In my 40 years of practice, I have consistently found that practitioners do not understand the area of the law dealing with liquidated damages and stipulated sums provisions. Yes, they can quote the hornbook law of Williston. And they can advise that the parties have a broad right to stipulate in an agreement the number of damages recoverable in the event of a breach, especially in circumstances where the actual damages likely to flow from the breach would be difficult to estimate or prove. But the requisite familiarity with these concepts does not end there. Indeed, it is hardly the beginning.
Attorneys frequently fail to grasp the major counterbalance point set forth in Williston—that liquidated damages clauses will be held to violate public policy, and will not be enforced, if they have the effect of punishing a party as opposed to representing actual damages. One such example is when a large disparity exists between the amount payable pursuant to such a clause in comparison to the actual damages incurred. It is this scale of liquidated damages analysis with one side being the damages per the clause and the other side being the actual damages at the time of the breach that most do not understand.
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