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74.

Validity and Construction of Liquidated Damages Provisions

The parties to a contract may specify in the contract itself the amount of damages to be paid in the event of a breach; these contractually defined damages are known as "liquidated damages." See generally Restatement (Second) of Contracts § 356. Contractual provisions specifying such damages are enforced if "they are fair and reasonable attempts to fix just compensation for anticipated loss caused by breach of contract." Priebe & Sons v. United States, 332 U.S. 407, 412 (1947). A liquidated damages clause is particularly appropriate "[w]hen damages are uncertain or difficult to measure," and the clause will be enforced in such a scenario "as long as 'the amount stipulated for is not so extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention, or oppression.'" DF Mfg. Corp. v. United States, 86 F.3d 1130, 1134 (Fed. Cir. 1996) (quoting Wise v. United States, 249 U.S. 361, 365 (1919)).

The challenging party bears the "exacting" burden of demonstrating the unenforceability of a liquidated damages clause. DF Mfg. Corp., 86 F.3d at 1134. Liquidated damages may be recovered even if actual damages are not proved. United States v. Bethlehem Steel Co., supra. Where actual damages are proved, the fact that they may be less, or more, than the amount specified in the liquidated damages clause is insufficient, standing alone, to prove the clause unenforceable. See Printing & Publishing Ass'n v. Moore, 183 U.S. 642 (1902).

[updated September 2013; cited in USAM 4-4.420]