A enters into a contract with B to provide surface material for A's tennis courts by April 1 for a tournament to begin May 1. The contract specifies an amount to be paid if the contract is breached. This is a liquidated damages clause if the amount is
A) an excessive estimate of the loss on a breach.
B) a reasonable estimate of the loss on a breach.
C) designed to penalize the breaching party.
D) intended to quickly provide cash to the nonbreaching party.

Question

Quizplus · Accepted Answer

A liquidated damages clause is considered valid and enforceable if the amount specified in the contract is a reasonable estimate of the actual damages that would be incurred in case of a breach. Therefore, choice B is the correct answer. Choices A and C are incorrect because an excessive estimate of damages or a clause designed to penalize the breaching party would make the liquidated damages clause unenforceable. Choice D is incorrect because the purpose of a liquidated damages clause is not to provide quick cash to the nonbreaching party, but rather to compensate them for actual damages incurred.

A Enters into a Contract with B to Provide Surface