"Agreed Remedies" i.e. stipulated or liquidated damages

Liquidated Damages Clause

A contract term that specifies a predetermined amount of money agreed upon by the parties at contract formation that must be paid as damages for breach.

What are the Benefits of a Liquidated Damages Clause

They provide predictability, efficiency in saving time and costs, serve as insurance against breach, and replace the need for proving actual damages.

Replacement of Other Damages

If valid, a liquidated damages clause takes the place of other damages calculations, regardless of the actual damages and whether or not the amount was more or less that then stipulated liquidated damages provision.

Practical Considerations of Liquidated Damages Clause

If a clause fails, parties may need to prove actual damages which can lead to different court interpretations.

Enforceability of Liquidated Damages Clause

To be enforceable, a LD clause must be reasonable in light of the anticipated loss caused by the breach. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy and not wanting to punish a breaching party. K law does not like to punish.

What are the three elements to assessing reasonableness of a liquidated damages clause and the enforceability of them?

1. Is it a reasonable forecase of anticipated OR actual harm.

2. Is it difficult to estimate damages at the time of contracting?

3. Is it so unreasonably high that it penalizes the breaching party?

Element 1: Reasonable Forecast of Anticipated or Actual Harm

To be enforceable, a liquidated damages clause must be a reasonable forecast of the loss expected from breach.
➤ Test: Was the amount or formula a reasonable prediction of actual or anticipated harm at the time of contracting?
➤ Courts focus on whether the estimate was fair and not excessive, based on the facts known when the contract was made.

Element 2: What does Difficulties of Proof of Loss mean?

Whether the stipulated amount/formula is reasonable also turns on how difficult it is to prove the loss. This factor asks whether at the time of contracting, were damages difficult to estimate?

A liquidated damages clause is unenforceable if the amount is unreasonably high and intended to punish the breaching party rather than compensate for loss.

➤ Rule: A term fixing unreasonably large liquidated damages is void as a penalty under public policy.
➤ Rationale: Contract law disfavors punitive or exemplary damages—remedies should compensate, not punish.