Section 15 In General

• Library: Damages 2012

Parties may agree on the damages to be assessed in the event of breach of contract between them. These agreements are set forth in liquidated damage clauses. A liquidated damage provision is a measure of compensation, which, at the time of contracting, the parties agree will represent their damages in case of a breach. Frank v. Sandy Rothschild & Assocs., Inc., 4 S.W.3d 602 (Mo. App. E.D. 1999). Liquidated damage clauses are valid and enforceable, but penalty provisions are not. Diffley v. Royal Papers, Inc., 948 S.W.2d 244 (Mo. App. E.D. 1997); Paragon Group, Inc. v. Ampleman, 878 S.W.2d 878 (Mo. App. E.D. 1994). The main distinction between a liquidated damage clause and a penalty provision is that the former is a measure of damages and the latter constitutes nothing more than a punishment for breach. Diffley, 948 S.W.2d 244; Muhlhauser v. Muhlhauser, 754 S.W.2d 2 (Mo. App. E.D. 1988). The validity of a liquidated damage clause must be viewed based on the circumstances at the time the contract was entered into. Info. Sys. & Networks Corp. v. City of Kansas City, Mo., 147 F.3d 711 (8^th Cir. 1998).

For a provision to be a valid liquidated damages clause and not a penalty, the amount fixed as damages must be a reasonable forecast of the harm caused by the breach, and the harm caused by the breach must be difficult to estimate accurately. Id.; see also Restatement (Second) of Contracts § 356 (1981); § 400.2‑718(1), RSMo 2000. In determining whether the provision is a penalty or a liquidated damage clause, the court will look to the intention of the parties and the contract as a whole. Repair Masters Constr., Inc. v. Gary, 277 S.W.3d 854 (Mo. App. E.D. 2009); Hawkins v. Foster, 897 S.W.2d 80 (Mo. App. S.D. 1995). Simply labeling a clause as one of “liquidated damages” does not necessarily make it so. Hawkins, 897 S.W.2d at 85. But the label parties attach to the provision is circumstantial evidence of their intent. Diffley, 948 S.W.2d 244.

If the primary purpose of the liquidated damages provision is to estimate the damages to avoid the rigors of proof, the courts will enforce the provision. But if the primary purpose is to compel performance, the courts will deem it a penalty and will refuse to enforce it. Wilt v. Waterfield, 273 S.W.2d 290 (Mo. 1954). If
the amount of damages forecast is reasonable as measured from the time of the agreement, the agreement will be enforced even though it can be shown that the actual damages were considerably greater or less...