Formal and Operative Rules in Overliquidation Per Se Cases

Abstract

Liquidated damages clauses are typically upheld where the damages are of a type that will be difficult to ascertain, and where the parties have made a reasonable estimate of the potential damages. A unique but not entirely rare phenomenon the author calls overliquidation per se occurs when, fortuitously, no damage is sustained as a result of a contract breach. The applicable formal rule of law, the penalty doctrine, is quite ineffective in resolving this interesting contract dilemma. So what do judges do? What should they do? On the one hand, strong freedom of contract principles dictate enforcement; while on the other, the equally well entrenched principle of just compensation prescribes non-enforcement. By analyzing the modern overliquidation per se case law, the author is able to look beyond the formal rule of law to the functional 'operative rules,' a series of sometimes overlapping questions that explain the cases. This original analysis permits the development and articulation of a new formal rule for overliquidation per se cases.