Article 2 — Sales · Section 2-718
Explore UCC § 2-718, which addresses liquidated damages in sales contracts, allowing parties to limit damages in case of breach.
Source: U.C.C. § 2-718
1. Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the 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. 2. A term fixing unreasonably large liquidated damages is void as a penalty. 3. If a seller has no right to recover the full liquidated damages except a limited amount, the seller may recover that amount if it is reasonable.
UCC § 2-718 allows parties in a sales contract to specify liquidated damages in case of breach, provided those damages are reasonable based on anticipated harm. It invalidates any unreasonably high liquidated damages as a penalty.
Pre-determined damages agreed upon by the parties to a contract, designed to make reasonable compensation for anticipated losses in the event of a breach.
A punitive amount specified in a contract that exceeds reasonable compensation, which is deemed unenforceable under this section.
Example 1
A contract between a supplier and a retailer specifies that if the supplier fails to deliver goods on time, they will pay a fixed sum per day as liquidated damages. This amount must reflect a reasonable estimate of the actual harm incurred by the retailer due to delayed delivery.
Example 2
In a real estate purchase agreement, the parties might agree that if the buyer breaches, they will forfeit a portion of their deposit as liquidated damages, provided that the forfeiture amount is not disproportionately high compared to the loss.