Liquidated damages

It is true in Alabama that, because penalty provisions are void as against public policy, "Courts ... are disposed to lean against any interpretation of a contract which will make the provision one for liquidated damages and, in all cases of doubtful intention, will pronounce the stipulated sum a penalty." Cook v. Brown, 408 So.2d 143, 144 (Ala.Civ.App. 1981); see also, Keeble v. Keeble, 85 Ala. 552 , 5 So. 149 (1888). In Alabama, liquidated damages are a sum to be paid in lieu of performance, Forsyth v. Central Foundry Co., 240 Ala. 277 , 198 So. 706 (1940), while a penalty is characterized as a security for the performance of the agreement or as a punishment for default. Standard Tilton Milling Co. v. Toole, 223 Ala. 450 , 137 So. 13 (1931). The courts generally identify three criteria by which a valid liquidated damages clause may be distinguished from a penalty. First, the injury caused by the breach must be difficult or impossible to accurately estimate; second, the parties must intend to provide for damages rather than for a penalty; and, third, the sum stipulated must be a reasonable pre-breach of the probable loss. See, C. Gamble and D. Corley, Alabama Law of Damages, § 5-4 (1982). Determining whether a liquidated damages provision is valid is a question of law to be determined by the trial court based on the facts of each case.

It is clear that the damages awarded by the trial court in this case are compensatory, are to be paid in lieu of performance, and are approximately in a sum that the parties reasonably could have expected to be suffered by the lessor in the event of a breach. In other words, the calculations by the trial court gave an amount that would have been paid had Camelot performed its obligations under the contract. Because the liquidated damages assessed here are those that Camelot reasonably could have expected to result from its breach of the contract, we hold that the liquidated damages clause of the contract was not a penalty, and that the trial judge did not err in assessing damages in the sum found by him to have been suffered by the lessor. The judgment of the trial court is due to be, and it hereby is, affirmed. AFFIRMED.

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 void as a penalty.

(2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds: (a) The amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1), or (b) In the absence of such terms, 20 percent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

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 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 void as a penalty.

If the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of an amount by which the sum of the buyer's payments exceeds (1) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with (a) of this section, or (2) in the absence of those terms, 20 percent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

The buyer's right to restitution under (b) of this section is subject to offset to the extent that the seller establishes (1) a right to recover damages under this chapter other than (a) of this section, and (2) the amount or value of benefits received by the buyer directly or indirectly by reason of the contract.

If a seller has received payment in goods, their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of (b) of this section; but, if the seller has notice of the buyer's breach before reselling goods received in part performance, the resale is subject to the conditions laid down on resale by an aggrieved seller ( AS 45.02.706 ).

(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made. (c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either: (1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party’s personal, family, or household purposes; or (2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support. (d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

We conclude the trial court correctly understood the prepayment provision here to be a penalty for delinquency in meeting the contractual interest payments and thus correctly *974 held the penalty to be unenforceable, because it bore no relationship to the potential damages defendant would incur from a late interest payment. We therefore reverse the judgment of the Court of Appeal, which reversed the trial court’s judgment for plaintiffs.

This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.

In contrast to late payment fees, contractual charges for prepayment of the loan principal are generally considered valid provisions for alternative performance, rather than penalties or liquidated damages for breach. Payment before maturity is not a breach of the contract, but simply an alternative mode of performance on the borrower’s part; the prepayment charge is not a penalty imposed for default, but an agreed form of compensation to the lender for interest lost through prepayment, additional tax liability or other disadvantage.

(a) This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract. (b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

(c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either: (1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party’s personal, family, or household purposes; or (2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support. (d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

(1) Damages for breach by either party may be liquidated in the agreement subject to and in compliance with Section 1671 of the Civil Code. If the agreement provides for liquidation of damages, and such provision does not comply with Section 1671 of the Civil Code, remedy may be had as provided in this division. (2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his or her payments exceeds: (a) The amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subdivision (1), or (b) In the absence of such terms, 20 percent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars ($500), whichever is smaller.

A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under section 1671(b), if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. The amount set as liquidated damages "must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained." ( Garrett v. Coast & Southern Fed. Sav. & Loan Assn., supra, 9 Cal.3d at p. 739 (hereafter Garrett ).) In the absence of such relationship, a contractual clause purporting to predetermine damages "must be construed as a penalty."

The complication presented by this case is that the charge here was contingent on both events, prepayment of principal and late payment of an interest installment (or other default). It can be described, therefore, as both a prepayment charge and a late payment penalty. "We have consistently ignored form and sought out the substance of arrangements which purport to legitimate penalties and forfeitures." ( Garrett, supra, 9 Cal.3d at p. 737 .)

The dissent suggests a different set of rules must apply because this was an "arm's-length commercial transaction." (Dis. opn., post, at p. 983.) That plaintiffs are small business owners rather than consumers, however, does not deprive them of section 1671's protection against unreasonable penalties or of the right to relief from contractual forfeiture under section 3275.

We conclude the trial court correctly understood the prepayment provision here to be a penalty for delinquency in meeting the contractual interest payments and thus correctly *974 held the penalty to be unenforceable, because it bore no relationship to the potential damages defendant would incur from a late interest payment. We therefore reverse the judgment of the Court of Appeal, which reversed the trial court's judgment for plaintiffs.

DISPOSITION The judgment of the Court of Appeal is reversed. The matter is transferred to the Court of Appeal for consideration of plaintiffs' appeal. George, C.J., Kennard, J., Baxter, J., Chin, J., and Brown, J., concurred.

[T]he law is well established in this jurisdiction, as well as elsewhere, that a term in a contract calling for the imposition of a penalty for the breach of the contract is contrary to public policy and invalid, but a contractual provision fixing the amount of damages to be paid in the event of a breach is enforceable if it satisfies certain conditions.

(a) No provision in a written contract for the purchase or lease of goods or services primarily for personal, family or household purposes that provides for the payment of liquidated damages in the event of a breach of the contract shall be enforceable unless (1) the contract contains a statement in boldface type at least twelve points in size immediately following such liquidated damages provision stating “I ACKNOWLEDGE THAT THIS CONTRACT CONTAINS A LIQUIDATED DAMAGES PROVISION”, and (2) the person against whom such provision is to be enforced signs such person's name or writes such person's initials next to such statement. Nothing in this section shall validate a clause that is a penalty clause or is otherwise invalid under the law of this state.

(c) The provisions of subsection (a) of this section shall not apply to (1) contracts between a consumer and an agency of the state or any political subdivision of the state or of the federal government, (2) negotiable instruments, (3) contract provisions for late fees, prepayment penalties or default interest rates, (4) contracts originated or held by an institution, or any subsidiary or affiliate of such institution, that is regulated by the Department of Banking or by a federal bank regulatory agency, provided, in the case of a contract originated or held by a subsidiary or affiliate of such institution, the subject matter of the contract is an activity that is financial in nature or incidental to such an activity as described in the Bank Holding Company Act, 12 USC 1843(k)(4), and (5) contracts originated or held by a person, firm or corporation licensed by the Department of Motor Vehicles in accordance with the provisions of section 14-52 or 14-67a .

A provision for liquidated damages, on the other hand, is one the real purpose of which is to fix fair compensation to the injured party for a breach of the contract. In determining whether any particular provision is for liquidated damages or for a penalty, the courts are not controlled by the fact that the phrase “liquidated damages” or the word “penalty” is used. Rather, that which is determinative of the question is the intention of the parties to the contract. Accordingly, such a provision is ordinarily to be construed as one for liquidated damages if three conditions are satisfied: (1) The damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of abreach of the contract.

(b) For purposes of this subsection, “personal emergency response system” means a twenty-four-hour-per-day electronic alarm system placed in an adult's home that enables him or her to obtain immediate help in case of an emergency. In the event a consumer dies during the term of a consumer contract or consumer lease for a personal emergency response system, the consumer contract or consumer lease for such system shall be deemed terminated upon such consumer's death and any penalty provision contained in the contract or lease regarding early termination shall be unreasonable pursuant to section 42-421 .

In the present case, § 49-8 is not akin to a liquidated damages clause because, although the damages may be difficult to prove, they did not arise from an agreement of the parties, and the parties, therefore, could not have *204 had the intent to liquidate damages.

In Lee Builders v. Wells, a case involving a liquidated damages provision equal to 5% of the purchase price in a contract for the sale of land, the Court of Chancery articulated the following two-prong test for analyzing the validity of the amount of liquidated damages: “Where the damages are uncertain and the amount agreed upon is reasonable, such an agreement will not be disturbed.” 12 Plaintiff argues that the termination fee, if properly analyzed as liquidated damages, fails the Lee Builders test because both portions of the fee are punitive rather than compensatory, having nothing to do with actual damages but instead being designed to punish Bell Atlantic stockholders and the subsequent third-party acquirer if Bell Atlantic were ultimately to agree to merge with another entity. We find, however, that the termination fee safely passes both prongs of the Lee Builders test. To be a valid liquidated damages provision under the first prong of the test, the damages that would result from a breach of the merger agreement must be uncertain or incapable of accurate calculation. Plaintiff does not attack the fee on this ground. Given the volatility and uncertainty in the telecommunications industry due to enactment of the Telecommunications Act of 1996 and the fast pace of technological change, one is led ineluctably to the conclusion that advance calculation of actual damages in this ease approaches near impossibility. • Plaintiff contends, however, that the $550 million fee violates the second prong of the Lee Builders test, i.e., that it is not a reasonable forecast of actual damáges, but rather a penalty intended to punish the stockholders of Bell Atlantic for not approving the merger. Plaintiffs attack is without force. Two factors are relevant to a determination of whether the amount fixed as liquidated damages is reasonable. The first factor is the anticipated loss by either party should the merger not occur. The second factor is the difficulty of calculating that loss: the greater the difficulty, the easier it is to show that the amount fixed was reasonable. 13 In fact, where the level of uncertainty surrounding a given transaction is high, “|e]xpe-rience has shown that ... the award of a court or jury is no more likely to be exact compensation than is the advance estimate of the parties themselves.” 14 Thus, to fail the second prong of Lee Builders, the amount at issue must be unconscionable 15 or not rationally related to any measure of damages a party might conceivably sustain. 16 Here, in the face of significant uncertainty, Bell Atlantic and NYNEX negotiated a fee amount and a fee structure that take into account the following: (a) the lost opportunity costs associated with a contract to deal exclusively with each other; (b) the expenses incurred during the course of nego- *49 Rating the transaction; (e) the likelihood of a higher bid emerging for the acquisition of either party; and (d) the size of termination fees in other merger transactions. The parties then settled on the $550 million fee as reasonable given these factors. Moreover, the $550 million fee represents 2% of Bell Atlantic’s market capitalization of $28 billion. This percentage falls well within the range of termination fees upheld as reasonable by the courts of this State. 17 We hold that it is within a range of reasonableness and is not a penalty.

While a breach of the merger agreement is not the only event that would trigger payment of the termination fee, the express language of section 9.2(c) states that a party’s breach of section 7.2 (which provides that the parties are required to take all action necessary to convene a stockholders’ meeting and use all commercially reasonable efforts to secure proxies to be voted in favor of the merger), coupled with other events, may trig *48 ger a party’s obligation to pay the termination fee. Thus, we find no compelling justification for treating the termination fee in this agreement as anything but a liquidated damages provision, in light of the express intent of the parties to have it so treated.

(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 void as a penalty.

So be it, but in our view, the drafters of corporate documents bear the responsibility for the selection of appropriate and clear language.

See Brazen v. Bell Atlantic Corp., 695 A.2d 43, 67 (Del. 1997) (“[l]iquidated damages, by definition, are damages paid in the event of a breach.”)

Conclusion Because we find that actual damages in this case do not lend themselves to reasonably exact calculation, and because we further find that the $550 million termination fee was a reasonable forecast of damages and that the fee was neither coercive nor unconscionable, we hold that the fee is a valid liquidated damages provision in this merger agreement. In light of the foregoing, we affirm, albeit on somewhat different grounds, the judgment of the Court of Chancery.

The express language in section 9.2(e) of the agreement unambiguously states that the termination fee provisions “constitute liquidated damages and not a penalty.” 9 The Court of Chancery correctly found that liquidated damages, by definition, are damages paid in the event of a breach of a contract.

The default provision reads as follows: 1. DEFAULT BY BUYER: If Buyer fails to perform the Contract within the time specified, the deposit(s) made or agreed to be made by Buyer may be retained or recovered by or for the account of Seller as liquidated damages, consideration for the execution of the Contract and in full settlement of any claims; whereupon all parties shall be relieved of all obligations under the Contract; *328 or Seller, at his option, may proceed at law or in equity to enforce his rights under the Contract.

In Hyman v. Cohen, 73 So.2d 393 (Fla. 1954), this Court established the test as to when a liquidated damages provision will be upheld and not stricken as a penalty clause. First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages.

First, were the damages consequent upon a premature termination of the lease by the lessor readily ascertainable? And it should be noted that this question is to be determined by a consideration of the status of the parties at the time the contract was entered into, and not at the time of the breach.

Under the rationale of the Fourth District Court of Appeal, a liquidated damages clause would constitute a penalty if the damages were readily ascertainable at the time of breach, regardless of whether the damages were not ascertainable at the time the contract was executed. By contrast, in Hyman this Court had decided that in order for a liquidated damages clause to be construed as a penalty it was necessary for the damages to be readily ascertainable at the time of the drawing of the contract. In Hutchison we reaffirmed the validity of the Hyman rationale and held the liquidated damages clause could stand if the damages were not readily ascertainable at the time of the drawing of the contract.

We agree with the court below that the forfeiture of the $38,500 deposit was not unconscionable. The deposit represented only ten percent of the purchase price and half of this had to be paid to the broker. The $38,500 was not so grossly disproportionate to any damages that might reasonably be expected to follow from a breach of the contract so as to show that the parties intended only to induce full performance.

However, we do not read Cortes or any of the prior cases in which the term "mutuality" appears as meaning that an option by one party either to retain the deposit or to seek actual damages is enforceable whenever the other party also has a right to choose remedies. [2] The phrase "mutuality of the agreement" used in the Pappas opinion and cited in Cortes was not meant to impose a requirement that the parties to a contract have identical remedies. [3] Rather, we interpret these opinions to mean that the existence of the option reflects that the parties did not have the mutual intention to stipulate to a fixed amount as their liquidated damages in the event of a breach.

The reason why the forfeiture clause must fail in this case is that the option granted to Baron either to choose liquidated damages or to sue for actual damages indicates an intent to penalize the defaulting buyer and negates the intent to liquidate damages in the event of a breach. The buyer under a liquidated damages provision *330 with such an option is always at risk for damages greater than the liquidated sum. On the other hand, if the actual damages are less than the liquidated sum, the buyer is nevertheless obligated by the liquidated damages clause because the seller will take the deposit under that clause. Because neither party intends the stipulated sum to be the agreed-upon measure of damages, the provision cannot be a valid liquidated damages clause.

We hold that the default provision in the subject contract was not enforceable as a liquidated damages clause. The provision constituted a penalty as a matter of law because the existence of the option negated the intent to liquidate damages. [5] We quash the decision below with directions to remand the case for a trial on the actual damages incurred by Baron as a result of the breach of contract. It is so ordered. SHAW, C.J., and OVERTON, EHRLICH, BARKETT and KOGAN, JJ., concur. McDONALD, J., dissents.

[5] We express no opinion with respect to whether the same result would occur if the Uniform Commercial Code were applicable to this transaction, nor do we imply that a liquidated damages clause which merely provided the option of pursuing equitable remedies would be unenforceable.

(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 void as a penalty.

Second, is the sum stipulated to be forfeited so grossly disproportionate to any damages that might reasonably be expected to follow from a premature termination of the lease as to show that the parties could have intended only to induce full performance thereunder, rather than to liquidate their damages?

Another rule cited in the Stenor case, and which was held to be applicable to the facts in that case, may be stated as follows: where a lease gives the lessor an *402 option either to retain the deposit as his liquidated damages or to apply it pro tanto against his actual damages, such a provision by its very terms negatives an intention to liquidate damages in advance and cannot be upheld as such. There was no such provision in the lease in the instant case.

As has been shown, there is nothing in the record to overcome such presumption here, and it must be held that the provision for the forfeiture of the deposit was one for liquidated damages rather than for a penalty; since the record also fails to show any circumstances which would activate a court of equity in relieving the lessee from the forfeiture of his deposit, the lower court must be held in error for so doing. For the reason stated, the decree is affirmed in part and reversed in part, and the cause remanded for the entry of a decree not inconsistent with the opinions herein expressed. TERRELL, HOBSON, MATHEWS and DREW, JJ., concur. THOMAS and SEBRING, JJ., dissent.

Unless the context otherwise requires, this chapter applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this chapter impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

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 void as a penalty.

Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds (a) the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1), or (b) in the absence of such terms, twenty per cent (20%) of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

(3) The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller establishes (a) a right to recover damages under the provisions of this chapter other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer’s breach before reselling goods received in part performance, his resale is subject to the conditions laid down in this chapter on resale by an aggrieved seller (section 28-2-706).

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 void as a penalty.

While the intention of the parties on this question must be taken into consideration, the language of the contract is not conclusive. The courts of this State, as well as in other jurisdictions, lean towards a construction which excludes the idea of liquidated damages and permits the parties to recover only damages actually sustained.

(2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds (a) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or (b) in the absence of such terms, 20% of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

This court has said that the rules deducible from the cases may be stated as follows: “First, where by the terms of a contract a greater-sum of money is to be paid upon default in the payment of a lesser sum at a given time, the provision for the payment of the greater sum will be held a penalty; second, where by the terms of a contract the damages are not difficult of ascertainment according to the terms of the contract and the stipulated damages are un-' conscionable, the stipulated damages will be regarded as a penalty; third, within these two rules parties may agree upon any sum as compensation for a breach of contract.” (Poppers v. Meagher, 148 Ill. 192 .)

Section 11 of the lease between the parties provided that said sum was “to be held by the party of the first part as security for the faithful performance by the party of the second part of the covenants and agreements in this rider and in the indenture of lease to which this rider is attached contained, to be kept and performed by said party of the second part, which said sum of twenty-five hundred dollars ($2500) shall be applied by said party of the first part as rental reserved for the said premises for each of the last seven and one-seventh months of the term herein demised, provided that prior to the application of each of said month’s rental said second party shall not be in default in any of the terms, covenants and conditions in this rider or in the indenture of lease to which it is attached contained, to be kept and performed by said party of the second part. Party of the first part covenants and agrees to pay or cause to be paid to party of the second part, its successors or assigns, interest at the rate of five per cent (5%) annually on the said sum of twenty-five hundred dollars ($2500), so long as said sum of $2500 shall remain in the hands of the said party of the first part undisposed of, under the terms of this rider and the indenture of lease to which it is attached.”

By section 12 it was further covenanted and agreed that “in the event that the indenture of lease to which this rider is attached shall be terminated by reason of a breach by party of the second part of any of the terms and conditions in said indenture of lease contained, by said party of the second part to be kept and performed, then and in such event the party of the first part may, at his option, retain as and for full liquidated damages the said sum of $2500 or such portion thereof as may at such time be in the hands of the party of the first part under the terms hereof, and thereafter the party of the second part shall have no further right, claim or interest in and to the said sum of $2500 or any part thereof.”

We have frequently said that courts will look to see the nature and purpose of fixing the amount of damages to be paid, and if it appears to have been inserted to secure the prompt performance of the agreement it will be treated as a penalty and no more than actual damages proved can be recovered. (Westfall v. Albert, 212 Ill. 68 , and cases cited.)

In the light of the circumstances in this case the Appellate Court rightly held this sum a penalty and not liquidated damages.

(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes (a) a right to recover damages under the provisions of this Article other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

The only question .argued there touching upon damages was whether the $2500 named in the lease should be considered liquidated damages or a penalty. The judgment of the Appellate Court will be affirmed. Judgment affirmed.

The American Law Institute adopts a more conservative approach as follows: 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.

Under the test stated in Subsection (1), two factors combine in determining whether an amount of money fixed as damages is so unreasonably large as to be a penalty. The first factor is the anticipated or actual loss caused by the breach. The amount fixed is reasonable to the extent that it approximates the actual loss that has resulted from the particular breach, even though it may not approximate the loss that might have been anticipated under other possible breaches. Furthermore, the amount fixed is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss. The second factor is the difficulty of proof of loss. The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty, the easier it is to show that the amount fixed is reasonable. To the extent that there is uncertainty as to the harm, the estimate of the court or jury may not accord with the principle of compensation any more than does the advance estimate of the parties. A determination whether the amount fixed is a penalty turns on a combination of these two factors. If the difficulty of proof of loss is great, considerable latitude is allowed in the approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude is allowed in that approximation. If, to take an extreme case, it is clear that no loss at all has occurred, a provision fixing a. substantial sum as damages is unenforceable.

the amount of liquidated damages set in each contract appears to be unreasonably large and goes far beyond the anticipated loss caused by delay in performance of the contract

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 void as a penalty.

Each contract established $400.00 per day as the amount of liquidated damages.

Under the record of this case, the person who set the $400-per-day amount in each contract is unknown and was not called as a witness.

The county engineer did not conduct studies or present any other data suggesting that defendants anticipated that the government entities and the public could sustain damages equivalent to the $400-per-day liquidated damage amount contained in each of the three contracts.

Therefore, we conclude that the $400-per-day liquidated damage clause contained in each of the three contracts is an unrealistic amount and is therefore a penalty that should not be enforced.

In the past, we disfavored the use of liquidated damage clauses and favored interpretation of contracts that make stipulated sums penalties. Elzey v. City of Winterset, 172 Iowa 643, 646 , 154 N.W. 901 , 902 (1915). Later, we relaxed this penalty rule and recognized that parties may fix damages by contract when the amount of damages is uncertain and the amount fixed is fair.

However, the American Law Institute shows no hostility toward liquidated damages by stating: The parties to a contract may effectively provide in advance the damages that are to be payable in the event of breach as long as the provision does not disregard the principle of compensation. The enforcement of such provisions for liquidated damages saves the time of courts, juries, parties and witnesses and reduces the expense of litigation. This is especially important if the amount in controversy is small. However, the parties to a contract are not free to provide a penalty for its breach. The central objective behind the system of contract remedies is compensatory, not punitive. Punishment of a promisor for having broken his promise has no justification on either economic or other grounds and a term providing such a penalty is unenforceable on grounds of public policy.

The county did sustain damages, however, due to erosion because it could not seed the highway shoulders because of the delay.

Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of the buyer’s payments exceeds a. the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection 1, or b. in the absence of such terms, twenty percent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars, whichever is smaller.

In doing so, we explain below that the reasonableness of a liquidated damages clause in a contract deliberately entered into should be determined with regard to the conditions of the parties existing at the time the contract was executed, not from hindsight after the contract is breached.

To that end, our decision in this case is intended to lay aside any further doubt and embrace a prospective analysis as the sole basis for evaluating a liquidated damages provision in a contract. To the extent any prior decisions of our Court of Appeals have contributed to that doubt by adding a retrospective test in their determination of this issue, they are overruled as to this limited point.

We decline to adopt a rule that operates solely to invalidate liquidated damages clauses that were freely entered into just because damages would be applicable after occupancy. We believe the better rule is to require a liquidated damages clause applicable to a delay in achieving final completion to withstand the prospective analysis described in this opinion. We affirm the district court and the Court of Appeals for the reasons stated.

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 void as a penalty.

The provisions recited above show at the time the contract was entered into by the parties, the City and Carrothers agreed: (1) Time was of the essence in completing the project; (2) actual damages would be difficult to ascertain, so the parties chose to use the liquidated damages provision if a breach occurred rather than requiring proof of actual damages; (3) the same per diem amount of liquidated damages applicable to a failure to achieve substantial completion would apply to a failure to achieve final completion; (4) the $850 per diem liquidated damages amount for failure to achieve either substantial or final completion was not a penalty; and (5) the project engineer’s opinion would be relied upon by both parties to determine whether the completion dates were met.

In considering the issue, this court previously stated: “In determining whether contractual agreements are to be treated as penalties or as liquidated damages, courts look behind the words used by the contracting parties to the facts and the nature of the transaction. The use of the terms ‘penalty’ or ‘liquidated damages’ in the instrument is of evidentiary value only. It is given weight and is ordinarily accepted as controlling unless the facts and circumstances impel a contrary holding. [Citations omitted.] The instrument must be considered as a whole, and the situation of the parties, the nature of the subject matter and the circumstances surrounding its execution taken into account. There are two considerations which are given special weight in support of a holding that a contractual provision is for liquidated damages rather than a penalty — the first is that the amount stipulated is conscionable, that it is reasonable in view of the value of the subject matter of the contract and of the probable or presumptive loss in case of breach; and the second is that the nature of the transaction is such that the amount of actual damages resulting from default would not be easily and readily determinable. [Citations omitted.]” Beck, 153 Kan. at 726 .

In TMG Life Ins. Co. v. Ashner, 21 Kan. App. 2d 234, 250, 898 P.2d 1145 (1995), the Court of Appeals ruled the burden of proving a liquidated damages clause is an unenforceable penalty falls on the party challenging the provision. See Oriental Gardens, 32 Kan. App. 2d at 561 . We agree. By placing the burden of proof on the party challenging a liquidated damages clause, we promote a public policy favoring settlement and avoidance of litigation, and .allowing parties to make, and live by, their own contracts.

Parties may stipulate the damages to be recovered in case of nonperformance, defective performance, or delay in performance of an obligation. That stipulation gives rise to a secondary obligation for the purpose of enforcing the principal one.

An obligee who avails himself of a stipulated damages clause need not prove the actual damage caused by the obligor's nonperformance, defective performance, or delay in performance.

Stipulated damages may not be modified by the court unless they are so manifestly unreasonable as to be contrary to public policy.

An obligee may not avail himself of a clause stipulating damages for delay unless the obligor has been put in default.

Stipulated damages may not be modified by the court unless they are so manifestly unreasonable as to be contrary to public policy, C.C. Art. 2012

Nullity of the principal obligation renders the stipulated damages clause null. Nullity of the stipulated damages clause does not render the principal obligation null.

An obligee may demand either the stipulated damages or performance of the principal obligation, but he may not demand both unless the damages have been stipulated for mere delay.

In an October 1, 1985 real estate purchase agreement, the parties stipulated that, if the purchaser failed or delayed in performance, the seller would have the right to demand specific performance or to declare a $1,000 deposit by the purchaser forfeited. When the purchaser failed to perform, the seller sued for specific performance but subsequently sold the property to a third person for a sum substantially below the purchase agreement's sale price and amended the suit to pray that damages be fixed by the court rather than according to the stipulated damages clause.

The court of appeal was correct in concluding that the seller was bound by the stipulated damages clause agreed upon by the parties to the real estate purchase agreement. The trial court erred in awarding court-determined damages. (1) The seller was bound by the stipulated damages clause. Under Civil Code Article 1986, the seller could enforce her right to damages when her right to specific performance became impracticable, but this article must be read in pari materia with Article 2012 which provides that stipulated damages cannot be modified by the court unless they are so unreasonable as to be contrary to public policy.

Consequently, we conclude that the seller, Lombardo, was bound by the stipulation of damages clause that she agreed to in advance with the purchaser, Deshotel. She was not excused from her reciprocal duty under this obligation simply because she sought to enforce her right to performance of the obligation before resorting to her right to damages. For the reasons assigned, the judgment of the court of appeal is affirmed. AFFIRMED.

The enforceability of a liquidated damages provision is a question of law and is reviewed accordingly by the Law Court.

Moreover, the amount of the liquidated damages, which was 100% of the contract price, suggests the conclusion that it was an unenforceable penalty.

In the present matter, as will almost universally be the case, the Scoblion-kos were not only the drafters of the contract but also the parties seeking to enforce the liquidated damages clause. As such they were correctly assigned the burden of proving its validity.

The defendants’ remaining contentions are without merit and require no discussion. The entry is; Judgment affirmed.

First, the damages caused by the breach must be “very difficult to estimate accurately,” and second, the amount fixed by the agreement must be “a reasonable forecast of the amount necessary to justly compensate one party for the loss occasioned by” the other’s breach.

If a late charge amounts to liquidated damages, we will affirm it; if it is an excessive or usurious penalty, we will not uphold the provision.

The trial court must, upon remand, reexamine what, if any, late fees and escalated interest rates may be imposed on Casey. The parties will be able to argue, and the trial court should determine, whether and to what extent these late fees and escalated interest rates amounted to liquidated damages or excessive and usurious penalties. *1217 The entry is: Judgment vacated. Remanded to the Superior Court for further proceedings consistent with this opinion.

Liquidated damages must meet two requirements in order to be enforceable: the damages must be difficult to prove and the amount fixed must be a reasonable forecast.

We agree with the trial court that this test has been met. Because an optometrist’s practice is dependent on his relationship with his patients, it was evident at the time the employment contract was formed that damages would be difficult to prove after a breach. Further, $30,000 was a reasonable estimate of Brignull’s potential loss of revenue. The evidence revealed that each patient could be valued at $140 annually, so' that Albert merely needed to take 215 patients away from Brignull to justify the damages. In light of the fact that Albert saw 210 of BrignuU’s patients in his first six months of practice, $30,000 was a reasonable forecast. The entry is: Judgment affirmed.

We review the enforceability of a liquidated damages provision as a question of law, but we review for clear error the factual determinations that the trial court found to satisfy the two-part test.

In sum, the restrictive covenants protected legitimate business interests of SOCHS, and the contracts contained enforceable liquidated damages provisions. The entry is: Judgment affirmed.

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 void as a penalty.

Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds (a). The amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1) ; or (b). In the absence of such terms, 20% of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

The buyer's right to restitutions under subsection (2) is subject to offset to the extent that the seller establishes (a). A right to recover damages under the provisions of this article other than subsection (1) ; and (b). The amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

The Scoblionkos produced no proof as to what damages were anticipated or actually sustained as a result of the younger Pacheco’s withdrawal.

Considering the competent evidence before the court demonstrating that it takes two to three years for a replacement physician to generate income at a level commensurate with that of an established doctor, and that 1373 patients requested that their medical records be transferred following these doctors’ breaches, the amount of damages fixed in the contract was a reasonable approximation of the damages that SOCHS would incur if a doctor left Court Street to practice within a twenty-five-mile radius.

The modem trend is to look with candor, if not with favor, upon a contract provision for liquidated damages when entered into deliberately between parties who have equality of opportunity for understanding and insisting upon their rights, since an amicable adjustment in advance of difficult issues saves the time of courts, juries, parties, and witnesses and reduces the delay, uncertainty, and expense of litigation. 10 Accordingly this court has long regarded provisions for liquidated damages as prima facie valid 11 on the assumption that the parties in naming a liquidated sum intended it to be a fair compensation for an injury caused by a breach of contract and not a penalty for nonperformance.

This court has held that where the actual damages resulting from a-breach of the contract cannot be ascertained or measured by the or *483 dinary rules, a provision for liquidated damages not manifestly disproportionate to the actual damages will be sustained. 18 On the other hand, when the measure of damages resulting from a breach of contract is susceptible of definite measurement, we have uniformly held an amount greatly disproportionate to be a penalty.

Punishment of a promisor for breach, without regard to the extent of the harm that he has caused, is an unjust and unnecessary remedy 16 and a provision having an impact that is punitive rather than compensatory will not be enforced.

The controlling factor, rather than intent, is whether the amount agreed upon is reasonable or unreasonable in the light of the contract as a whole, the nature of the damages contemplated, and the surrounding cir- | cumstances.

In the instant case the provision for liquidated damages covered specific elements of damages which were clearly and readily susceptible of definite measurement and proof by ordinary rules. These elements were: (1) Salesman’s commission, (2) advertising, and (3) commitment of labor and equipment to perform contract. Obviously the amount of a salesman’s commission is easily ascertained. No- attempt was made to prove the payment of any commission. Likewise the actual committing of any labor or equipment to perform the contract was susceptible of proof without difficulty. The record, however, discloses that plaintiff learned that defendant had cancelled the contract prior to any commitment of labor or equipment and therefore no expenses therefor were incurred by plaintiff.

On cross-examination of Mr. Coplin it was brought out that plaintiff’s ratio of general and administrative expenses to sales included such expenses as rent, utilities, the bookkeeper’s salary, and accounting and legal fees. With respect to these types of expenses, this court in Goodell v. Accumulative Income Corp. 185 Minn. 213, 219 , 240 N. W. 534, 537 , in holding that a stipulated-damage provision was a penalty, made the following comment: “Defendant states that the court will take judicial notice that defendant suffered damages in the matter of expense of selling the certificate, salaries of officers, maintenance of office, bookkeeping, investment of funds, etc. These are general expenses of conducting its business. Plaintiff’s default neither increased nor decreased such expenses.”

The Minnesota rule is in accord with Restatement, Contracts, § 339, which provides: “(1) An agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless “(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and “(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.”

Since the provision for liquidated damages relates solely to items readily subject to definite proof, and in view of the fact that the record is almost devoid of any evidence that would tend to support a conclusion that the sum stipulated for liquidated damages (i. e., 15 percent of $1,800 or $270) bears any reasonable relation to plaintiff’s pecuniary loss, it must be concluded that the provision for liquidated damages is in the nature of a penalty and is therefore unenforceable.

Every contract by which the amount of damage to be paid or other compensation to be made for a breach of an obligation is determined in anticipation thereof is to that extent void, except as expressly provided in subsection (2).

The parties to a contract may agree therein upon an amount which shall be presumed to be an amount of damage sustained by a breach thereof when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

As indicated by Montana’s statute on liquidated damages, § 28-2-721, MCA,6 and by treatises including WILLISTON ON CONTRACTS, § 65:1, and § 356 of the RESTATEMENT (SECOND) OF CONTRACTS (1965) (hereinafter RESTATEMENT § 356), the threshold indicator of reasonableness is whether the situation involves damages of a type that are impractical or extremely difficult to prove. When the parties to the contract will suffer difficult to prove damages, a court can assume there was a reasonable motive for adding a liquidated damages clause, because, as mentioned, stipulated damages can quantify damages that a court could not otherwise award for lack of proof.

Ballou’s tender of $1.00 for Walker’s interest, and the Agreement’s provision upon which it was based, was an unconscionable and void attempt to fix liquidated damages, in violation of § 28-2-721, MCA.

In sum, although Klyap had no meaningful choice regarding the liquidated damages provision, the clause itself is still not unconscionable because the 20% amount was within Klyap’s reasonable expectations as a teacher familiar with the employment needs of the School and the damages the School would suffer upon breach of the contract. Accordingly, we hold the District Court correctly determined that the liquidated damages provision was enforceable.

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 void as a penalty.

The question of whether a stipulated sum is for a penalty or for liquidated damages is answered by the application of one or more aspects of the following rule: a stipulated sum is for liquidated damages only (1) where the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.

Ordinarily a sum paid in part performance of a contract, with a provision that it shall be forfeited in the event of a default, if not excessive, and if the actual damages are not calculable in advance, will be regarded as liquidated damages.

The question of whether or not the damages to be anticipated on breach could reasonably have been ascertained at the time the contract was entered into must be answered in the negative.

the reasonableness of the stipulated damages can be judged as of the time the contract was formed

This court has consistently upheld the right of contracting parties to privately bargain for the amount of damages to be paid in the event of a breach of contract, provided the stipulated sum is reasonable in light of the circumstances.

Generally, the question whether a sum mentioned in a contract is to be considered as liquidated damages or as a penalty is a question of law, dependent on the construction of the contract by the court.

It is well established that a contractual provision that requires payment based on something other than a breach of the contract is neither a liquidated damages clause nor a penalty provision.

The question whether the fee is a reasonable estimate of damages caused by a breach is irrelevant, and the district court erred in engaging in such an analysis.

And we have been reluctant to modify contracts between parties with business experience, as opposed to contracts between consumers and skilled corporate parties.

If the damages arising from a breach of the contract are difficult of ascertainment or admeasurement, and if the stipulated amount is not disproportionate to the amount of damages that may be reasonably anticipated from the breach, it will usually be regarded as a provision for liquidated damages.

On the other hand, if the damages may be easily and readily ascertained, and if the amount stipulated is more than sufficient to compensate for the breach, it will be .regarded as a penalty.

If the construction is doubtful, the agreement will be considered a penalty merely.

If defendant’s contention, and the view taken by the court, is sound, it would follow that, if plaintiff had completed all of the work contemplated by the contract, except a single rod or a single yard of the paving or curbing, defendant would be entitled to retain from the contract price $200 a month for the extra time in which the insignificant part of the work remained uncompleted, although the uncompleted part of the work could be done at the cost of a few dollars.

Evidently, the language used contemplated repayment of such sums as defendant may have been required to expend because of the delay.

Under the circumstances disclosed by the record in this case, we are constrained to hold that the language in the contract is a provision for a penalty, rather than for liquidated damages, and, as such, cannot be enforced.

unless the sum fixed in the contract is very unreasonable the provision is treated as one for liquidated damages.

Such damages are obviously graded according to the extent of the breach, increasing proportionately with each day’s delay.

We hold that the trial court’s determination that the contract provision for liquidated damages was not penal is correct.

The question of the reasonableness of a remedy generally addresses whether a liquidated damages clause is so great as to constitute a penalty.

Agreed-upon damages can also be so small as to be stricken as unconscionable in light of the breach.

A contract will not be construed to limit the remedial rights of the parties unless that intention is clearly expressed

We suggest that if the circumstances of a contract and its breach lend themselves to mitigation of damages, it is difficult to sustain a liquidated damage clause.

However, we acknowledge that liquidated damages and mitigation of damages are antithetic doctrines. See Lake Ridge Academy v. Carney, 66 Ohio St. 3d 376 , 613 N.E.2d 183 (1993) (holding as matter of law that when liquidated damage clause is valid, there is no duty to mitigate damages). But we do not believe a contracting party can negate the general duty to mitigate damages by merely inserting a liquidated damages provision in a contract.

the evidence reveals this to be the “avoidance of knowledge,” perhaps to shore up the claim for liquidated damages, rather than a situation where actual damages are truly difficult to ascertain.

A marketing contract may liquidate damages to be paid to a limited cooperative association for a breach or anticipatory repudiation of the marketing contract but only at an amount or at a formula that is reasonable in light of the actual or then anticipated harm caused by the breach or to be caused by the anticipatory repudiation. The provision may be enforced as liquidated damages and is not to be considered a penalty.

The contractor agrees to start this work on or before July 15, 1925, .and to complete same on or before the 1st day of September, 1925, and to reimburse the Village of Campbell at the rate of $200 per month for any extra time that may be required to complete said work.

For each calendar day that any work remains uncompleted after the end of the contract period, the amount of Seventy Five Dollars ($75.00) per calendar day will be assessed, not as a penalty, but as a predetermined and agreed amount to be used to pay, in part, any additional engineering expenses incurred by the Owner after the end of the contract period.

It is apparent that BFI had no incentive to place the container in another location or even keep track of whether it did because the contractual damage provision gives BFI a far better deal: another 6 months’ worth of billings, without any overhead costs, regardless of how much time was left on the contract.

A provision in a building contract that the contractor shall pay a stipulated sum per day after a certain date if he failed to complete the building at the time designated is in the nature of penalty and not liquidated damages.

When, however, the parties are experienced in business, the damages are economic, and the parties had fair opportunity to consider the agreement, courts rarely find that liability limitations are unconscionable.

When a declaratory judgment action presents a question of law, an appellate court has an obligation to reach its conclusion independently of the conclusion reached by the trial court with regard to that question.

parties to a contract may override the application of the judicial remedy for breach of a contract by stipulating, in advance, to the sum to be paid in the event of a breach.

(4) Nothing in this section shall restrict a limited cooperative association from seeking any other remedy at law or equity in the enforcement of a marketing contract.

In this section and sections 21-2950 to 21-2952 , marketing contract means a contract between a limited cooperative association and another person that need not be a patron member: (1) Requiring the other person to sell, or deliver for sale or marketing on the person's behalf, a specified part of the person's products, commodities, or goods exclusively to or through the limited cooperative association or any facilities furnished by the association; or

(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 non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. (2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds (a) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or (b) in the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller. (3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes (a) a right to recover damages under the provisions of this Chapter other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

As the law has evolved, a stipulated damage clause “must constitute a reasonable forecast of the provable injury resulting from breach; otherwise, the clause will be unenforceable as a penalty and the non-breaching party will be limited to conventional damage measures.” Goetz & Scott, supra, 77 Colum.L.Rev. at 554. So viewed, “reasonableness” emerges as the standard for deciding the validity of stipulated damages clauses. See Wassenaar, supra, 331 N.W.2d at 361 (noting that “[t]hq overall single test of validity is whether the clause is reasonable under the totality of circumstances”).

Because stipulated damages clauses are presumptively reasonable, supra at 252-53, 645 A.2d at 108, the burden of production and of persuasion rests on the Township.

We remand to the Law Division the issue whether the clause requiring payment of stipulated damages based on the lessee’s gross receipts is a valid liquidated damages clause. The judgment of the Appellate Division is affirmed in part, reversed in part, and the matter is remanded to the Law Division.

Consistent with the trend toward enforcing stipulated damages clauses, the Appellate Division has recognized that such clauses should be deemed presumptively reasonable and that the party challenging such a clause should bear the burden of proving its unreasonableness.

Although the Appellate Division has indicated that courts should determine the enforceability of a stipulated damages clause as of the time of the making of the contract, Westmount Country Club, supra, 82 N.J.Super. at 206 , 197 A.2d 379 , the modern trend is towards assessing reasonableness either at the time of contract formation or at the time of the breach.

As the law has evolved, a stipulated damage clause “must constitute a reasonable forecast of the provable injury resulting from breach; otherwise, the clause will be unenforceable as a penalty and the non-breaching party will be limited to conventional damage measures.” Goetz & Scott, supra, 77 Colum.L.Rev. at 554. So viewed, “reasonableness” emerges as the standard for deciding the validity of stipulated damages clauses. See Wassenaar, supra, 331 N.W.2d at 361 (noting that “[t]hq overall single test of validity is whether the clause is reasonable under the totality of circumstances”).

We conclude that the parties’ characterization of stipulated damages as “liquidated damages” or as a “penalty” should not be dispositive.

Because stipulated damages clauses are presumptively reasonable, supra at 252-53, 645 A.2d at 108, the burden of production and of persuasion rests on the Township.

Actual damages, moreover, reflect on the reasonableness of the parties’ prediction of damages. “If the damages provided for in the contract are grossly disproportionate to the actual harm sustained, the courts usually conclude that the parties’ original expectations were unreasonable.” Wassenaar, supra, 331 N.W.2d at 364

On balance, we believe we should remand this matter to the trial court to consider the reasonableness of the clause in light of this opinion. In resolving that issue, the court should consider, among other relevant considerations, the reasonableness of the use of gross receipts as the measure of damages no matter when the cancellation occurs; the significance of the award of damages based on twenty-five percent of one year’s average gross receipts, rather than on some other basis such as total gross receipts computed for each year remaining under the lease; the reasoning of the parties that supported the calculation of the stipulated damages; the lessee’s duty to mitigate damages; and the fair market rent and availability of replacement space.

To summarize, we affirm the judgment of the Appellate Division that the Township is liable to plaintiffs for terminating the lease. The agreement did not violate N.J.S.A. 40:60-42, and N.J.S.A 40A:12-14 does not apply retroactively to the lease. We also affirm the judgment of the Appellate Division awarding plaintiffs damages of $55,748.27 for renovation costs. We remand to the Law Division the issue whether the clause requiring payment of stipulated damages based on the lessee’s gross receipts is a valid liquidated damages clause. The judgment of the Appellate Division is affirmed in part, reversed in part, and the matter is remanded to the Law Division.

Determining enforceability at the time either when the contract is made or *252 when it is breached encourages more frequent enforcement of stipulated damages clauses.

Consistent with the trend toward enforcing stipulated damages clauses, the Appellate Division has recognized that such clauses should be deemed presumptively reasonable and that the party challenging such a clause should bear the burden of proving its unreasonableness.

A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.

Parties to a contract have the right to agree to such clauses, provided that the clause is neither unconscionable nor contrary to public policy.

In effect, a liquidated damage provision is an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.

If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.

In interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for "liquidated damages”, as in this case, or have styled it as a penalty. (E.g., Wirth & Hamid Fair Booking v Wirth, 265 NY 214, 225 , supra; Ward v Hudson Riv. Bldg. Co., 125 NY 230, 234 , supra.) Such an approach would put too much faith in form and too little in substance. Similarly, the agreement should be interpreted as of the date of its making and not as of the date of its breach.

In applying these principles to the case before us, we conclude that the amount stipulated by the parties as damages bears a reasonable relation to the amount of probable actual harm and is not a penalty. Hence, the provision is enforceable and the order of the Appellate Division should be affirmed.

We attach no significance to the fact that the liquidated *427 damages clause appears on the preprinted form portion of the agreement. The agreement was fully negotiated and the provisions of the form, in many other respects, were amended. There is no indication of any disparity of bargaining power or of unconscionability. The provision for liquidated damages related reasonably to potential harm that was difficult to estimate and did not constitute a disguised penalty. We also find no merit in the claim of trial error advanced by Puritan. Accordingly, the order of the Appellate Division should be affirmed, with costs.

Article 16 of the lease agreement provided that if the agreement should terminate prior to expiration of the term of the lease as a result of the lessee’s breach, the lessor would be entitled to damages, "liquidated for all purposes”, in the amount of all rents that would have come due from the date of termination to the date of normal expiration of the term less the "re-rental value” of the vehicles, which was set at 50% of the rentals that would have become due. In effect, the lessee would be obligated to pay the lessor, as a consequence of breach, one half of all rentals that would have become due had the agreement run its full course.

The agreement recited that, in arriving at the settled amount of damage, "the parties hereto have considered, among other factors, Lessor’s substantial initial investment in purchasing or reconditioning for Lessee’s service the demised motor vehicles, the uncertainty of Lessor’s ability to re-enter the said vehicles, the costs to Lessor during any period the vehicles may remain idle until re-rented, or if sold, the uncertainty of the sales price and its possible attendant loss. The parties have also considered, among other factors, in so liquidating the said damages, Lessor’s saving in expenditures for gasoline, oil and other service items.”

The text of article 16 of the lease, in pertinent part, reads as follows: "16. Upon termination of this agreement, * * * Lessor * * * shall be entitled to damages, herein liquidated for all purposes * * * as follows: "(a) The sum of all rents designated as 'Fixed Rental Charges’ which would have become due under the normal operation of this agreement from the date of the said termination * * * including any effective renewal period; less *422 "(b) The re-rental value of said motor vehicles which is hereby agreed upon as fifty per cent (50%) of the sum of such 'Fixed Rental Charges’ as are set forth in subdivision '(a)’ of this article. "In arriving at said liquidated damages, the parties hereto have considered, among other factors, Lessor’s substantial * * * investment in purchasing or reconditioning for Lessee’s service the demised motor vehicles, the uncertainty of Lessor’s ability to re-enter the said vehicles, the costs to Lessor during any period the vehicles may remain idle until re-rented, or if sold, the uncertainty of the sales price and its possible attendant loss. The parties have also considered, among other factors, in so liquidating the said damages, Lessor’s saving in expenditures for gasoline, oil and other service items.”

Looking forward from the date of the lease, the parties could reasonably conclude, as they did, that there might not be an actual market for the sale or re-rental of these specialized vehicles in the event of the lessee’s breach. To be sure, plaintiffs lost profit could readily be measured by the amount of the weekly rental fee. However, it was permissible for the parties, in advance, to agree that the re-rental or sale value of the vehicles would be 50% of the weekly rental. Since there was uncertainty as to whether the trucks could be re-rented or sold, the parties could reasonably set, as they did, the value of such mitigation at 50% of the amount the lessee was obligated to pay for rental of the trucks.

Whether a stipulated sum will be treated as a penalty or as liquidated damages may ordinarily be determined by applying one or more aspects of the following rule: "[A] stipulated sum is for liquidated damages only (1) where the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach." 22 Am.Jur.2d, Damages § 214.

Even so, it is the general rule that the amount stipulated in a contract as liquidated damages for a breach thereof, if regarded by the court as liquidated damages and not as a penalty, may be recovered in the event of a breach even though no actual damages are suffered. 22 Am.Jur.2d, Damages § 234

Applying the foregoing principles of law to the contract before us, we are of the opinion that the terms of the agreement are within the principles under which such contracts are held to be valid and that the sum to be paid upon breach should be considered as liquidated damages and not as a penalty. The formula for ascertaining the amount of damages, contained in Clause F of the contract, affords a mathematical method of making certain that which otherwise is very uncertain. Furthermore, the result of such calculation is a reasonable estimate of the damages which would probably be caused by a breach as it appeared to the parties at the time the contract was made. In addition, absent Clause F there is no standard by which a jury could fix with any degree of certainty the amount of damages sustained by plaintiff by reason of the breach.

Courts do not make contracts. As stated by Higgins, J., in Roberson v. Williams, 240 N.C. 696 , 83 S.E.2d 811 , "Ordinarily, when parties are on equal footing, competent to contract, enter into an agreement on a lawful subject, and do so fairly and honorably, the law does not permit inquiry as to whether the contract was good or bad, whether it was wise or foolish." In the trial below we find No error.

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 void as a penalty.

(b) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds (1) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (a) [of this section], (2) in the absence of such terms, twenty per cent (20%) of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars ($500.00), whichever is smaller, or (3) at the election of the seller in the case of a layaway contract, the aggregate payments received by seller from buyer under the contract or fifty dollars ($50.00), whichever is smaller.

(c) The buyer's right to restitution under subsection (b) [of this section] is subject to offset to the extent that the seller establishes (1) a right to recover damages under the provisions of this article other than subsection (a) [of this section], and (2) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

Every contract by which the amount of damages to be paid, or other compensation to be made, for a breach of an obligation is determined in anticipation thereof is to that extent void, except that the parties may agree therein upon an amount presumed to be the damage sustained by a breach in cases in which it would be impracticable or extremely difficult to fix the actual damage.

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 void as a penalty.

Neither of these clauses considers the earnest money provided for in the agreement to be the sole remedy in case of a breach by Walcker. Nor, as they did in Bishop Ryan High School, 370 N.W.2d at 728 , and Dosland, 424 N.W.2d at 142 , do the clauses refer to liquidated damages. Rather, both clauses consider that the earnest money is simply considered part payment toward the total amount due for purchase of the town home.

Here, nothing in the agreement’s two earnest money clauses precluded Shull from seeking additional remedies.

Furthermore, the amount Walcker deposited as earnest money — $1000—when compared to the overall contract price of the home — $179,900—can hardly be considered adequate compensation for potential damages resulting from a breach, given the lack of any language limiting Shull’s remedy to the earnest money deposits in the event of Walcker breaching the agreement. Finally, N.D.C.C. § 9-08-04 states that contracts for liquidated damages are void except where the parties agree to an amount presumed to be the damage in cases in which it would be “impracticable or extremely difficult to fix the actual damage.” Our case law requires that there be a reasonable endeavor by the parties to fix the compensation for the breach of contract. Eddy v. Lee, 312 N.W.2d 326, 330 (N.D.1981). No evidence was presented before the trial court that the earnest money amount was the result of a negotiation between the parties to be a reasonable pre-estimate of such damages. We affirm the damages awarded by the district court to Shull in the amount of $30,433.30.

When the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of the buyer's payments exceeds: - The amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection 1; or - In the absence of such terms, twenty percent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars, whichever is smaller.

Earnest money is a comparatively small down payment made as an assurance that the purchaser is in earnest and good faith, and that if he or she fails to purchase the property after making the payment, the deposit will be forfeited. Bishop Ryan High School v. Lindberg, 370 N.W.2d 726, 728 (N.D.1985). This Court has previously considered whether a particular earnest money agreement limited the seller’s remedy to the earnest money paid, or whether there were additional remedies the seller could pursue. Dosland v. Netland, 424 N.W.2d 141, 141 (N.D.1988). While this Court did not state a hard and fast rule on the matter in Dosland , we did find the clause allowing for the earnest money as liquidated damages “without prejudice or other rights and legal remedies” was ambiguous, suggesting there could or could not be additional remedies available to the seller. Id. at 142 . [¶21] Whether an earnest money agreement limits a seller’s remedies to the earnest money itself, then, is a matter of contractual interpretation.

but time has apparently had no undermining influence upon the guiding principles initially set forth in Jones v. Stevens, supra, where the court held at paragraph two of the syllabus: “Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.”

Hence, Honeywell’s standard reference “to the sum of Fifty Dollars ($50.00) as liquidated damages and not as a penalty” is by no means conclusive or controlling in this case.

the court of appeals expressly noted that “the damages here are patently estimable,” and this finding is attuned to the indisputable fact that the damages in this case would be as readily ascertainable as the damages in a multitude of other conceivable situations involving negligence and/or breach of contract.

Whether a particular sum specified in a contract is intended as a penalty or as liquidated damages depends upon the operative facts and circumstances *29 surrounding each particular case

While some jurisdictions have rejected such contract provisions on policy grounds, clauses in contracts providing for reasonable liquidated damages are recognized in Ohio as valid and enforceable. Lange v. Werk (1853), 2 Ohio St. 519 ; Jones v. Stevens (1925), 112 Ohio St. 43 ; 30 Ohio Jurisprudence 3d (1981) 136-137, Section 128. However, reasonable compensation for actual damages is the legitimate objective of such liquidated damage provisions and where the amount specified is manifestly inequitable and unrealistic, courts will ordinarily regard it as a penalty. Sheffield-King Milling Co. v. Domestic Science Baking Co. (1917), 95 Ohio St. 180 , paragraph one of the syllabus

As to the second guideline recommended by this court, the stated sum of $50 in the contract involved in this case is manifestly disproportionate to either the consideration paid by Samson or the possible damage that reasonably could be foreseen from the failure of Honeywell to notify the police of the burglary. And with particular emphasis upon the third condition proposed in Jones v. Stevens, supra, it is beyond comprehension that the parties intended that damages in the amount of $50 should follow the negligent breach of the contract. In other words, an examination of the minute type used in the standard contract issued by Morse, as well as a fair construction of the contract provision as a whole, fails 'to evince a conscious intention of the parties to consider, estimate, or adjust the damages that might reasonably flow from the negligent breach of the agreement. See, particularly, American Financial Leasing Co. v. Miller (1974), 41 Ohio App. 2d 69 [ 70 O.O.2d 64 ]. Surely, Samson, which apparently had some business experience, did not pay $10,500 for the mere possibility of recouping $50 if Honeywell provided no service at all under the terms of the contract. Characteristically, therefore, and by way of analysis, the nominal amount set forth in the contract between Samson and Honeywell has the nature and appearance of a penalty. Accordingly, the judgment of the court of appeals is affirmed.

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 void as a penalty.

Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of the buyer’s payments exceeds: (a) The amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1) of this section; or (b) In the absence of such terms, 20 percent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

It is true that the legislature’s choice, by its terms, applies only to contracts for the sale of goods, but we are unable to perceive any good reason for not using that same rule as the initial point of departure for analyzing the validity of provisions for liquidated damages in contracts in general. It *693 may be that reasons for variance will surface in the context of litigating the validity of such provisions, but until then the courts of this state shall follow that legislative formulation in cases of this kind. Citations to cases earlier than this one that state or suggest conflicting rules are to be disregarded unless a decision cited is of assistance in interpreting the text of ORS 72.7180(1).

Defendants, as proponents, did plead that the loss was incapable or difficult of accurate estimation and that the amount fixed in the clause was a reasonable forecast of “anticipated” damages, but the cause was tried as if plaintiff had the burden of proof to establish the allegations in his complaint. 10 We are presently of the belief that the same result would obtain if the text of ORS 72.7180(1) were the point of departure, but it is not necessary that we here interpret or construe that text, and we do not do so.

Defendants have argued that such is the case here, but we agree with the Court of Appeals that there was evidence, as summarized by that court, 61 Or App 155 -156, which we have quoted, supra, at page 681, to support the findings of the trial judge on both criteria discussed above. The judgment of the Court of Appeals is affirmed.

The issue in this case is whether a contractual clause, providing that a real estate broker shall receive 10 percent of the selling price no matter who actually sells the *344 property, was an unenforceable liquidated damages provision. We hold that the provision was not for liquidated damages but was an independent, valid contractual promise.

The Court of Appeals erred when it interpreted the 10 percent provision as a liquidated damages provision. Its analysis of cases such as Illingworth v. Bushong, supra , was unnecessary but did not lead to an erroneous conclusion. To the extent that prior opinions are inconsistent with this opinion, they are disapproved. The decision of the Court of Appeals and the judgment of the circuit court are affirmed on different grounds.

6 Plaintiff cites Cash Flow Investors, Inc. v. Union Oil Co., 318 Or 88, 91 , 862 P2d 501 (1993) (in contract dispute, court may impose attorney fees as provided in contract); Illingworth v. Bushong, 297 Or 675, 694 , 688 P2d 379 (1984), overruled on other grounds by Ditommaso Realty, Inc. v. Moak Motorcycles, Inc., 309 Or 190 , 785 P2d 343 (1990) (contracting parties may agree on liquidated damages where damages would be difficult or impossible to accurately estimate)

The “if-you-sell-it-yourself’ clause is a liquidated damage clause. It should be so treated. I would follow our precedents. My approach does not leave the broker without a remedy. The broker wins in this case because its proof meets the requirements of Illingworth v. Bushong, supra. We have seen generations of cases such as these, culminating with Illingworth. The majority effectively has trashed those cases. *204 The Court of Appeals majority had it right. I would affirm for the reasons stated by it. Fadeley, J., joins in this specially concurring opinion.

The question whether a deposit or other payment is to be regarded as a penalty or as liquidated damages is to be decided upon consideration of the provisions of the whole agreement in view of the circumstances in each case, and the intention of the parties as thus disclosed is the decisive test.

The Cavanaugh case is not an authority for the proposition, nor is it the law, that a deposit thus made, as a matter of law *359 is to be held in every case to be liquidated damages.

the principle upon which the cases turn is, that when once it appears that the main purpose of the parties to a contract is, the sale and purchase of an estate, any sum that is named in it to be paid by either in the event of his neglect or refusal to perform his part of the agreement, is construed as a penalty to insure the performance of the contract in the option of the other party, and not as constituting the agreement an alternative one, in the sense of giving him the option to perform his contract or to forfeit the penalty.”

The above statement of the law is in accord with the authorities and is applicable to the present case.

The question whether a deposit or other payment is to be regarded as a penalty or liquidated damages is to be decided upon consideration of the provisions of the whole agreement in view of the circumstances of each case; and the intention of the parties as thus disclosed is the decisive test.

It is generally held that where a contract is not for the mere payment of money and there is no certain measure of the damages which would naturally result from a violation of the agreement in question, the parties may fix upon a sum in the nature of liquidated damages which shall be paid as compensation for breach of the agreement. 2 Pom. Eq. Juris. (5th ed.) § 440.

In the case of the Authority against the contractor we find merit only in part of the latter’s contention that the provision of the contract for liquidated damages is in effect the imposition of a penalty and therefore unenforceable.

it is generally held that a provision for liquidated damages for delay in the performance of a contract will be enforced provided the delay is not due in whole or in part to the fault of the party claiming the benefit of such provision.

Viewed in such a light we consider the provision for liquidated damages in the matter of landscaping as coercive in nature and therefore in substance the imposition of a penalty. The Authority was not entitled to recover liquidated damages for the contractor’s delay in landscaping.

The question as to which party is responsible for delay as bearing on the right to liquidated damages is, on a conflict in the evidence, a question of fact for determination by the trier of the facts.

Where there are a number of delays which are separate and distinct from each other, then the party without fault in any such instance is in our judgment entitled to recover liquidated damages for delay in any one or more of those instances.

After due consideration of exhibit 26 and the surrounding circumstances, we are of the opinion that the parties stipulated, by clear implication if not in express terms, that if the defendant violated its agreement it would pay to the plaintiff at least $12,000, which sum was intended and fixed by them as in the nature of liquidated damages.

The damage the defendant would sustain on account of delay in the delivery of the extractors could not be ascertained in advance, and the amount of it would be difficult to prove at any time. The amount agreed upon by the parties to be paid for each day’s delay does not seem to be greatly out of proportion to the damage the defendant would be likely to sustain.

The proof showed that the extractors were not delivered on time and consequently the defendant was entitled to have the amount due under the forfeiture clause deducted from the contract price.

That clause gave the Authority a defense to the contractor’s claim of damages for delay, but it cannot be used as a springboard by the Authority to recover such damages from the contractor.

The complainant’s appeal is sustained, the decree of the Superior Court appealed from is reversed. On July 7, 1923, at nine o’clock, a. m., Standard time, the parties may present a form of decree in accordance with this opinion.

Penalties imposed by contract for any nonperformance thereof are void. This section does not void obligations penal in form such as heretofore have been commonly used, but it voids their penal clauses.

Every contract in which amount of damage or compensation for breach of an obligation is determined in anticipation thereof is void to that extent except the parties may agree therein upon an amount presumed to be the damage for breach in cases where it would be impracticable or extremely difficult to fix actual damage.

Whether a forfeiture provision is a liquidated damages provision or an unenforceable penalty is a question of law for the court.

The burden of proving that a forfeiture clause is valid as a liquidated damages clause _ is upon the party relying on the clause. Hofer v. W.M. Scott Livestock Co., 201 N.W.2d 410 (N.D.1972). We do not find Groseclose has carried this burden.

Such a provision will be upheld if (1) damages in the event of breach are incapable or very difficult of accurate estimation at the time the contract was made; (2) there was a reasonable attempt by the parties to fix compensation; and (3) the amount stipulated bears a reasonable relation to probable damages and is not disproportionate to any damages reasonably to be anticipated.

The burden of establishing that such a provision is a penalty rests on the party against whom enforcement is sought.

Lewis argues the trial court erred when it found that the default clause in the contract for deed was a void penalty under SDCL 53-9-4.

These admissions by Lewis’ counsel clearly support the trial court’s finding that the parties did not discuss fixing compensation or the default provision in general. Without such a discussion or negotiation, the provision constitutes an unenforceable penalty. See Heikkila, 378 N.W.2d at 216 . Since the default provision is invalid, the trial court did not err in giving Wandler a ten-day redemption period.

The trial court held that the damages in the event of breach were extremely difficult to estimate, but the forfeiture provision was a penalty as there was no reasonable endeavor by the parties to fix a fair compensation, and the stipulated damages were not reasonably related to probable damages and were disproportionate to the reasonably anticipated damages. We agree.

This forfeiture clause is valid only if it meets each of the requirements set forth in Safari; clearly it is not a liquidated damages provision (despite the mere use of the word “liquidation”).

We affirm the trial court's grant of specific performance of the contract to Buyers. We have considered the other issue raised by Groseclose and, in light of our decision as set forth above, find it to be without merit. We affirm in all respects.

In addition, we find no error in the trial court's conclusion that the forfeiture provision constituted a penalty and is void as a matter of law.

Enforcement of an illegal agreement violates public policy. Id. For the same reasons, we hold that the defense of penalty is not waived by the failure to plead it if it is apparent on the face of the petition and established as a matter of law. Enforcement of a penalty, like enforcement of an illegal contract, violates *790 public policy. RESTATMENT (SECOND) OF CONTRACT § 356; see State v. Alpha Oil & Gas, Inc., 747 S.W.2d 378 (Tex.1988). It should not be done, even if the parties do not object. In this case Martha pleaded that she was "entitled to damages ... in the amount of ten (10) times all losses suffered". Inasmuch as Martha's own pleading establishes that the contractual provision she relies upon is an unenforceable penalty under our decisions in Stewart and Campesi as a matter of law, Harry was not required to plead penalty as an affirmative defense.

The basic principle underlying contract damages is compensation for losses sustained and no more; thus, we will not enforce punitive contractual damages provisions. See Stewart v. Basey, 150 Tex. 666 , 245 S.W.2d 484, 486 (1952). In Phillips v. Phillips, we acknowledged this principle and restated the two indispensable findings a court must make to enforce contractual damages provisions: (1) “the harm caused by the breach is incapable or difficult of estimation,” and (2) “the amount of liquidated damages called for is a reasonable forecast of just compensation.” 820 S.W.2d 785, 788 (Tex.1991) (citing Rio Grande Valley Sugar Growers, Inc. v. Campesi, 592 S.W.2d 340 , 342 n. 2 (Tex.1979)). We evaluate both prongs of *70 this test from the perspective of the parties at the time of contracting. 2 In Phillips we recognized that, under this test, a liquidated damages provision may be unreasonable “because the actual damages incurred were much less than the amount contracted for.” 820 S.W.2d at 788 . A defendant making this assertion may be required to prove the amount of actual damages before a court can classify such a provision as an unenforceable penalty. Id. While the question may require a court to resolve certain factual issues first, ultimately the enforceability of a liquidated damages provision presents a question of law for the court to decide.

If the general partner breaches his trust hereunder, he shall pay to the limited partner as liquidated damages ten times the amount she loses as a result of such breaches of trust. Errors of judgment shall not be considered breaches of trusts.

we do not hold that the affirmative defense of penalty need never be pleaded. Whenever the defense is not clearly established on the face of the pleadings, as it is here, it must be pleaded. We do not "resurrect[ ] trial by ambush", post, at 790, or "retreat from ... encouraging full disclosure during discovery", post, at 792. We apply a narrow but necessary exception, long and well established, to the general requirement that affirmative defenses be pleaded

we recognized that a liquidated damages provision may be unreasonable in light of actual damages. 820 S.W.2d at 788 . The burden of proving unreasonableness falls to FPL. See id. The court of appeals held that FPL failed to meet this burden, yet the court’s evaluation was based on evidence of damages for electricity and RECs. 328 S.W.3d at 589-90 . Our holding on the scope of the liquidated damages clauses limits our consideration to damages for REC deficiencies. The evidence reviewed in this opinion demonstrates that FPL has met its burden. Phillips did not create a broad power to retroactively invalidate liquidated damages provisions that appear reasonable as written. See 820 S.W.2d at 788 . Nor do we create such a power here. But when there is an unbridgeable discrepancy between liquidated damages provisions as written and the unfortunate reality in application, we cannot enforce such provisions.

The enforceability of the contractual provision in this case involves no fact issues. A contractual provision like the one here by which one party agrees to pay the other some multiple of actual damages for breach of the agreement does not meet either part of the legal test for an enforceable liquidated damages provision. It cannot meet the first prong of the test because the harm caused by the breach of the contract is not incapable or difficult of estimation. The provision assumes actual damages can and will be determined, indeed must be determined, before the prescribed multiplier can be applied. The provision cannot meet the second prong of the test because, instead of attempting to forecast actual damages, it calls for them to be determined and then multiplied. Cf. Robert G. Beneke & Co. v. Cole, 550 S.W.2d 321 (Tex.Civ.App.—Dallas 1977, no writ) (contract provision which fixes liquidated damages without excluding additional liability for actual damages is not a reasonable forecast of just compensation and therefore a penalty). A contractual provision like the one in this case is thus, on its face, an unenforceable penalty.

we conclude that Martha is not entitled to recover ten times her actual damages. Finding no error in the judgment of the court of appeals, we affirm it.

We affirm the court of appeals’ holding that TXUPM owed no contractual duty to provide transmission capacity. However, we hold the liquidated damages provisions apply only to RECs and are unenforceable as a penalty. Accordingly, we reverse the court of appeals’ judgment in part and remand the case to the court of appeals to determine damages.

When the liquidated damages provisions operate with no rational relationship to actual damages, thus rendering the provisions unreasonable in light of actual damages, they are unenforceable.

Thus we clarify that liquidated damages clauses are not subject to any form of heightened judicial serutiny. Instead, courts should begin with the longstanding presumption that liquidated damages clauses are enforceable. See, eg., Bair, 2001 UT 20 , 1 25, 20 P.3d 888 . A party may challenge the enforceability of a liquidated damages clause only by pursuing one of the general contractual remedies, such as mistake, fraud, duress, or unconscionahility.

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 void as a penalty.

We now hold that liquidated damages clauses should be reviewed in the same manner as other contractual provisions.

Reviewing liquidated damages clauses for un-conscionability still preserves challenges to penalty clauses. Even our cases purporting to apply the penalty approach conclude that penalties are unenforceable because they are unconscionable.

Comcast challenges the enforceability of the liquidated damages clause in its contract with CRE. The burden lies with Comeast in challenging the enforceability of the clause. See Ryan v. Dan's Food Stores, Inc., 972 P.2d 395, 402 (Utah 1998) ("A party claiming unconscionability bears a heavy burden."); Res. Mgmt. Co., 706 P.2d at 1043 (noting, after first laying out the standards for evaluating unconscionability, that "a duly executed written contract should be overturned only by clear and convincing evidence"); see also, eg., Bair, 2001 UT 20 , ( 25, 20 P.3d 388 (noting the burden is on the party seeking to invalidate a liquidated damages clause). As we have previously noted, the burden properly rests on the party challenging the clause's enforceability because "the purpose of a liquidated damages provision is to obviate the need for the nonbreach-ing party to prove actual damages."

6. At the time of the district court’s decision, it appeared that Utah followed section 339 of the Restatement (First) of Contracts in analyzing the validity of contractual liquidated damages provisions. See Reliance Ins. Co. v. Utah Dep’t of Transp., 858 P.2d 1363, 1366 (Utah 1993) (“In determining the validity of a liquidated damages provision, this court has adopted section 399 of the Restatement of Contracts.”), abrogated by Commercial Real Estate Inv., LC v. Comcast of Utah II, Inc., 2012 UT 49, ¶ 27 (explaining that “[t]he three most recent Utah Supreme Court cases to consider liquidated damages have all done so pursuant to section 339 of the first Restatement of Contracts” but stating that prior case law never “officially adopted the Restatement’s test”). Very recently, in Commercial Real Estate Investment, LC v. Comcast of Utah II, Inc., 2012 UT 49, the Utah Supreme Court abandoned the Restatement approach in favor of reviewing “liquidated damages clauses . . . in the same manner as other contractual provisions,” which are only to be invalidated if “enforcement of a liquidated damages clause would be unconscionable.”

Liquidated damages clauses are not subject to heightened judicial serutiny. Instead, such clauses are presumed enforceable, although they may be challenged on the same equitable grounds as other contractual provisions. We conclude that no such *1205 grounds exist to invalidate the liquidated damages clause in the contract between Comcast and CRE.

lthough Comcast now argues that over $1.7 million in liquidated damages is "grossly disproportionate" to CRE's actual damages, this type of post hoe weighing does not bear on the question of substantive unconscionability, which focuses on the "relative fairness of the obligations assumed" at the time of contracting.

under the rule recognized in our cases, a liquidated damages clause is invalid only when the actual damages contemplated at the time of the agreement are shown to be certain and not difficult to determine or the stipulated amount is out of all proportion to the actual damages.

The party challenging the validity of a liquidated damages clause has the burden of proof on the issue of whether the opposing party’s “damages . . . are susceptible of definite measurement or . . . the stipulated damages are grossly in excess of the actual damages suffered by the non-breaching party.”

The fact that a party enters into a contract containing a liquidated damages clause does not prevent that party from later litigating the validity of the clause. The party opposing the imposition of liquidated damages is entitled to conduct discovery and present relevant evidence that the damages resulting from breach of the contract are susceptible of definite measurement or that the stipulated damages are grossly in excess of the actual damages suffered by the nonbreaching party. Upon proof of either of these elements, a liquidated damages clause becomes an unenforceable penalty.

Here, when Singh failed to terminate the sales contract in writing within the forty-day period as extended, the deposit became non- refundable, entitling Boots to payment of the deposit unless Singh could prove that Boots’ damages were susceptible of definite measurement or the deposit amount was grossly in excess of actual damages. Singh contends he carried this burden, and he relies solely upon testimony given by Jagdish Patel, Boots’ president, during his direct examination as a witness for Boots. Patel said the $1,300,000.00 contract with DEN OF HOPEWELL was “[r]oughly, the same” as the $1,500,000.00 contract with Singh because Boots would have had to pay a sales commission of $239,000.00 on the Singh sale but no commission on the sale to DEN OF HOPEWELL. Singh maintains that this testimony shows Boots suffered no damage but actually “received an increase of profit in the amount of $39,000.00.” 5

Singh presented no evidence at all relating to damages contemplated at the time of the sales contract, and he does not explain how one could conclude that, at that time, Boots’ damages in event of default were certain and not difficult to determine. Indeed, it would be pure speculation to say it was certain at the time the Singh contract was signed that Boots would be able to obtain a sale of the restaurant more than six months later for “[r]oughly, the same” amount. And Singh offered nothing to show that the amount of the deposit would be out of all proportion to any probable loss. In any event, we upheld as enforceable liquidated damages a deposit of 4.6% of the purchase price of real property in Taylor, 233 Va. at 76, 353 S.E.2d at 747, and a deposit of 10% in Brooks, 248 Va. at 209, 445 S.E.2d at 480. Here, the deposit was only 3.3% of the purchase price, an amount certainly not disproportionate in comparison. 6 Accordingly, we conclude that Singh failed to present evidence to establish that the liquidated damages clause was an unenforceable penalty. We will reverse the judgment of the circuit court and remand the case for the entry of an order directing payment of the $50,000.00 deposit to Boots.

However, the court’s actions here substantially affected the O’Brians’ ability and right to litigate the validity of the liquidated damages clause. For these reasons, we will reverse the judgment of the circuit court and remand this case for further proceedings consistent with this opinion.

The trial court enforced the agreement, finding it was a reasonable estimate of anticipated harm as of the date of contract formation. The Court of Appeals affirmed, likewise evaluating the provision as of the date of contract formation. Petitioner contends the seller suffered no actual damage and the courts below erred by not evaluating the liquidated damages provision as of the date of trial. We affirm.

Liquidated damages clauses are favored in Washington, and courts will uphold them if the sums involved do not amount to a penalty or are not otherwise unlawful.

This court has adopted and applied a 2-part test to determine whether a liquidated damages clause is enforceable. First, the amount fixed must be a reasonable forecast of just compensation for the harm that is caused by the breach. Second, the harm must be such that it is incapable or very difficult of ascertainment. Schassberger , at 327-28; Knight, Vale & Gregory v. McDaniel, 37 Wn. App. 366, 371 , 680 P.2d 448 (1984); Northwest Acceptance Corp. v. Hesco Constr., Inc., 26 Wn. App. 823, 828 , 614 P.2d 1302 (1980). Reasonableness of the forecast will be judged as of the time the contract was entered.

The designation in this contract that the additional amount is not a penalty but is liquidated damages, therefore, does not decide the issue.

For example, using this formula, the earlier the default the greater the penalty although the equipment is returned sooner resulting in less depreciation of the equipment. Besides the formula not appearing to have any relation to the anticipated actual damages, such damages are not difficult to ascertain.

The clause provides for "an amount equal to twenty (20) percent of the aggregate minimum rental charges for the unexpired portion of the term of this agreement, not as a penalty, but as and for liquidated damages".

We affirm the Court of Appeals and find the liquidated damages clause is a penalty and unenforceable. We remand to the trial court to determine how much the equipment reasonably could have been expected to be worth at the end of the lease term. That value should be included in the Fochts' debt and the deficiency adjusted accordingly.

Having adopted the date of contract formation as the proper timeframe for evaluating the Restatement test, the Restatement’s second requirement loses independent significance. The central inquiry is whether the specified liquidated damages were reasonable at the time of contract formation. The reasonableness of liquidated damages is not determined retroactively by their correspondence with actual damages, but by reference to the prospective difficulty of estimating the possible damages that would flow from a breach. The prospective difficulty of estimating possible damages is merely an element of the court’s inquiry into the reasonableness of a liquidated damages provision. The greater the prospective difficulty of estimating possible damages, the greater the range of reasonableness used in assessing a liquidated damages provision.

We likewise find Ingram’s potential damages were difficult to ascertain at the time of contracting; the parties could not know what delays might ensue, what might occur in the real estate market, or how a failed sale might affect Ingram’s plans. Real estate purchase and sale agreements are precisely the type of contracts that are amenable to liquidated damages provisions. Under these facts, we hold the $15,000 earnest money agreement was a reasonable estimate of Ingram’s potential damages in the event of a breach. Because Ingram is the prevailing party on appeal, he is entitled to reasonable attorney fees and costs pursuant to the parties’ agreement. The decision of the Court of Appeals is affirmed.

(1) A provision in a written agreement for the purchase and sale of real estate which provides for liquidated damages or the forfeiture of an earnest money deposit to the seller as the seller's sole and exclusive remedy if a party fails, without legal excuse, to complete the purchase, is valid and enforceable, regardless of whether the other party incurs any actual damages. However, the amount of liquidated damages or amount of earnest money to be forfeited under this subsection may not exceed five percent of the purchase price. (2) For purposes of this section: (a) "Earnest money deposit" means any deposit, deposits, payment, or payments of a part of the purchase price for the property, made in the form of cash, check, promissory note, or other things of value for the purpose of binding the purchaser to the agreement and identified in the agreement as an earnest money deposit, and does not include other deposits or payments made by the purchaser; and (b) "Liquidated damages" means an amount agreed by the parties as the amount of damages to be recovered for a breach of the agreement by the other and identified in the agreement as liquidated damages, and does not include other deposits or payments made by the purchaser.

(3) This section does not prohibit, or supersede the common law with respect to, liquidated damages or earnest money forfeiture provisions in excess of five percent of the purchase price. A liquidated damages or earnest money forfeiture provision not meeting the requirements of subsection (1) of this section shall be interpreted and enforced without regard to this statute. [ 2005 c 186 s 1; 1991 c 210 s 1.] Notes: Application—2005 c 186: "This act applies to all contracts executed after April 26, 2005." [ 2005 c 186 s 2.] Effective date—2005 c 186: "This act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect immediately [April 26, 2005]." [ 2005 c 186 s 3.] Application—1991 c 210: "The provisions of this act apply only to written agreements entered on or after July 28, 1991." [ 1991 c 210 s 2.]

We reverse in part and affirm in part because we hold the notice sufficient and the liquidated damages clause unenforceable. Accordingly, we remand to the trial court for a determination of actual damages.

2 We note with respect to purchase and sale agreements providing for the forfeiture of an earnest money deposit to the seller as the seller’s sole and exclusive remedy, the Legislature has eliminated the Lind court’s actual damage requirement and legislatively defined the Restatement’s reasonableness requirement. RCW 64.04.005(1)(a)(i) provides that such agreements are valid and enforceable, regardless of whether the seller incurs any actual damages, so long as the earnest money deposit does not exceed 5 percent of the purchase price. The statute does not apply to this case because it only pertains to agreements executed on or after July 28,1991, and is limited to agreements in which the earnest money deposit is the seller’s sole remedy. Here, the agreement was executed August 6, 1990, and it gives the seller additional remedy options.

We turn now to the test that the trial court (and the appellate court) should apply in deciding whether a stipulated damages clause is valid. The overall single test of validity is whether the clause is reasonable under the totality of circumstances.

In deciding whether a stipulated damages clause is valid, then, the trial judge should inquire into all relevant circumstances, including such matters as the existence and extent of the anticipated and actual injury to the nonbreaching party. The trial court’s decision that a clause is or is not valid involves determinations of fact and law and will be reviewed as such. The reviewing court will uphold the factual determinations underlying its legal conclusion unless they are contrary to the great weight and clear preponderance of the evidence. Fields Foundation, Ltd. v. Christensen, 103 Wis. 2d 465, 475 , 309 N.W.2d 125 (Ct. App. 1981). Whether the facts fulfill the legal standard, here reasonableness, is a determination of law, id., and ordinarily the appellate court need not defer to the trial court’s determination of a question of law. United Leasing & Financial Services, Inc. v. R.F. Optical, 103 Wis. 2d 488, 492 , 309 N.W.2d 23 (Ct. App. 1981). Nevertheless, because the trial court’s legal conclusion, that is, whether the clause is reasonable, is so intertwined with the factual findings supporting that conclusion, the appellate court should give weight to the trial court’s decision, although the trial court’s decision is not controlling.

We conclude that where the stipulated damages clause is a valid provision for liquidated damages, the doctrine of mitigation of damages is not applicable to determine the damages awarded the nonbreaching party.

We agree with the court of appeals that the validity of a stipulated damages clause is a question of law for the trial judge rather than a mixed question of fact and law *524 for the jury. 3 The validity of a stipulated damages clause is a matter of public policy, and as in other contract cases the question of contractual validity as a matter of public policy is an issue the trial j udge initially decides. 4 But we disagree with the court of appeals that the label of “question of law” automatically relieves the trial court from its duty to consider evidence or gives the appellate court free rein in reviewing the trial court’s decision. Even though the trial court’s conclusion regarding the validity of the stipulated damages clause is a legal con- *525 elusion — a policy judgment — that legal conclusion will frequently be derived from a resolution of disputed facts or inferences. 5 The trial judge, not the jury, determines these facts and inferences.

Because the employer sought to set aside the bargained-for contractual provision stipulating damages, it had the burden of proving facts which would justify the trial court’s concluding that the clause should not be enforced. Northwestern Motor Car, Inc. v. Pope, 51 Wis. 2d 292, 295 , 187 N.W.2d 200 (1971). Placing the burden of proof on the challenger is consistent with giving the non-breaching party the advantage inherent in stipulated damages clauses of eliminating the need to prove damages, and with the general principle that the law assumes that bargains are enforceable and that the party asking the court to intervene to invalidate a bargain should demonstrate the justice of his or her position.

In this case we hold that the stipulated damages clause is a valid provision for liquidated damages, not a penalty, and that the employee’s earnings after the breach do not reduce the damages award.

We use the term “stipulated damages” herein to refer to the contract and the term “liquidated damages” to refer to stipulated damages which a court holds to be reasonable and will enforce.

Over time, the cases and commentators have established several factors to help determine whether a particular clause is reasonable: 10 (1) Did the parties intend to provide for damages or for a penalty? 11 (2) Is the injury caused by the breach one that is difficult or incapa *530 ble of accurate estimation at the time of contract ? 12 and (3) Are the stipulated damages a reasonable forecast of the harm caused by the breach ?

As the above discussion demonstrates, the various factors and approaches to determine reasonableness are not separate tests, each of which must be satisfied for a stipulated damages clause to stand. Reasonableness of the stipulated damages clause cannot be determined by a mechanical application of the three factors cited above. 3 Hawkland, Uniform Commercial Code Series, sec. 2-718:01, p. 426 (1982).

This court appears to have adopted the position that if the nonbreaching party suffers no damage the stipulated damages clause is a penalty. See Hathaway v. Lynn, 75 Wis. 186 , 43 N.W. 956 (1889). 21 Apparently the court *538 reasons, first, that if there is no damage, awarding stipulated damages violates the compensation principle of contract damages, and, second, that since one way to test reasonableness of stipulated damages is by comparing the estimated damages with actual harm suffered, if there is no harm the stipulated damages is automatically disproportionate to the harm.

This case is therefore distinguishable from Fields Foundation, Ltd. v. Christensen, 103 Wis. 2d 465, 476 , 309 N.W.2d 125 (Ct. App. 1981), upon which the employer relies, where the court held the stipulated damages clause unenforceable when the record established that the nonbreaching party suffered no harm.

As we said previously, the employer, the party challenging the contract, carries the burden of proving that the stipulated amount of damages is grossly disproportionate to the actual harm and thus unreasonable. North *540 western Motor Car, Inc. v. Pope, 51 Wis. 2d 292, 295 , 187 N.W.2d 200 (1971). The employer has failed to carry the burden of production and persuasion in this case.