---
title: "Liquidated Damages"
type: Legal Rule
source: https://casebriefly.com/legal-rules/liquidated-damages
---

# Liquidated Damages

A liquidated damages clause sets an agreed-upon amount of damages payable upon breach. It is enforceable if the amount is a reasonable forecast of harm and actual damages are difficult to estimate; otherwise, it is an unenforceable penalty.

## Definition

A liquidated damages clause is a provision in a contract specifying the amount of damages to be paid in the event of a breach, agreed upon by the parties at the time of contracting. Such clauses are enforceable when they satisfy two requirements: first, the amount stipulated must be a reasonable forecast of the probable harm that would result from the breach; and second, actual damages must be difficult to estimate or prove at the time of contracting. If the clause fails either test, it is deemed an unenforceable penalty.

The distinction between an enforceable liquidated damages clause and an unenforceable penalty is one of the most frequently tested topics in contracts. Courts look at several factors: whether the amount bears a reasonable relationship to the anticipated or actual harm, whether the parties had difficulty estimating damages at the time of formation, and whether the clause was negotiated or imposed. Some jurisdictions apply a single reasonableness test at the time of contracting, while others also consider reasonableness in light of actual damages suffered.

Under the UCC, section 2-718(1) provides that liquidated damages are enforceable if reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. The Restatement (Second) of Contracts section 356 adopts a similar approach. When a liquidated damages clause is struck down, the non-breaching party reverts to proving actual damages.

## Elements

- The parties included a liquidated damages clause in the contract
- The stipulated amount is a reasonable forecast of probable harm from breach
- Actual damages were difficult to estimate at the time of contracting
- The clause was not designed to punish or coerce performance
- The clause is not unreasonably disproportionate to actual or anticipated harm

## Key Case

Wassenaar v. Towne Hotel, 111 Wis. 2d 518 (1983)

## Landmark Cases

| Name | Citation | Significance |
| --- | --- | --- |
| Wassenaar v. Towne Hotel | 111 Wis. 2d 518 (1983) | Articulated the modern two-part test for enforceability: reasonableness of the estimate and difficulty of ascertaining actual damages at formation. |
| Southwest Engineering Co. v. United States | 341 F.2d 998 (8th Cir. 1965) | Upheld a per-diem liquidated damages clause in a construction contract, finding it a reasonable forecast of the government's loss from delay. |
| Lake River Corp. v. Carborundum Co. | 769 F.2d 1284 (7th Cir. 1985) | Posner struck down a minimum quantity guarantee as a penalty because it bore no reasonable relationship to estimated damages and overcompensated the plaintiff. |
| Kemble v. Farren | 6 Bing. 141 (C.P. 1829) | Classic English case striking down a fixed damages clause as a penalty because the same amount applied regardless of the severity of the breach. |

## Exam Tips

- Apply the two-part test: (1) Was the amount a reasonable estimate at the time of contracting? (2) Were actual damages difficult to prove at that time?
- If the same amount applies to all types of breaches regardless of severity, the clause is more likely to be deemed a penalty.
- Some jurisdictions allow a second look at actual damages to determine reasonableness—know your jurisdiction's approach.
- If the clause is struck down as a penalty, the plaintiff must prove actual damages using standard measures.

## Common Mistakes

- Labeling a clause 'liquidated damages' and assuming it is enforceable—the label does not determine enforceability; the substance does.
- Applying the reasonableness test at the time of breach rather than at the time of contract formation (though some jurisdictions consider both).
- Forgetting that when a liquidated damages clause is invalidated, the non-breaching party does not lose the right to damages—they simply must prove actual damages.

## Mnemonic Or Memory Aid

Liquidated = Legitimate estimate of Loss. Penalty = Punishment for breach. Two tests: reasonable forecast + hard-to-prove actual damages.

## Related Rules

- expectation-damages
- unconscionability
- specific-performance

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Source: [Liquidated Damages — CaseBriefly](https://casebriefly.com/legal-rules/liquidated-damages)