Liquidated Damages and Penalties

Question 1

What are the three requirements for a liquidated damages clause to be valid?

Answer 1

1) Difficult to measure at the time of contracting
2) Reasonable effort to fix the damages which breach caused
3) Proportionate to harm (actual final harm)

Question 2

Define: Liquidated damages clause

Answer 2

The sum a party to a contract agrees to pay if he breaks the contract, and having been arrived at by good faith effort to estimate in advance the actual damages that will probably ensure from the breach, is legally recoverable as agreed damages if the breach occurs.

Question 3

Define: Penalty

Answer 3

The sum a party agrees to pay in the event of a breach, but which is fixed, not as a pre-estimate of probably actual damages, but as a punishment, the threat of which is designed to prevent a breach.

Question 4

Who determines if a liquidated damages clause is valid or not?

Answer 4

The court does because it is a public policy matter. So although it is a matter of fact, the court will decide it rather than a jury.