Janus Head of Liquidated Damages: Does Public Policy Influence United States Courts Regarding Enforceability of a Liquidating Damages Clause?

Abstract

For a liquidated damages clause to be legally enforceable, it must not be economically punitive. The scholarly literature maintains there exist four legal test to validate a liquidated damages clause. These test are: a) intent, b) difficulty, c) reasonableness, and d) public policy. It is the application of the public policy test that creates scholastic controversy. Therefore, the purpose of this research is to statistically ascertain whether the United States court system employs a public policy legal test to determine the enforceability of a liquidated damages clause. The sample set is composed of 43 United States Federal appellate court cases. Chi-square and Cramer V coefficient, measuring judicature application preference, resoundingly rejected the null hypothesis: the United States Federal Court system maintains a patterned application preference to test the validity of a liquidated damages clause using a public policy test. This outcome is represented by a percent case split equaling a 3 to 40 metric. This metric translates into 7% of the cases applied a public policy measure, while 93% of the cases made no application, nor crafted a discussion regarding public policy. Therefore, providing the empirical conclusion that the public policy test possess inconsequential effect regarding validating a liquidated provision.