MBE Rules · Contracts
Liquidated damages
The rule
A liquidated-damages clause is enforceable if (1) actual damages were difficult to estimate at contract formation, AND (2) the stipulated amount was a reasonable forecast of probable harm. If the amount is grossly excessive, it is an unenforceable penalty. Modern trend (UCC §2-718) also considers actual harm.
In plain English
A liquidated damages clause is valid if it's hard to predict actual damages when the contract is made and the set amount seems fair. If it's way too high, it won't be enforced.
Worked example
A concert promoter and a band agree that if the band cancels, they'll pay $10,000 because estimating ticket losses is tricky. If the band cancels and the loss is around $10,000, the clause is enforceable.
Memory hook
Liquidated = Legitimate Loss Limit. Difficult to estimate damages + reasonable forecast = enforceable.
The trap
Students think: any pre-set amount is valid. Wrong, because excessive sums are penalties. The actual test is reasonableness and difficulty of estimation.
How examiners test it
The MBE loves: contract with clear liquidated damages clause. Trap: students miss excessive penalty angle. Look for difficulty in estimation and reasonableness at formation.
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