A homeowner and a builder entered into a written contract for the construction of a new house, with a completion date of October 1. The contract included a clause stating that for each day the house was not complete after October 1, the builder would pay the homeowner $1,000. At the time of contracting, it was difficult to estimate the precise damages the homeowner might suffer from a delay, but both parties believed $1,000 per day was a reasonable estimate, considering potential costs for temporary housing, storage, and other inconveniences. The builder completed the house on October 31, a 30-day delay. The homeowner's actual damages due to the delay amounted to approximately $950 per day. The homeowner has sued the builder to enforce the daily damages clause.
How is a court most likely to rule on the liquidated damages clause?
The clause is enforceable only up to the actual damages of $950 per day, with the remaining $50 per day being an unenforceable penalty.
The clause is enforceable because the amount is a reasonable forecast of the harm caused by the breach.
The clause is unenforceable because its primary purpose was to penalize the builder for being late.
The clause is unenforceable because the liquidated amount of $1,000 per day is not identical to the actual damages of $950 per day.
The court is most likely to rule that the clause is enforceable. A liquidated damages clause is enforceable if the amount is a reasonable forecast of the anticipated or actual harm caused by the breach and is not intended as a penalty. In this case, the $1,000 per day was considered a reasonable estimate at the time of contracting, especially given the difficulty in calculating actual damages. The fact that the stipulated amount is very close to the actual damages suffered further supports its reasonableness. It does not function as a penalty, but as a valid pre-agreed measure of compensation.
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