California First-Year Law Students' Exam (Baby Bar) — MCContractsMedium
A software developer contracts with a client to create a custom application for $10,000, payable upon completion. The contract includes a provision stating that if the developer breaches the contract, the developer agrees to pay the client $500 for each day the project is delayed beyond the agreed-upon deadline. The client's actual damages for a delay are difficult to ascertain beforehand. The project is delayed by 10 days, and the client seeks to enforce the $500 per day clause. What is the most likely legal classification of this clause?
- AA forfeiture clause, unenforceable as it deprives the developer of the benefit of the bargain.
- BA penalty clause, unenforceable because the amount is disproportionate to potential actual damages.
- CAn acceleration clause, enforceable as it makes the entire debt due upon a single breach.
- DA liquidated damages clause, enforceable because the amount is a reasonable pre-estimate of difficult-to-ascertain damages.
Show answer & explanationAnswer & explanation
Correct answer: D. A liquidated damages clause, enforceable because the amount is a reasonable pre-estimate of difficult-to-ascertain damages.
A clause specifying damages for breach is enforceable as liquidated damages if actual damages are difficult to ascertain at the time of contracting, and the stipulated amount is a reasonable forecast of the likely damages. Here, $500 per day for a custom software delay is likely reasonable.
Why the other options are wrong
- A. A forfeiture clause typically relates to the loss of a right or property due to failure to perform, not a fixed sum for delay.
- B. A penalty clause is unenforceable, but this requires the amount to be disproportionate, which is not clearly the case here given the difficulty of ascertaining actual damages for custom software delays.
- C. An acceleration clause makes the entire remaining balance of a debt due immediately upon a default, which is not what this clause does.
Liquidated Damages Clause
A contractual provision that specifies a predetermined sum of money that must be paid as damages by a breaching party. It is enforceable if actual damages are difficult to ascertain and the stipulated amount is a reasonable forecast of the damages.
- Purpose is to avoid litigation over damage calculations.
- Must not be a penalty; must be a reasonable estimate.
- Enforceability determined at time of contract formation, not breach.
Memory trick: Forecast or Punish? That's the Damages Question.