Limits on Damages II — Certainty + Liquidated Damages

Foreseeability (Class 45) and mitigation (Class 47) screen out losses that were unforeseeable or avoidable. Today adds two more constraints on the expectation number. First, the certainty limitation: even a foreseeable, unavoidable loss is not recoverable unless it can be proven with reasonable certainty. Second, the parties’ own attempt to fix the number in advance — the liquidated-damages clause — which the law will enforce only if it survives a two-part reasonableness test, and otherwise strikes down as a penalty.

Certainty

R2d § 352. A party cannot recover damages for a loss beyond the amount that the evidence permits to be established with reasonable certainty. The requirement does not bar recovery whenever some loss is uncertain; it excludes only those elements that cannot be proven with reasonable precision. Its main bite falls on lost profits. An established business with a track record can usually prove what it would have earned; a new venture or speculative line often cannot, and courts deny those profits as speculative rather than guess at a number.

When lost profits fail the certainty filter, the plaintiff is not necessarily empty-handed. Reliance expenditures are ordinarily easy to prove, so a party who cannot establish profit can fall back on the reliance measure (R2d § 349) — the subject of the next class.

Liquidated damages and penalties

R2d § 356. Parties may agree in advance on a sum payable as damages, but only at an amount reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large damages is unenforceable as a penalty, on grounds of public policy. The traditional formulation is a two-gate test: (1) at the time of contracting, the harm from breach must have been difficult to estimate; and (2) the sum fixed must be a reasonable forecast of that harm. A clause failing either gate is a penalty, void no matter how sophisticated the parties.

UCC § 2-718. The sale-of-goods analogue tracks § 356: liquidated damages are valid only at an amount reasonable in light of the anticipated or actual harm, the difficulties of proof, and the inconvenience of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. The companion provision, § 2-719, governs the mirror-image move — a clause that caps or limits recovery — which is enforceable unless unconscionable or it fails of its essential purpose.

Cases

Lake River Corp. v. Carborundum Co. (Posner, J.) applies the penalty doctrine to a contract between sophisticated commercial parties. The liquidated-damages formula passed the first gate — the harm was hard to estimate when the parties signed — but failed the second: on the volumes actually shipped, the formula produced a recovery far larger than any plausible loss. Because the clause operated to deter breach rather than to compensate, it was an unenforceable penalty. The lesson: even informed commercial actors cannot contract their way past the reasonableness test.

What you should be able to do

Run the full damages-limitation stack: foreseeability, certainty, mitigation, causation. Identify when a lost-profits claim exits at the certainty gate and what measure substitutes. Apply the two-gate test of § 356 and § 2-718 to label a clause valid liquidation or void penalty, and distinguish a liquidation clause (§ 2-718) from a limitation-of-liability cap (§ 2-719). Next class: when money in any measure is inadequate, the law reaches for specific performance and restitution.