Contracts & ExecutionQuestion 176 of 1605
A liquidated damages clause in a construction contract will most likely be unenforceable if:
a.The stated amount bears no reasonable relationship to anticipated harm and operates as a penalty
b.The amount is a reasonable forecast of the owner's likely loss
c.Actual damages would have been hard to calculate at signing
d.Both parties negotiated the clause at arm's length
Explanation
Under Civil Code §1671, liquidated damages must be a reasonable estimate of probable harm. A clause set arbitrarily high to punish, with no relation to actual anticipated loss, is an unenforceable penalty.
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Reviewed by Abraham Chen — Licensed California General Contractor (CSLB License #1101856 — verify)