Contracts & ExecutionQuestion 826 of 1605
For a liquidated damages clause to be enforceable rather than struck down as a penalty, courts generally require that:
a.The clause be notarized
b.The stated amount be a reasonable estimate of anticipated damages that would otherwise be difficult to determine
c.Actual damages be easy to calculate
d.The amount be at least triple the actual loss
Explanation
A liquidated damages provision is enforceable when, at the time of contracting, the fixed amount is a reasonable estimate of the harm that a breach would cause and actual damages would be difficult or impractical to determine. If the amount is grossly disproportionate to any anticipated loss, courts treat it as an unenforceable penalty. Notarization is irrelevant, and the doctrine applies precisely because actual damages are hard, not easy, to calculate.
Law Reference: California Civil Code §1671Practice all 1605 questions free — no signup required.
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