To be valid under Illinois law, a liquidation of damages must be a reasonable estimate at the time of contracting of the likely damages from breach, and the need for estimation at that time must be shown by reference to the likely difficulty of measuring the actual damages from a breach of contract after the breach occurs. If damages are easy to determine then, or if the estimate greatly exceeds a reasonable upper estimate of what the damages are likely to be, it is a penalty.
Parties made a contract whereby defendant agreed not to participate in any litigation against the plaintiff. The parties agreed on fixed damages if defendant indeed participated in any litigation against the plaintiff – the damages would be $50,000. Defendant subsequently participated in a third party’s litigation against the plaintiff. Plaintiff sued for the $50,000, and won at trial. Defendant appeals.
Whether the damages provision is enforceable against the defendant?
Yes, the damages provision is enforceable against the defendant
In affirming the lower court’s judgment, the Court found that the damages estimated in the contract were both reasonable at the time the parties formed the contract, and would be difficult to evaluate at the time of an eventual breach