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 — see sources 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.
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.
In July 1965, Loral Corporation received a $6,000,000 contract from the Navy to produce radar sets. The contract contained a schedule of deliveries, a liquidated damages clause applying to late deliveries, and a cancellation clause in case of default by Loral. Loral solicited bids for some 40 precision gear components needed to produce the radar sets and awarded Austin a subcontract to supply 23 such parts. Austin commenced delivery in early 1966. In May 1966, Loral was awarded a second Navy contract for the production of more radar sets and again went about soliciting bids. Austin bid on all 40 gear components but, on July 15, a representative from Loral informed Austin's president, Mr. Krauss, that his company would be awarded the subcontract only for those items on which it was low bidder. The Austin officer refused to accept an order for less than all 40 of the gear parts. On the next day he told Loral that Austin would cease deliveries of the parts due under the existing subcontract unless Loral consented to substantial increases in the prices provided for by that agreement—both retroactively for parts already delivered and prospectively on those not yet shipped. He also demanded that Loral place with Austin the order for all 40 parts needed under Loral's second Navy contract. Shortly thereafter, Austin did, indeed, stop delivery. After contacting 10 manufacturers of precision gears and finding none who could produce the parts in time to meet its commitments to the Navy, Loral acceded to Austin's demands. In a letter dated July 22, Loral wrote to Austin that "We have feverishly surveyed other sources of supply and find that because of the prevailing military exigencies, were they to start from scratch as would have to be the case, they could not even remotely begin to deliver on time to meet the delivery requirements established by the Government. ... Accordingly, we are left with no choice or alternative but to meet your conditions." Loral thereupon consented to the price increases insisted upon by Austin under the first subcontract. Austin was awarded a second subcontract making it the supplier of all 40 gear parts for Loral's second contract with the Navy. Although Austin was granted until September to resume deliveries, Loral did, in fact, receive parts in August and was able to produce the radar sets in time to meet its commitments to the Navy on both contracts. After Austin's last delivery under the second subcontract in July, 1967, Loral notified Austin of its intention to seek recovery of the price increases. On September 15, 1967, Austin instituted this action against Loral to recover an amount in excess of $17,750 which was still due on the second subcontract. On the same day, Loral commenced an action against Austin claiming damages of some $22,250—the aggregate of the price increases under the first subcontract—on the ground of economic duress. The two actions were consolidated and, following a trial, Austin was awarded the sum it requested and Loral's complaint against Austin was dismissed. A closely divided Appellate Division affirmed.
View caseThe 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…