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In New Jersey, Marital Settlement Agreements are contracts that are enforceable just like contracts outside the family law context – with some very important distinctions. Generally, Marital Settlement Agreements are enforceable to the extent they are “fair and equitable.” But does this concept apply to agreements between spouses regarding specific penalties for violations of the agreement?

The case of Holtham v. Lucas involved a legal challenge to a provision in a Marital Settlement Agreement (MSA) that charged a “per diem penalty of $150” for breach of any duty under the agreement. The husband failed to pay off a loan in a timely manner as required by the MSA. As a result, the trial court ordered him to pay $150 for each day of his noncompliance, totaling $18,450, plus attorney’s fees.

On appeal, the husband argued that under general contract law this “stipulated damages” provision was an unenforceable penalty, since the wife did not actually incur $18,450 in damages.

The appellate court agreed the clause would not be enforceable if it was in a standard contract. However, the court held the “Penalty Rule” does not apply in the divorce context. It stated “[a] principal reason to enforce such agreements is to secure post-divorce harmony and stability. Enforcement of penalty provisions may appropriately deter post-divorce non-compliance that is not economically motivated, and it may compensate for the emotional harm resulting from such a breach.”

The parties had entered into the MSA freely and voluntarily and had the advice of counsel. The husband had the financial means to pay the loan but did not do so until several months after the agreed upon date. While the wife did not suffer $18,450 worth of damages as a result of the delay, the court looked at two important public policies that apply in the divorce context. First, courts favor enforcement of divorcing parties’ voluntary agreements, and second, they favor sanctions to deter noncompliance with matrimonial orders. As a result, the “Penalty Rule” did not apply to MSAs, and the husband was required to pay the penalty even though the wife did not actually incur $18,450 in damages.

If you need assistance with enforcing your settlement agreement or meeting your settlement obligations, contact us for a consultation.

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