Section 4.10 Liquidated Damages

• Library: Contracts 2016 Supp

4. (§4.10) Liquidated Damages

Parties to a contract are free to determine and agree in advance on the damages to be assessed in the event of a breach of the contract. Sides Constr. Co. v. City of Scott City, 581 S.W.2d 443 (Mo. App. S.D. 1979). Enforcement of these “liquidated damages” provisions tends to save the court’s time and reduce the expense of litigation, which is particularly important if the amount in controversy is small, while not being inconsistent with the central objective of contract remedies, i.e., to compensate an aggrieved party upon the breach of a contract. Frank v. Sandy Rothschild & Assocs., Inc., 4 S.W.3d 602 (Mo. App. E.D. 1999); Diffley v. Royal Papers, Inc., 948 S.W.2d 244 (Mo. App. E.D. 1997); Restatement (Second) of Contracts § 356 cmt. a (1981). Thus, as a basic rule, liquidated damages provisions are valid and enforceable, while penalty provisions are not. Diffley, 948 S.W.2d 244; Paragon Group, Inc. v. Ampleman, 878 S.W.2d 878 (Mo. App. E.D. 1994); Grand Bissell Towers, Inc. v. Joan Gagnon Enters., Inc., 657 S.W.2d 378 (Mo. App. E.D. 1983). The primary distinction between a liquidated damages provision and a penalty provision is that the former is designed to be a measure of compensation while the latter is intended to punish a breaching party upon default, deter a party from breaching, or provide security for actual damages. Wilt v. Waterfield, 273 S.W.2d 290 (Mo. 1954); Goldberg v. Charlie’s Chevrolet, Inc., 672 S.W.2d 177 (Mo. App. E.D. 1984); Zeppenfeld v. Morgan, 185 S.W.2d 898 (Mo. App. E.D. 1945). Referring to a clause as a liquidated damages provision or as a penalty provision does not conclusively decide the issue. Jennings v. First Nat. Bank of Kansas City, 30 S.W.2d 1049 (Mo. App. W.D. 1930). Instead, the courts will consider the contract as a whole to determine the parties’ intention. Yerxa, Andrews & Thurston v. Randazzo Macaroni Mfg. Co., 288 S.W. 20, 33 (Mo. 1926). The validity of a liquidated damages clause will be viewed as of the time a contract was executed, Info. Sys. & Networks Corp. v. City of Kansas City, Mo., 147 F.3d 711 (8^th Cir. 1998); Sw. Eng’g Co. v. United States, 341 F.2d 998 (8^th Cir. 1965), and on a case-by-case basis, Thompson v. St. Charles County, 126 S.W. 1044 (Mo. 1910).

Missouri has adopted the Restatement (Second) of Contracts approach for determining whether a liquidated damages provision is enforceable. Corrigan Co. Mech. Contractors, Inc. v. Fleischer, 423 S.W.2d 209 (Mo. App. E.D. 1967); Restatement (Second) of Contracts § 356. For a provision to be deemed a valid and enforceable liquidated damages provision, rather than an unenforceable penalty provision, the amount stipulated by the parties in the contract must be a reasonable forecast of just compensation for the harm caused by a breach, and the harm caused by the breach must be incapable of estimation or difficult to estimate accurately. Taos Constr. Co....