Also known as: UCC 2-718 · U.C.C. § 2-718 · Uniform Commercial Code § 2-718 · liquidated damages · UCC 2-718 damages
Written by attorneys · grounded in primary & secondary sources — see below
A statutory rule governing contracts for the sale of goods that permits parties to liquidate damages in their agreement only at an amount 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.
Horizon Land contracted with Vertex Land to build a condo tower. The agreement required Vertex to pay Horizon $50,000 for each day the project exceeded the completion date. Horizon had anticipated only about $8,000 per day in lost rental revenue. Vertex finished thirty days late. Horizon sued to enforce the clause.
Ridge Buildings contracted with WindowCo for custom floor-to-ceiling glass panels and paid a forty percent deposit. The contract allowed WindowCo to retain the entire deposit if Ridge cancelled within sixty days of scheduled delivery. Ridge cancelled after discovering HVAC interference in a separate lease. WindowCo sought to keep the full deposit.
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Karen, Daisy, and Byron formed a general partnership to operate a boutique clothing store. Their agreement allowed Karen to impose reasonable limitations on information sharing and defined liquidated damages for breach of any such restriction. Daisy and Byron later sued Karen after she refused access to financial records. The court considered whether the liquidated damages clause could apply to any proven breach of a reasonable restriction.
A, B, and C formed a partnership to practice veterinary medicine. Each promised not to compete after termination and to pay $50,000 as liquidated damages for breach. A left and immediately began practicing in the same town. B and C sued for an injunction and damages despite the liquidated damages provision.
Buyers contracted to purchase a boat from Retail Marine but defaulted before delivery. Retail Marine proved it would have sold two boats instead of one and incurred storage and finance costs while the boat remained unsold. The court addressed whether the seller could recover its lost profit in addition to any deposit retention under the contract.
Loral contracted with Austin Instrument for components needed to fulfill a government contract. Austin threatened to stop deliveries unless Loral agreed to higher prices. Loral paid under protest to avoid liquidated damages it faced from its customer. Loral later sued to recover the excess payments.
The clause is enforceable only when the amount is 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. An unreasonably large amount is void as a penalty.
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No. Difficulty of proof is one relevant factor, but the stipulated sum must still bear a reasonable relationship to the anticipated or actual harm. An amount grossly disproportionate to the loss remains unenforceable as a penalty.
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The buyer may obtain restitution of any amount by which payments exceed the seller's liquidated damages under a valid clause or the seller's actual loss. Retention of the entire deposit is permissible only when it satisfies the reasonableness test of UCC § 2-718(1).
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A valid liquidated damages clause does not preclude specific performance or an injunction if that relief would otherwise be granted. The clause merely provides an alternative measure of damages and does not fix a price for the privilege of nonperformance.
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…v. Harlan & Hollingsworth Co. , 30 App.D.C. 270 (1908), may appear to reject the rule, in reaching its decision upholding the liquidated damages clause in that case the court considered the circumstances existing at the time the contract was made, see 30 App.D.C. at 279, and applied the usual rule on liquidated damages. See 5…