Opinion ID: 2498554
Heading Depth: 3
Heading Rank: 1

Heading: The ETF Is an Alternative Performance Provision under Washington Law

Text: ¶ 12 An alternative contract allows a promisor to render `one of two or more alternative performances either one of which is mutually agreed upon as the bargained-for... exchange for the [other party's] return performance.' Chandler, 44 Wash.2d at 401, 267 P.2d 907 (quoting 5 Arthur Linton Corbin, Corbin on Contracts § 1079, at 379 (1951)). By comparison, a liquidated damages provision is a sum of money agreed upon in advance that is a reasonable forecast of just compensation for the harm caused by breach. Walter Implement, Inc. v. Focht, 107 Wash.2d 553, 559, 730 P.2d 1340 (1987). If the liquidated damages provision is either not a reasonable forecast or if the harm is easy to ascertain, then the provision is an unlawful penalty. Id. Whether a contract provides for alternative performance or for liquidated damages is a question of factual interpretation that does not rely upon the form of words used by the parties. Bentley, 38 Wash.App. at 155, 684 P.2d 793. The distinguishing factor between the provisions is that the parties intended the options to give the promisor a real choice between reasonably equivalent choices. Chandler, 44 Wash.2d at 401, 267 P.2d 907. ¶ 13 This means that at the time fixed for performance either alternative might prove more desirable and that the parties did not intend the device to assure the performance of the [other] option. Id. at 401, 403, 267 P.2d 907. Additional factors to consider are whether the money payment is equivalent to performance of the option, and the relative values of the performances. Bentley, 38 Wash.App. at 156, 684 P.2d 793. The value of the options is determined at the time of contracting and not at the time the option is exercised. Id. In other words, whether a contract provides for an alternative performance or for a liquidated damages provision depends on whether (a) the contract gives the promisor a real option, and (b) there is a reasonable equivalence between the two choices. ¶ 14 Appellants reject this analytical framework, claiming that a true alternative performance contract would allow Appellants to choose between paying (1) the monthly payments and receiving Clearwire's services for the life of the fixed term or (2) the ETF and receiving Clearwire's services for the life of the fixed term. This is incorrect and is not supported by case law. So long as the ETF is a `specified payment' that either nullifies the contract or allows Appellants to `regain the legal privilege of not' performing, then an alternative contract can exist. Chandler, 44 Wash.2d at 402, 267 P.2d 907 (quoting 5 Corbin, supra, § 1213, at 883, 884); Bentley, 38 Wash.App. at 155-56, 684 P.2d 793 (same). Thus, despite Appellants' claims otherwise, the framework established in Chandler and Bentley applies here. ¶ 15 Under the Washington framework, the ETF at issue is an alternative performance provision and not a liquidated damages provision because the ETF provides a real option to Appellants and there is a reasonable equivalence between the two choices. ¶ 16 Here, a real option exists because at the time of contracting, Appellants did not know whether they would want to honor the contract for the fixed term or cancel early. A real option exists if either option might prove more desirable and the promisor is free to choose either one. Chandler, 44 Wash.2d at 401, 267 P.2d 907; Bentley, 38 Wash.App. at 155, 684 P.2d 793. At issue in Bentley was a collective bargaining agreement between a teacher and her school. Id. at 154, 684 P.2d 793. Under the agreement, Bentley received paid sabbatical leave but had to repay the sabbatical funds if she chose not to return to work afterward. Id. The parties disputed whether this requirement was a liquidated damages provision or an alternative performance provision. Id. at 154-55, 684 P.2d 793. The court held a real option existed because the teacher did not, at the time of contracting, know whether she would need or desire to return to her position. Id. at 156, 684 P.2d 793. More importantly, the school could not compel Bentley to choose either option. Id. Thus, rather than coerce Bentley into returning to her job, the agreement gave her control over her future plans by not requiring her to return. Id. Similarly in Chandler, a real option existed because the defendant had the power to choose between the two choices. 44 Wash.2d at 403, 267 P.2d 907. The defendant corporation had agreed to either sell plaintiff property or to pay plaintiff additional salary. Id. at 398, 267 P.2d 907. The defendant argued that the option of an increased salary was merely a device to enforce the property sale. Id. at 403, 267 P.2d 907. However, the court held that the agreement gave a real option because the defendant reserved for itself the ability to choose between paying the increased salary or selling the property depending on which one it preferred. Id. ¶ 17 Here, Appellants contracted with Clearwire to pay monthly fees for a fixed term in exchange for Clearwire's services at a discounted monthly price. Appellants had the option of canceling their contracts early if they paid the ETF. Similar to the teacher's position in Bentley, Appellants did not know whether they would want to continue the service in six months or in one year. As such, Appellants occupied a position similar to the defendant in Chandler and the teacher in Bentley who could choose between options. Appellants had a real option of exiting the contract early by paying the ETF if they so chose. Perhaps most importantly, Clearwire, like the school in Bentley, could not compel Appellants to choose either option. ¶ 18 Appellants counter that, unlike the school in Bentley, Clearwire can impose the ETF on the promisor in some situations. Clearwire, in fact, can force a customer to pay the ETF if the customer breaches the contract. However, Appellants' contention argues a scenario not before this court because Clearwire did not impose the ETF on any plaintiff for breach of contract. Rather, the only ETFs charged were for canceling the contract early, a contingency provided for in the contract allowing a customer to regain their freedom from performance. Thus, the question before us is not whether the ETF is a liquidated damage if unilaterally imposed upon Appellants, but whether the ETF is a liquidated damage when charged for canceling the contract. ¶ 19 Another issue the Appellants raise is the apparent lack of negotiations between the parties. In Chandler, 44 Wash.2d at 403, 267 P.2d 907, the parties had conducted extensive negotiations while, here, Appellants signed a form contract on line. Regardless, Appellants had an initial option between a month-to-month contract and a fixed-term contract. Further, negotiations are not always significant to the analysis as illustrated by Bentley, which did not consider them. 38 Wash.App. at 154-56, 684 P.2d 793. Thus, even though extensive negotiations did not occur, Appellants still chose the fixed-term contract with the ETF over an alternative month-to-month contract. The lack of negotiations does not detract from the real option that existed between the two options. ¶ 20 Moreover, it is conceivable that even if these contracts were negotiated one at a time, customers would still negotiate for an ETF. A customer signing up for a yearlong (or two-year-long) commitment might be hesitant without having an escape from performance. The ETF provides that escape. It allows customers to enjoy a discounted monthly premium due to signing up for a long-term plan while retaining some of the flexibility that existed with the month-to-month plan. ¶ 21 Next, this court must determine if there exists a reasonable equivalence between the two options: paying the ETF or continuing the contract. The court must look to the relative value of the options at the time of contracting to determine if a reasonable equivalence exists. Id. at 155-56, 684 P.2d 793; Chandler, 44 Wash.2d at 403-04, 267 P.2d 907; Restatement (Second) of Contracts § 356 cmt. c (1981) (In determining whether a contract is one for alternative performances, the relative value of the alternatives may be decisive.). If the values are so disproportionate as to be unequal then one option is a penalty and not an alternative performance. Chandler, 44 Wash.2d at 404, 267 P.2d 907. Both Bentley and Chandler analyze the relative value of options using a fairly deferential lens. In Bentley, the court held that a reasonable equivalence existed between the teacher returning to work or returning the sabbatical pay instead. 38 Wash.App. at 156, 684 P.2d 793. Bentley claimed the values were unequal because no reasonable person would choose unemployment. Id. However, at the time of contracting, a teacher may want to retain control over her future plans and not return to work. Id. Similarly, in Chandler, the court was unwilling to declare the option between the property and additional salary unequal because there was no vast disproportionality between them. 44 Wash.2d at 404, 267 P.2d 907. In other words, because there was a lack of obvious inequality between the two options, the relative values of the two options supported finding an alternative performance provision. See id. at 403-04, 267 P.2d 907. ¶ 22 We must determine the relative value of the ETF's three different values compared to the value of fulfilling the contract. Following the reasoning of Bentley, where the court looked to the relative value between the options at the time of contracting, the options here are relatively equal. As stated above, the value of the ETF compared to the sum of the remaining monthly payments generally depended upon the time left under the contract. Under the two-year contract, most disfavorable to the customer, the ETF is greater than the remaining payments only during the last four months. ¶ 23 The ETF benefited Appellants by allowing them to retain control over their future decision making while enjoying Clearwire's services at a discount, much like the teacher's option to not return to work gave her flexibility. As for the few months where the ETF is greater than the remaining payments, the court's reasoning in Chandler  that so long as obvious inequality does not exist the relative values are equal is instructive. The ETF is significantly less than the remaining payments for the majority of the life of the contract. Put differently, a customer at the time of contracting could see value in canceling early and paying the ETF rather than paying the remaining monthly payments. ¶ 24 Even when the ETF is greater, it is not so vastly unequal to the remaining payments as to render it a liquidated damages provision. Under the most disadvantageous circumstances, a customer would have to pay a $180 ETF even though a single monthly payment of either $36.99 or $29.99 remained. Br. of Def./Appellee Clearwire US, LLC, App. A. This disparity between the ETF and the remaining payment may seem great, but taken in context of the entire two-year contract, the disparity lessens. Specifically, for the first 20 months of that contract the $180 ETF is less than the remaining payments. Id. In sum, the relative equivalence between the two options is such that a customer, at the time of contracting, could foresee utilizing the ETF to escape his or her obligation of monthly payments. Therefore, the ETF is an alternative performance provision and not a liquidated damages provision.