Multistate Bar Examination Practice Question

A valid liquidated damages provision focuses on compensating for expected harm arising from a breach when the harm is uncertain or difficult to quantify at the time of contracting. The amount must reflect a reasonable forecast of anticipated damages to avoid being categorized as an unenforceable penalty. In contrast, provisions that aim to punish breaches, or that are unrelated to actual damages, are typically deemed penalties and unenforceable. Provisions allowing damages to be adjusted based on actual harm post-breach do not meet the requirements of a valid liquidated damages clause since they undermine the advance agreement on damages.