Effect of Agreement Liquidating Damages or Altering the Scope of Liability or

Remedy

Case: Southwest Engineering Co. v. United States (1965, 8th) [pp. 1003-1009]

Facts: K for Southwest to do work for the gov't. K provided liquidated damages
per day that the completion of the projects were delayed, but excluded certain
circumstances where the delay was out of the control and not due to fault or
negligence of Southwest. Southwest, however, had to notify govt of such a delay,
and would be extended the time for completion of the work if justified by the
provision. Govt did allow some extensions, but the projects still completed 97
days late, even after the extension, which according to the K, liquidated damages
would be $8,300. Govt withheld this amount from Southwest, and Southwest files
suit to recover it. Lower court ordered summary judgment dismissing the complaint,
and Southwest appeals, asserting that the K provision for liquidated damages is
clearly a penalty and not enforceable where the party seeking to enforce it admits
he sustained no actual damage.

Issue: Whether the provision was an enforceable liquidated damages clause, or

whether an unenforceable penalty clause.

Holding: Liquidated damages provision, and enforceable regardless of whether Df

actually suffered damages.

Reasoning:
○ To determine whether the provision will be interpreted as an enforceable
liquidated damages clause, the following requirements must be complied with as of
the time the K was executed (what was the intent of the parties at that time?):
§ The amount so fixed must be a reasonable forecast of just
compensation for the harm that is caused by the breach -and-
§ The harm that is caused by the breach must be one that is incapable
or very difficult of accurate estimation
○ Regarding liquidated damages: "When they are fair ad reasonable attempts
to fix just compensation for anticipation loss caused by breach of contract, they
are enforced. They serve a particularly useful function when damages are uncertain
in nature or amount or are unmeasureable, as is the case in many government
contracts. And the fact that the damages suffered are shown to be less than the
damages contracted for is not fatal. These provisions are to be judged as of the
time of making the contract."
§ "Where parties have by their K agreed upon a liquidated damages
provision as a reasonable forecast of just compensation for breach of contract and
damages are difficult to estimate accurately, such provision should be enforced.
If […] damages prove to be greater […], the party entitled to damages is bound by
the liquidated damages agreement. It is not unfair to hold the contractor
performing the work to such agreement if […] damages prove to be less or
nonexistent. Each party by entering into such contractual provision took a
calculated risk and is bound by reasonable contractual provisions to liquidated
damages."
○ Conclusion: The amount of the liquidated damages forecasted at K creation
was reasonable, and the harm that may be caused was unmeasurable at time of K
creation, so it is an enforceable liquidated damages clause. The absence of actual
damages at the time of breach of K or thereafter does not bar recovery of
liquidated damages.

Notes:
○ "Time of contracting" test - most jurisdictions follow this
○ However, sometimes a liquidated damages clause serves the interest of one
party over the other, and is a result of unequal bargaining power. In this
situation, it may be more appealing to look at the actual damages.
○ UCC 2-718(1): "Damages for breach by either party may be liquidated in the
agreement but only at an amount which is reasonable in the light of the
anticipated or actual harm caused by the breach, the difficulties of proof of
loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate
remedy. A term fixing unreasonably large liquidated damages is unenforceable on
grounds of public policy as a penalty."
§ What if the fixed liquidated damages were unreasonable in the light
of the anticipated loss, but reasonable in the light if actual loss?

Notes
• Liquidated damages clause - says if I breach, this is what I have to pay
○ What do you need to have liquidated damages?
§ Reasonable forecast of actual damages at time of contracting
(anticipated damages) or actual harm
§ Actual damages would be difficult or impossible to estimate
□ Why liquidated damages would help - if you were to sue, you
wouldn’t be able to show the damages to a reasonable certainty. This is a
protection from breach.
• Very difficult to determine damages with a K with the govt
• Actual damages here were $0. So why should they pay liquidated damages?
• This case is basically all the law you need to know on liquidated damages.
○ UCC 2-718 / Rest 86 - These are almost the same