Two requirements must be considered to determine whether a provision is an enforceable liquidated damage clause rather than an unenforceable penalty clause. First, the amount so fixed must be a reasonable forecast of just compensation for the harm that is caused by the breach, and second, the harm that is caused by the breach must be one that is incapable or very difficult of accurate estimation.
Plaintiff and defendant entered into four construction contracts that included a provision for liquidated damages on a per diem basis for each day's delay beyond the agreed completion date. All four contracts were completed late, and defendant withheld from payment the agreed upon liquidated damages. Plaintiff sued to recover the money claiming that defendant contributed to the delay and that defendant was not entitled to the liquidated damages because it suffered no actual damages. The lower court dismissed its complaint and the case was appealed to the United States Court of Appeals for the Eighth Circuit.
Is plaintiff entitled to recover his money?
The court held that no damages were withheld for the excusable delay caused by defendant because defendant had already given plaintiff credit for those extensions of time. Further, in situations where damages could reasonably be anticipated at the time of contracting, proof of actual damages was not required to sustain an action for liquidated damages unless the contracts so provided.