§ 29.2 What Are Liquidated Damages?

LibraryDamages (OSBar) (2016 Ed.)
§ 29.2 WHAT ARE LIQUIDATED DAMAGES?

To determine whether a clause in an agreement constitutes a liquidated-damages provision, it is appropriate to begin the analysis with what is not a liquidated-damages provision. If the provision is considered a penalty imposed for the purpose of securing performance of a contract, such a provision is not one for liquidated damages. Medak v. Hekimian, 241 Or 38, 44, 404 P2d 203 (1965), disapproved by DiTommaso Realty, Inc. v. Moak Motorcycles, Inc., 309 Or 190, 785 P2d 343 (1990). Considerations of fairness are independent of this analysis. If a contract imposes financial obligations on a party that are shocking to the conscience, courts simply refuse to enforce them without regard to their designation. Secord v. Portland Shopping News, 126 Or 218, 224, 269 P 228 (1928). While there is general agreement that such an amount is not improper just because it exceeds actual damages, it will not be enforced when the imposed fee is grossly disproportionate or has no reasonable relation to the actual damages. Wright v. Schutt Const. Co., 262 Or 619, 625, 500 P2d 1045 (1972), disapproved by DiTommaso Realty, 309 Or 190. This principle was demonstrated in Martin Bros. Signs, Inc. v. Vice, 118 Or App 304, 305, 846 P2d 1205 (1992), withdrawn on recons, 118 Or App 304, 846 P2d 1205 (1993) (per curiam), rev den, 317 Or 162 (1993), in which the court held that a liquidated-damages provision was void as a penalty because it would have resulted in a sum equal to 80 percent of the remaining rent under the plaintiff's lease.

The law of liquidated damages was significantly developed in DiTomasso Realty. In that case, the Oregon Supreme Court distinguished a liquidated-damages provision from contractual indebtedness that results from an event as opposed to a breach of the agreement. If the provision is an independent, valid contractual promise, it...

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