Disputes over liquidated damages typically center on whether the amount of damages to which the parties stipulated is unreasonably high in comparison with the nonbreaching party's actual loss. If the disparity between the actual and the contracted-for damages is unreasonable in amount and as an approximation of damages at the time the contract was made, courts may treat the liquidated damages clause as a penalty and set it aside.
But What about When Liquidated Damages Are Too Low?
What remedies are available when the liquidated damages amount is too low compared with the loss the nonbreaching party actually suffered? California Civil Code section 1671(b) provides that a liquidated damages provision is enforceable "unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." By using a reasonableness standard, the law makes liquidated damages clauses vulnerable to challenges for both over- and undercompensating the nonbreaching party. In practice, however, courts routinely treat liquidated damages provisions as a limitation on liability and enforce liquidated damages provisions that undercompensate the nonbreaching party. Yet under certain circumstances, even when the contract contains a valid liquidated damages clause, the nonbreaching party can recover damages that go beyond those provided for in the contract or receive other forms of equitable relief in lieu of, or in addition to, the liquidated damages.