R2d § 356

Elements: (1) damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach AND the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty; (2) a term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused.

Common misunderstanding: students think clear contract language locks in liquidated damages. § 356 second-guesses the parties' bargain. The two-prong test (reasonable in light of anticipated OR actual loss + difficulty of proof) is doing the work. Disproportion makes it a penalty even if both parties signed off. Modern courts sometimes ask whether the clause is reasonable as of contracting OR as of breach (the disjunctive "anticipated or actual": a UCC-style relaxation).