Arbitration & Mediation

Non-Lawyer Fails to Argue Unconscionability in Settlement Agreement at Trial, Loses Appeal Over Escalation Clause

By Christopher B. Hopkins, Esq.

It is common to have a time-limit demand and a settlement agreement which states that failure to pay on time results in the defendant/payor consenting to a judgment of a (higher) amount. This is known as an escalation clause.

In Lawrence Reznik v. FRCC Products, Inc., this issue arose in the context of a construction dispute. FRCC develops generators and its plans passed Broward and Palm Beach County building departments. Reznik, apparently a competitor, reportedly copied the plans. Suit was filed and the parties agreed to settle it for only $2,000 as long as it was paid at a certain time and place. The settlement agreement contained an escalation clause which said that failure to pay exposed the defendant to a consent judgment of $40,000 plus attorney’s fees and costs. It further stated that FRCC only had to file an affidavit of failure to pay “without the necessity of hearing, notice or any further proceeding.” Reznik failed to timely pay $2,000 and FRCC sought to collect on the $40,000.

At the trial level, Reznik defended himself, claiming that he was not a lawyer and could not be bound by the letter since he signed it individually and on behalf of his company. Since he was not a lawyer, he could not sign for the company and therefore the letter agreement was a nullity. Trial court was not convinced.

On appeal, Reznik hired counsel who argued, for the first time, that the amount was unconscionable and an impermissible penalty. Whether or not the Panel (Ciklin, Gross and Warner) was sympathetic, we’ll never know. They flatly concluded that the issue was not raised or preserved below so they could not consider it.

Lessons? We maintain that way too much construction business is done with incomplete written agreements/terms and without even scant legal consult. This may be one of those cases. Whether or not there was a loophole in the signor’s competency was, at a minimum, an incomplete argument which may have entirely been avoided if a lawyer was consulted and further negotiations could have trimmed out that term before a letter agreement was signed.

Full post as published by Florida Arbitration Law on August 18, 2009 (boomark / email).