Q: If plaintiff breaches contract, can liquidated damages provisions exceed settlement amount
A: Maybe. LDs are tricky. Under Civil Code section 1671, a "provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." (Civ. Code, § 1671, subd. (b).) A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under [Civil Code] section 1671(b), if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. The amount set as liquidated damages must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained. In short, an amount disproportionate to the anticipated damages is termed a "penalty." A contractual provision imposing a "penalty" is ineffective, and the wronged party can collect only the actual damages sustained. Send me an email if you want to discuss.
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