Punitive Damages and Liquidated Damages

Q: Where do punitive and liquidated damages fit in the damages framework?

A: They sit outside the standard two-step expectation damages framework. Punitive damages are an additional (rare) category; liquidated damages replace the framework with a pre-agreed amount.

Q: What is the standard expectation damages framework?

A: (1) Calculate expectation damages (§ 347 or UCC §§ 2-706–2-715)
(2) Apply limits: mitigation, foreseeability, certainty

Q: What is the general rule for punitive damages in contract law?

A: Punitive damages are not recoverable for breach of contract.

Q: Why are punitive damages generally unavailable in contract law?

A: Contract law compensates for loss (benefit of the bargain), not punishment.

Q: What is the exception to the no-punitive-damages rule?

A: Under § 355, punitive damages are available if the breach also constitutes a tort that allows punitive damages.

Q: What types of conduct support punitive damages in a contract case?

A: Fraud, malice, or wanton disregard for rights.

Q: What key principle comes from Romero v. Mervyn’s?

A: A promise made with no intent to perform (fraud) can justify punitive damages.

Q: Why were punitive damages awarded in Romero v. Mervyn’s?

A: The manager made a promise with no intention of performing to manipulate the plaintiff.

Q: Can contracts eliminate punitive damages?

A: Yes, damages limitation clauses (UCC § 2-719(3)) can exclude them.

Q: What is a liquidated damages clause?

A: A provision where parties agree in advance on damages for breach.

Q: What is the purpose of liquidated damages?

A: To address problems of foreseeability and certainty by fixing damages in advance.

Q: When are liquidated damages enforceable under § 356?

A: When the amount is reasonable in light of (1) anticipated/actual loss and (2) difficulty of proof.

Q: What makes a liquidated damages clause unenforceable?

A: If it is an unreasonably large penalty.

Q: What does UCC § 2-718 say about liquidated damages?

A: Same rule: enforceable if reasonable; void if a penalty.

Q: Key difference: liquidated damages vs. penalty?

A: Liquidated damages = reasonable estimate of loss; penalty = unreasonably large and coercive.

Q: How does difficulty of proving damages affect enforceability?

A: Greater difficulty → more likely the clause is enforceable.

Q: Why are fixed, non-scaling fees suspicious?

A: They may not reflect actual harm and suggest a penalty.

Q: Key takeaway from Dobson Bay Club v. La Sonrisa de Siena?

A: A large, fixed late fee that doesn’t scale and overlaps with other remedies is likely a penalty.

Q: What three factors suggested a penalty in Dobson Bay?

A: (1) Disproportionate amount
(2) Fixed sum (no scaling)
(3) Duplicates other remedies

Q: What happens if a liquidated damages clause is struck down?

A: The court reverts to standard expectation damages.

Q: What is the “inducement vs. penalty” distinction?

A: Inducement is okay if tied to reasonable loss; penalty is not if designed to coerce performance.

Q: What tension underlies liquidated damages law?

A: Freedom of contract vs. prohibition on penalties.

Q: Drafting check: What are the three key questions?

A: (1) Reasonable estimate of harm?
(2) Does it scale with breach?
(3) Does it duplicate other remedies?

Q: One-sentence rule for punitive damages?

A: Not available unless the breach is also a tort (e.g., fraud).

Q: One-sentence rule for liquidated damages?

A: Enforceable if reasonable estimate of loss; void if a penalty.