Will our liquidated-damages figure be enforced, or struck down as a penalty?
The Supreme Court of Wisconsin applies one test: the overall single test of validity is whether the clause is reasonable under the totality of circumstances (Wassenaar). The court set out three factors the cases had established, whether the parties intended damages or a penalty, whether the injury caused by the breach is difficult or incapable of accurate estimation at the time of contract, and whether the stipulated damages are a reasonable forecast of the harm, and held that they are not separate tests each of which must be satisfied and cannot be applied mechanically. Validity is a question of law for the trial judge rather than a mixed question for the jury, but the label does not relieve the trial court of its duty to consider evidence: in deciding whether a stipulated damages clause is valid the trial judge should inquire into all relevant circumstances, including the existence and extent of the anticipated and actual injury to the non-breaching party. Calling validity a question of law does not make review free, either: because the reasonableness conclusion is so intertwined with the findings supporting it, an appellate court should give weight to the trial court's decision although that decision is not controlling, and should uphold the underlying factual determinations unless they are contrary to the great weight and clear preponderance of the evidence. The burden is on the party challenging the clause, consistent with the general principle that the law assumes bargains are enforceable.
The trap
Before relying on that, note the rule running the other way: the court recorded that it appears to have adopted the position that if the non-breaching party suffers no damage the stipulated damages clause is a penalty, and it distinguished Fields Foundation, where such a clause was held unenforceable because the record established that the non-breaching party suffered no harm. What the challenger must prove is that the stipulated amount is grossly disproportionate to the actual harm, and the clause in Wassenaar survived because the employer failed to carry that burden of production and persuasion, not because a full-salary formula is reasonable on its face. Wassenaar also decides what happens after the clause is upheld, and that part cuts against the breaching party: 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 non-breaching party, and on those facts the employee's earnings after the breach did not reduce the award. Note the vocabulary the court uses, because it is how Wisconsin opinions are written: 'stipulated damages' is the clause the parties wrote, and 'liquidated damages' is a stipulated damages clause a court has held reasonable and will enforce.
12 authorities
The words that state the rule
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.
The words that state the rule
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.
The words that state the rule
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.
The words that state the rule
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.
The words that state the rule
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.
The words that state the rule
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.
The words that state the rule
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.
The words that state the rule
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 ?
The words that state the rule
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).
The words that state the rule
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.
The words that state the rule
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.
The words that state the rule
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.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.