The recent New Jersey Appellate Division decision in Holtham v. Lucas, 2019 N.J. Super. LEXIS 109 (App. Div. 2019), is important because it acknowledges the use and validity of “penalty provisions” in divorce and post-divorce agreements to ensure a party’s compliance with specific obligations imposed by marital settlement agreements (MSAs). If you are in the process of negotiating terms for an MSA with your ex or soon to be ex, it may be worth considering the use of penalty provisions in your agreement to function as a “sword of Damocles” to ensure compliance.
Under the terms of the divorce agreement in Holtham, the wife was to retain possession of the car and the husband was required to pay off the loan on that car by a date set certain in the agreement. The agreement provided that if husband defaulted on the payoff obligation by the date set in the agreement, a monetary penalty would kick in at the rate of $150.00 per day until he fully complied with the obligation. The husband failed to comply with the payoff obligation and the wife filed an application for enforcement of the underlying payoff obligation and for enforcement of the monetary penalty provision.
By the time of their court appearance, the husband had paid off the car loan but wife still sought enforcement of the monetary penalty provision, which was $18,450.00, reflecting 123 days of noncompliance from the date the loan was required to be paid off until the actual date of compliance. The lower court agreed with the wife and imposed the penalty obligation upon husband for the payment of the $18,450.00 penalty to wife, which was affirmed by the Appellate Division.
This type of penalty is referred to as a “sword of Damocles” type threat, which harkens back to a story told by Cicero, where King Dionysius allowed Damocles to sit on his throne. However, before Damocles was permitted to sit on the throne, Dionysius hung a sword from the ceiling that was suspended over the throne by a single thread. The “sword of Damocles” describes situations of looming danger, where the slightest misstep can cause the sword to fall and inflict injury on whomever is situated underneath the sword.
In the context of MSAs, the use of the term “sword of Damocles” references the use of monetary penalty provisions in a divorce or post-divorce agreement that imposes a specific “per diem” (daily) penalty (ie $150.00 per day) for everyday that a provision in the agreement remains in breach past an agreed upon date. As an example, if the agreement requires your former spouse to transfer title to your car into your name by September 1 and he fails / refuses to do so, a penalty provision within the agreement can impose a monetary penalty against him for each day after September 1 until compliance is had. In essence, the penalty provision represents the sword hanging over his head – so long as he complies with the specified provisions in the MSA by the agreed upon date, he suffers no harm. But if he fails to comply with the deadline for compliance, the thread will snap, and the sword will fall down upon him. The monetary penalties begin and continue until the obligation is complied with. By “freely and voluntarily” entering into and signing the MSA and the penalty provisions in the agreement, each of you takes your seat upon Dionysius’ throne. Whether the “sword of Damocles” falls or not is entirely dependent upon compliance with the specified provisions of the agreement imposed on each of you.
The Appellate Division in Holtham v. Lucas, drew a distinction between the use of a penalty provision in a normal business contract and a penalty provision in a divorce context, saying that “the policies underlying [traditional] contract principles do not apply with equal force in the divorce context,” and therefore the usual limitations on such penalty provisions in a business setting are not applicable in the divorce and post-divorce context. In Holtham, the husband argued that enforcement of the penalty provision was unreasonable and imposed too great a burden given the issue in dispute (his obligation to pay off his wife’s car loan by a certain date).
The Appellate Division in Holtham said that the application of a monetary penalty provision in a divorce or post-divorce agreement is enforceable and is consistent with two important public policies applicable to divorce matters:
The policy favoring enforcement of divorcing parties’ own resolution of their marital controversies; and
The policy favoring sanctions to deter non-compliance with matrimonial orders and agreements.
In other words, parties in a typical contract are assumed to be motivated by money and will only breach the contract when it is in their best economic-interest to do so. However, as it relates to MSA and parties to a divorce, there are a host of other factors at play as to why someone might not comply with an obligation imposed by the agreement upon him or her (ulterior motives for non-compliance besides economic-interests).
When wielded as the “sword of Damocles,” penalty provisions contained within a MSA can be very beneficial to the compliant spouse and can be effective at reducing “ulterior motives” by the other spouse. The Appellate Division in Holtham noted three purposes that monetary penalty provisions in divorce agreements can serve:
(1) : As a method to secure post-divorce harmony and stability;
(2) : As a deterrent for non-compliance that’s not economically motivated; and
(3) : As a means of compensation for the emotional harm resulting from such a breach.
In light of the Appellate Division’s decision in Holtham v. Lucas, it is worth considering the inclusion of a penalty provision in your MSA to act as the “sword of Damocles” – incentivizing compliance with the specified obligations imposed by your MSA. But, be careful because your ex may also want the same type of penalty provisions included in the agreement to ensure your compliance with obligations as well.