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Stipulated Damages, Exculpatory Clauses and Unconscionability

Dave Hoffman

Dave Hoffman is the Murray Shusterman Professor of Transactional and Business Law at Temple Law School. He specializes in law and psychology, contracts, and quantitative analysis of civil procedure. He currently teaches contracts, civil procedure, corporations, and law and economics.

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1 Response

  1. Jim Fischer says:

    Liquidated damages provisions present difficult issues because the history of such provisions have usually involved overcompensatory provisions relative to the actual losses sustained by the other contracting party. In this setting (overcompensation) thinking in terms of penalties for non-performance makes some sense. The problem arises when the liquidated damages provison is undercompensatory relative to the other party’s actual losses from non-performance. Here it is conceptually difficult to see the issue in terms of a penalty. The operative effect of the provision is similar to garden variety limited remedies, such as those found in security system contracts, contracts to process film, etc. I distinguish between a liquidated damages provision and a limited remedy based on the presence of a true breach. In my opinion, a true liquidated damages provision allows for alternative avenues of performance. A contracting party who pays liquidated damages does not breach the contract; rather, that party elects one of two alternative forms of performance. A true limited remedy, on the other hand, does involve a breach. I realize that most decisions adhere to the concept of breach when discussing liquidated damages provisons, but I believe this is unnecessary and confusing.
    Exculpatory provisions are, in my view, entirely different from liquidated damages provisions. Exculpatory provisions negate the existence of a legal wrong. Again, case law might not always recognize this in describing the legal relationships, but the practical effect of a valid exculpatory provision is to exonerate the party of legal responsibility for the loss as if the loss never happened.