Parties frequently include in their contracts a clause providing for the payment of a sum certain to the non-breaching party in the event of a breach by the other party in lieu of an award of compensatory damages upon a trial. This provision, in effect, constitutes the parties’ best guess of the amount of the injury that would be sustained in the event of a breach of the contract, a way of rendering certain and definite damages which would otherwise be uncertain and not easily susceptible of proof.129.1 Such a “liquidated damages” provision will be upheld and enforced only where the stated sum is a fair and reasonable estimate of the damages resulting from the breach and the damages are otherwise uncertain.130
The test for determining whether or not a liquidated damages clause is valid consists of two parts. First, are the damages which the parties might reasonably anticipate difficult to ascertain (at the time of contracting) because of their indefiniteness or uncertainty? Second, is the amount stipulated either a reasonable estimate of the damages which would probably be caused by the breach or reasonably proportionate to the damages which have actually been caused by the breach? If the answer to both of these questions is yes, a court will likely uphold the contractual arrangemenr.130.1 To fail the second prong, the stipulated amount must be unconscionable or not rationally related to any measure of damages a party might conceivably sustain.130.2
As a general rule, if a court upholds a liquidated damages provision, the injured party may not seek compensatory damages.131 However, unless a contract provides that liquidated damages are to be the exclusive remedy for a breach, a liquidated damages provision does not preclude other relief to the non-breaching party, if the actual damages are caused by an event not contemplated by the parties in the liquidated damages clause.131.1
If a court concludes that the stipulated sum is not rationally related to a measure of damages that the injured party might conceivably sustain by reason of any breach, the provision will be deemed a “penalty” and struck down as being against public policy.132 In such a case, any recovery is limited to actual damages.132.1
If the liquidated damages clause is upheld, it does not matter whether actual damages are proven, or that the liquidated damages are substantially higher than the actual damages, so long as the liquidated damages stated were a reasonable estimate of the damages that would be caused by the breach.132.2
The presumption is in favor of the validity of a liquidated damages provision. Thus, the burden is on the party opposing it to demonstrate that it is invalid and unenforceable. The decision on this issue is a matter of law for the court to decide.132.3
129.1. S.H. Deliveries, Inc. v. Tri-State Courier & Carriage, Inc., C.A. No. 96C-02-086-WTQ, slip op. at 3, Quillen, J. (Del. Super. May 21, 1997).
130. Wilkins v. Birnbaum, 278 A.2d 829, 831 (Del. 1971); Keyson Indus. Corp. v. Margaux, Inc., 674 A.2d 889, 897 (Del. 1996); Donegal Mut. Ins. Co. V. Tri-Plex Alarm Systems, 622 A.2d 1086, 1089 (Del. Super. 1992); Meyer Ventures, Inc. v. Barnak, C.A. No. 11502, slip op. at 11, Allen, C. (Del. Ch. Nov. 2, 1990).
130.1. Brazen v. Bell Atlantic Corp., 695 A.2d 43, 48 (Del. 1997); S.H. Deliveries, Inc. v. Tri-Stat Courier & Carriage, Inc., C.A. No. 96C-02-086-WTQ, slip op. at 4, Quillen, J. (Del. Super. May 21, 1997).
130.2. Brazen v. Bell Atlantic Corp., 695 A.2d 43, 48 (Del. 1997).
131. Harris v. Conrad, C.A. No. 7251, slip op. at 9, Berger, V.C. (Del. Ch. Sept. 18, 1984).
131.1. Draper v. Westwood Development Partners, LLC, C.A. No. 4428-MG, slip op. at 8, Glasscock, M. (Del. Ch. June 3, 2010, revised June 16, 2010); Delaware Limousine Service, Inc. v. Royal Limousine Service, Inc., C.A. No. 87C-FE-104, Goldstein, J. (Del. Super. Apr. 5, 1991), reh’g denied (Del. Super. May 2, 1991).
132. Meyer Ventures, Inc. v. Barnak, C.A. No. 11502, slip op. at 11, Allen, C. (Del. Ch. Nov. 2, 1990); S.H. Deliveries, Inc. v. Tri-Stat Courier & Carriage, Inc., C.A. No. 96C-02-086-WTQ, slip op. at 3-4, Quillen, J. (Del. Super. May 21, 1997).
132.1. S.H. Deliveries, Inc. v. Tri-State Courier & Carriage, Inc., C.A. No. 96C-02-086-WTQ, slip op. at 3-4, Quillen, J. (Del. Super. May 21, 1997).
132.2. S.H. Deliveries, Inc. v. Tri-State Courier & Carriage, Inc., C.A. No. 96C-02-086-WTQ, slip op. at 4, Quillen, J. (Del. Super. May 21, 1997).
132.3. S.H. Deliveries, Inc. v. Tri-State Courier & Carriage, Inc., C.A. No. 96C-02-086-WTQ, slip op. at 3-4, Quillen, J. (Del. Super. May 21, 1997).
© 2010 David L. Finger