MBE Rules · Remedies
Liquidated Damages Clauses
Cal. Civ. Code § 1671
The rule
In non-consumer contracts, a liquidated-damages provision is presumptively valid unless the party seeking to invalidate it establishes the provision was unreasonable under the circumstances existing at contract formation. In consumer contracts, the clause is invalid unless the party seeking to enforce it proves reasonableness.
In plain English
Liquidated damages clauses are pre-determined amounts that parties agree upon in a contract to be paid if a breach occurs. In non-consumer contracts, these clauses are generally valid unless proven unreasonable at the time the contract was made, while in consumer contracts, they are invalid unless the enforcing party can show they are reasonable.
Worked example
A contractor and a property owner agree that if the contractor fails to complete the work on time, they will pay $10,000 in liquidated damages. The contractor misses the deadline, but the property owner cannot prove that the amount was unreasonable when they signed the contract. Therefore, the contractor must pay the $10,000.
Memory hook
Liquidated damages: valid unless proven unreasonable for non-consumers, but consumers must prove they're reasonable.
The trap
Exams may present scenarios where the reasonableness of the liquidated damages is ambiguous, leading students to misinterpret the burden of proof based on the type of contract.
How examiners test it
Questions often test the distinction between consumer and non-consumer contracts, focusing on the burden of proof regarding the reasonableness of liquidated damages clauses.
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