mentee.