Liquidated Damages Enforceability by State

The clause that quietly becomes a penalty

The standard illustration of how an "agreed damages" clause turns into a void penalty is Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985), a diversity case decided by Judge Posner under Illinois law. Carborundum had guaranteed that it would ship 22,500 tons of a product called Ferro Carbo to Lake River for bagging. When the contract expired it had shipped only 12,000 tons. A formula in the minimum-guarantee clause (the $533,000 full contract price minus what Carborundum had already paid) still demanded $241,000.

Reviewed and corrected on 6 October 2026. This is general information, not legal advice; check the cited statute or opinion before relying on it.

Posner tested the formula the way Illinois law requires, as a reasonable estimate made at the time of contracting. Lake River expected a profit of about $107,000 (20 percent of the $533,000 price), which put its total cost of performance at $426,000. At the 55 percent mark, where the breach actually came, it had received $293,000 against about $274,000 of cost, an expected profit of only about $19,000. Adding the $241,000 produced a gain of $260,000, almost two and a half times the profit Lake River expected if nobody breached. Had Carborundum walked away on day one, Lake River's net gain would have been $444,000, more than four times that profit.

The court also said the formula was "invariant to the gravity of the breach," and that a clause which treats breaches of different gravity alike is not a reasonable effort to estimate damages, even though this clause did not literally fix a single sum. The court held it a penalty and sent the case back so Lake River could recover ordinary damages: the unpaid $241,000 minus the costs it saved by never bagging the last 45 percent.

That is the failure mode this post is about. The question is rarely whether a liquidated damages clause can be enforced in your state, because courts generally enforce a reasonable one. The real question is whether the number on the page survives once a court sets it beside the harm it was meant to cover.

Official text, as of 6 October 2026

California is the state most drafters ask about first, and its statute is short. Cal. Civ. Code § 1671(b) says a liquidated damages provision in a 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." Subdivision (d) applies a stricter rule to retail consumer contracts and residential leases (see below). Read the section on the California Legislative Information site.

What changed in 2026: we found no 2026 change to the statutes quoted in this post. The California section shows its last amendment as Stats. 1977, Ch. 198, and the Connecticut consumer statute shows P.A. 18-141 (2018) as its latest. We did not search every state for new 2026 court decisions, so check the opinion's later history before you rely on it.

Are liquidated damages clauses enforceable? The short answer

Generally yes. Courts in the states we reviewed enforce a liquidated damages clause when the amount is a reasonable estimate of the loss a breach is likely to cause, and refuse to enforce one that works as a penalty. When a court finds a penalty, the other side is usually left to prove actual damages.

The most widely cited statement of the test is Restatement (Second) of Contracts § 356(1), which asks whether the amount is reasonable in light of the anticipated or actual loss and the difficulties of proof of loss. Many courts treat difficulty of proof as a factor that moves the line, so a clause for a hard-to-measure harm gets more room than one for an easy-to-measure harm. Some states use older wording, a three-part test, or a statute instead. The state-by-state list below gives the authority we verified for each.

Courts also differ on when they measure reasonableness. Some look only at contract formation (a "single look"). Others let the actual loss into the analysis too. Massachusetts (Kelly v. Marx, 428 Mass. 877 (1999)) is the plainest single-look statement. Texas (Atrium Med. Ctr., LP v. Houston Red C LLC, 595 S.W.3d 188 (Tex. 2020)) and Kentucky (Louisville & Jefferson Cnty. Metro. Sewer Dist. v. T+C Contracting, Inc., 570 S.W.3d 551 (Ky. 2018)) are states where the breach-date picture counts.

TL;DR

• Liquidated damages are generally enforceable when the amount is a reasonable estimate of the harm and the harm was hard to measure when the contract was signed. Restatement (Second) of Contracts § 356(1) is the common reference point, though it is persuasive authority, not binding law.
• The biggest failure mode is a number with no link to the likely loss. In Lake River the formula would have produced a gain of about two and a half times Lake River's expected profit at the 55 percent mark and did not reflect the gravity of the breach, so the Seventh Circuit called it a penalty.
• At least eight states govern the subject by statute (California, Connecticut for consumer contracts, Georgia, Louisiana, Montana, North Dakota, Oklahoma and South Dakota), and sales of goods fall under UCC § 2-718 everywhere it is enacted. In North Dakota, South Dakota and Montana the statute voids a damages clause unless the damage would be impracticable or extremely difficult to fix.
• Courts split on timing. Massachusetts, Washington, Tennessee, Utah and Florida test the clause as of contracting. Texas, Kentucky, Missouri, New York, New Jersey, Wisconsin, Hawaii and Mississippi let actual harm into the analysis in some form.
• A clause that lets the creditor take the stipulated sum or sue for actual damages is a penalty in Florida (Lefemine v. Baron), and Georgia construes a clause that also leaves room for actual damages against enforcement (Southeastern Land Fund). A recital explaining the number helps but is not required, and it will not save a clause that operates as a penalty.

Part of our all-50-states legal reference series.

The Restatement § 356 standard

Restatement (Second) of Contracts § 356(1) reads: "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." The Texas Supreme Court quotes it in a footnote to Atrium.

Section 356(1) asks one question, whether the amount is reasonable, and gives two factors to answer it. Comment b explains how they interact, in language the Wyoming Supreme Court quotes in Marcam Mortgage Corp. v. Black, 686 P.2d 575 (Wyo. 1984): "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."

Two features of the section matter in practice. First, reasonableness can be met by either of two measures. The Arizona Supreme Court puts it this way in Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 242 Ariz. 108, 393 P.3d 449 (2017): the amount is reasonable "if it approximates either the loss anticipated at the time of contract creation (despite any actual loss) or the loss that actually resulted." Second, the Restatement is a treatise, not a statute. The Pennsylvania Supreme Court said in Commonwealth, Dep't of Transp. v. Mitchell, 517 Pa. 203, 535 A.2d 581 (1987), that it expressed "no opinion as to the validity of this section of the restatement in Pennsylvania," while requiring that liquidated damages be reasonable and that harm be hard to assess. States with their own statutes apply those instead.

The party attacking the clause usually carries the burden. The New Jersey Supreme Court said in Wasserman's Inc. v. Twp. of Middletown, 137 N.J. 238, 645 A.2d 100 (1994), that most courts place the burden on the challenger, and the Seventh Circuit (XCO Int'l Inc. v. Pac. Scientific Co., 369 F.3d 998 (7th Cir. 2004)), Wisconsin (Wassenaar v. Panos), New York (JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373 (2005)) and Arizona (Dobson Bay) agree. Texas allocates the initial showing differently: the party seeking to enforce the clause must show it accounts for the difficulty of estimation and the reasonable forecast (Atrium).

Sophistication of the parties does not save a bad number. Lake River struck a clause between two corporations, with Posner noting that it "seems odd that courts should display parental solicitude for large corporations" and that Illinois law still insists on the distinction.

Single look or second look: the split that decides close cases

The Massachusetts Supreme Judicial Court says "[c]ourts are divided between the single and second look approach" (Kelly v. Marx). Under a single look, the court tests the clause only as of contracting. Under a second look, or a mixed approach, the actual loss counts as well. Reading the cases we verified:

Tested as of contracting. Massachusetts (Kelly v. Marx, 428 Mass. 877 (1999); NPS, LLC v. Minihane, 451 Mass. 417 (2008); and Cummings Properties, LLC v. Hines, 492 Mass. 867 (2023), which enforced a full rent acceleration clause in a commercial lease). Washington (Watson v. Ingram, 124 Wash. 2d 845 (1994), which tested a $15,000 earnest money clause as of the contract date). Tennessee (Guiliano v. Cleo, Inc., 995 S.W.2d 88 (Tenn. 1999), which treated actual damages as immaterial to an employee's salary-continuation clause). Utah (Reliance Ins. Co. v. Utah Dep't of Transp., 858 P.2d 1363 (Utah 1993)). Florida (Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954), which looks at whether damages were readily ascertainable when the contract was made, not at breach). Illinois (Lake River).

Actual harm also counts. Texas looks again at the time of breach: a facially reasonable clause can still fail if the breaching party proves an "unbridgeable discrepancy" between liquidated and actual damages, though the clause in Atrium was enforced because that proof was missing. Kentucky's Mattingly Bridge Co. v. Holloway & Son Constr. Co., 694 S.W.2d 702 (Ky. 1985), says the anticipated-loss and actual-loss prongs "apply alternately," and T+C Contracting applied it to a sewer-construction delay clause. Missouri requires that the claimant show "some actual harm" (Grand Bissell Towers). New Jersey says reasonableness may be assessed "either at the time of contract formation or at the time of the breach" (Wasserman's), and Wisconsin uses a combined approach that looks at both the harm anticipated at contracting and the actual harm at breach or trial (Wassenaar). New York treats a clause "grossly disproportionate to the amount of actual damages" as a penalty (Truck Rent-A-Center, quoted in 172 Van Duzer Realty Corp., 24 N.Y.3d 528 (2014), where the Court of Appeals sent a rent-acceleration case back so the tenants could show the accelerated rent was disproportionate to the landlord's actual losses). New York's test is mixed, though: JMD Holding asks whether the fee was readily ascertainable when the agreement was signed or "grossly disproportionate to this probable loss." Hawaii and Mississippi tie retained payments to actual damages (Gomez; Maxey; both involve land-sale deposits).

Virginia does not fit either column cleanly. Brooks v. Bankson says a stipulated amount "grossly in excess of actual damages" is construed as a penalty, but it also frames the question as the parties' intent "in light of the circumstances under which the contract was made," and the court enforced a $24,500 clause (10 percent of the price).

New Jersey is sometimes labeled a second-look state, but that overstates it. Wasserman's says the modern trend is toward assessing reasonableness "either at the time of contract formation or at the time of the breach," and that this "encourages more frequent enforcement." It sent the enforceability question back to the trial court instead of striking the clause.

In a state that checks actual harm, keep the records that show how the number was set and what the delay or breach really cost. That is a practice tip, not a rule from any one opinion, but T+C Contracting shows why: the Kentucky Supreme Court held the trial court wrongly kept the contractor from discovery on the owner's actual damages.

How the states state the test

We found no clean three-bucket scheme in the opinions, so we group states by what each court or legislature actually says.

• Restatement (Second) § 356 or its comments. Arizona (Dobson Bay), Kentucky (Mattingly, T+C), Wyoming (Marcam), New Jersey (Wasserman's) and Massachusetts (Kelly) cite the section. Alaska's Supreme Court cited comment a in Kalenka v. Taylor, 896 P.2d 222 (Alaska 1995).
• Restatement of Contracts (First) § 339 style. The two-part rule asks for a reasonable forecast of just compensation and a harm that is incapable or very difficult of accurate estimation. Utah (Reliance v. UDOT), Minnesota (Gorco), Missouri (Grand Bissell), Idaho (Graves) and Oregon (Illingworth) follow it. Texas states the same two parts in Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991).
• Three-factor tests. Alabama (Sutton v. Epperson), Georgia (Southeastern Land Fund) and Vermont (Highgate Associates) ask whether the injury was hard to estimate, whether the parties intended to provide for damages rather than a penalty, and whether the sum is a reasonable estimate.
• Statutes. See the next section.
• Civil law. Louisiana's Civil Code has its own stipulated-damages articles.

Statutes you cannot skip

At least eight states govern the topic by statute. We read each one on an official or published code site, except as noted.

California. Cal. Civ. Code § 1671(b) makes a liquidated damages provision "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." Subdivision (c) sends two groups to subdivision (d): 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," and a party to a lease of a dwelling. Under (d) the provision 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."

Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal. 4th 970 (1998), is a § 1671(b) case. The California Supreme Court held that a prepayment fee of about six months' interest, triggered by a late interest payment on a $2.3 million business loan, was an unenforceable penalty.

North Dakota, South Dakota and Montana. N.D. Cent. Code § 9-08-04, S.D. Codified Laws § 53-9-5 and Mont. Code Ann. § 28-2-721 all start from the same rule. A contract that fixes damages in advance is void to that extent, "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" (North Dakota's wording; South Dakota's and Montana's sections are worded a little differently but say the same thing). In these states difficulty of estimation is a statutory condition, not just a factor.

Oklahoma. 15 Okla. Stat. § 213 voids contractual penalties. Section 215(A) allows a stipulated amount presumed to be the damage "when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage," outside real-estate sale contracts. Section 215(B) sets a rule for real estate sales: an amount up to 5 percent of the purchase price is valid, and a larger amount is invalid unless the party upholding it shows it is reasonable. We read the statutes on Justia's code pages (2024 edition). The Oklahoma Supreme Court applied sections 213 and 215(A) in Sun Ridge Investors, Ltd. v. Parker, 956 P.2d 876 (Okla. 1998), to a $5 per day apartment late charge.

Georgia. O.C.G.A. § 13-6-7: "If the parties agree in their contract what the damages for a breach shall be, they are said to be liquidated and, unless the agreement violates some principle of law, the parties are bound thereby." We read the text on FindLaw.

Louisiana. La. Civ. Code art. 2005 lets parties stipulate damages for nonperformance, defective performance or delay. Art. 2009 says the obligee "need not prove the actual damage." Art. 2012 says stipulated damages "may not be modified by the court unless they are so manifestly unreasonable as to be contrary to public policy." Louisiana is a civil-law state, so this is a different framework from the common-law penalty doctrine.

Connecticut. Conn. Gen. Stat. § 42-150u makes a liquidated damages provision in a consumer contract for goods or services "primarily for personal, family or household purposes" unenforceable unless a boldface statement of at least twelve points ("I ACKNOWLEDGE THAT THIS CONTRACT CONTAINS A LIQUIDATED DAMAGES PROVISION") follows it and the consumer signs or initials next to it. The statute adds that it does not validate a penalty clause, and it lists exclusions, including late fees and contracts held by regulated financial institutions.

Sales of goods. UCC § 2-718(1) allows liquidated damages "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." Subsection (2) lets a buyer in breach recover payments above the stipulated amount or, without a clause, above 20 percent of the value of the total performance or $500, whichever is smaller. We read the uniform text at Cornell's Legal Information Institute; check the version your state enacted.

Construction contracts

Daily delay clauses are where the cases pile up, and the reasoning is the same reasonableness test applied to delay costs. The authority we read:

• Utah. Reliance Ins. Co. v. Utah Dep't of Transp., 858 P.2d 1363 (Utah 1993), upheld a $600-a-day highway-delay clause. The court applied Restatement of Contracts § 339, tested the clause at formation, and said a disparity must be "grossly excessive" and "shock the conscience" before a clause is void.
• Montana. Morgen & Oswood Constr. Co. v. Big Sky of Mont., Inc., 171 Mont. 268, 557 P.2d 1017 (1976), upheld $500 a day, where the owner showed how it estimated lost rent, interest and utilities.
• Georgia. Fortune Bridge Co. v. Dep't of Transp., 242 Ga. 531 (1978), upheld a state highway contract's daily charges as liquidated damages.
• New Mexico. Gruschus v. C.R. Davis Contracting Co., 75 N.M. 649, 409 P.2d 500 (1965), limited a contractor's recovery for delay to the $100-a-day clause in the subcontract.
• Rhode Island. Psaty & Fuhrman, Inc. v. Housing Authority, 76 R.I. 87 (1949), enforced $250 a day for delay in a public housing project.
• Kentucky. Mattingly and T+C Contracting (see above).
• Iowa. Rohlin Constr. Co. v. City of Hinton, 476 N.W.2d 78 (Iowa 1991), held daily clauses in three road-resurfacing contracts to be unenforceable penalties.

For federal work, FAR subpart 11.5 limits the clause to cases where timely performance matters and the damage would be difficult or impossible to estimate or prove. FAR 11.501(b) says liquidated damages "are not punitive" and that the rate "must be a reasonable forecast of just compensation for the harm that is caused by late delivery or untimely performance of the particular contract." The standard construction clause is FAR 52.211-12. State and local public works carry their own procurement rules, so check the procurement code and the contract form for your project.

What gets clauses struck

The opinions we read strike clauses for a handful of recurring reasons.

A measure unrelated to the loss. The Minnesota Supreme Court struck a 15 percent cancellation charge on a $1,800 garage order because the listed costs, such as sales commissions, were easy to measure and nothing showed the sum bore any reasonable relation to the loss (Gorco Constr. Co. v. Stein, 256 Minn. 476, 99 N.W.2d 69 (1959)). The Texas Supreme Court refused to enforce a clause paying ten times the actual damages, because a clause that multiplies actual damages "does not meet either part of the legal test" (Phillips).

One sum for breaches of very different weight. Lake River and Kalenka both rest on this. The Seventh Circuit later said in XCO that a clause that would be a penalty if applied to minor breaches should be reformed to cover only the serious ones instead of being thrown out whole (a point the court made in passing, because the breach before it was a serious one), and it enforced a clause of $100,000 a year, running until the patents expired, against a party that let patents lapse by not paying maintenance fees.

A fee far out of proportion to a late payment. Dobson Bay struck a nearly $1.4 million late fee on a final balloon payment on a $28.6 million loan. Vermont's Highgate Associates, Ltd. v. Merryfield, 157 Vt. 313, 597 A.2d 1280 (1991), upheld a trial ruling that a $5 plus $1-a-day lease late charge was a penalty. Oklahoma's Sun Ridge did the same for a $5-a-day apartment late charge.

A creditor's option to claim actual damages too. In Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991), the option to keep the deposit or sue for actual damages made the clause a penalty as a matter of law. Southeastern Land Fund, Inc. v. Real Estate World, Inc., 237 Ga. 227 (1976), construed an ambiguous clause against enforcement ("in cases of doubt the courts favor the construction which holds the stipulated sum to be a penalty"), and Fortune Bridge later enforced a highway contract's daily charges after reading the clause as not preserving actual damages for delay. Connecticut's Hanson Dev. Co. v. East Great Plains Shopping Ctr., Inc., 195 Conn. 60 (1985), says a seller may not keep a stipulated sum and also recover actual damages.

The size of the number is not the test. Lake River's $241,000 was well under the $533,000 price and still a penalty, while Delaware upheld a $550 million termination fee as liquidated damages in Brazen v. Bell Atl. Corp., 695 A.2d 43 (Del. 1997), after noting it was about 2 percent of the acquirer's roughly $28 billion market capitalization and a reasonable proxy for the opportunity cost of a failed merger. Compare the amount with the loss the breach is likely to cause.

Recitals and labels. A recital explaining why damages are hard to estimate and how the number was set is useful evidence. It is not required: XCO rejected the argument that a clause is invalid unless it recites difficulty of estimation. It will not rescue a clause that works as a penalty, either, because Atrium says a recital proclaiming that a liquidated damages provision is not a penalty "will not save a provision that operates as one." A label does not decide the question in either direction. The Connecticut Supreme Court said in Hanson that the exact language the parties used "is not determinative." Still, calling a clause liquidated damages costs nothing, and a clause labeled a penalty invites the argument.

The full 50-state list

Each entry gives the authority we read. Where a statute governs, it is listed first. This is a starting map: confirm current authority for your forum and contract type before citing anything. We did not run a citator on these cases, so check later history yourself.

• Alabama. Sutton v. Epperson, 631 So. 2d 832 (Ala. 1993) (three-criteria test; reversed a ruling that a stock-purchase clause was a penalty).
• Alaska. Kalenka v. Taylor, 896 P.2d 222 (Alaska 1995) (flat $1,000-a-day "penalties" for subdivision covenant violations of differing gravity not enforced).
• Arizona. Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 242 Ariz. 108, 393 P.3d 449 (2017) (applies § 356(1); a roughly $1.4 million late fee was a penalty).
• Arkansas. Alley v. Rodgers, 269 Ark. 262, 599 S.W.2d 739 (1980) (a $2,000 mobile-home down payment kept as liquidated damages; judgment affirmed).
• California. Cal. Civ. Code § 1671(b) (most contracts) and (d) (retail consumer contracts and dwelling leases); Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal. 4th 970 (1998).
• Colorado. Rohauer v. Little, 736 P.2d 403 (Colo. 1987) (upheld the validity of a $20,000 earnest money clause in a home sale).
• Connecticut. Hanson Dev. Co. v. East Great Plains Shopping Ctr., Inc., 195 Conn. 60 (1985) (a $10,000 deposit on a commercial land purchase treated as liquidated damages); consumer contracts are governed by Conn. Gen. Stat. § 42-150u.
• Delaware. Brazen v. Bell Atl. Corp., 695 A.2d 43 (Del. 1997) (a $550 million merger termination fee upheld as liquidated damages).
• Florida. Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954) (the two-part test), and Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991) (a clause giving the seller the choice of deposit or actual damages is a penalty).
• Georgia. O.C.G.A. § 13-6-7; Southeastern Land Fund, Inc. v. Real Estate World, Inc., 237 Ga. 227 (1976) (three-part inquiry; ambiguous earnest-money clause treated as a penalty); Fortune Bridge Co. v. Dep't of Transp., 242 Ga. 531 (1978) (highway-construction daily charges upheld).
• Hawaii. Gomez v. Pagaduan, 1 Haw. App. 70 (1980) (a seller may keep payments as liquidated damages where they bear a reasonable relation to actual damages). We read the opinion on the Caselaw Access Project; check the later history.
• Idaho. Graves v. Cupic, 75 Idaho 451, 272 P.2d 1020 (1954) (forfeiture of payments on the sale of a club business held a penalty).
• Illinois. Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985), and XCO Int'l Inc. v. Pac. Scientific Co., 369 F.3d 998 (7th Cir. 2004), both federal cases applying Illinois law.
• Indiana. Gershin v. Demming, 685 N.E.2d 1125 (Ind. Ct. App. 1997) (a one-percent-a-day lease late fee enforceable, but only until the lease term ends).
• Iowa. Rohlin Constr. Co. v. City of Hinton, 476 N.W.2d 78 (Iowa 1991) (daily clauses in road-resurfacing contracts held penalties).
• Kansas. White Lakes Shopping Ctr., Inc. v. Jefferson Standard Life Ins. Co., 208 Kan. 121, 490 P.2d 609 (1971) (a $77,000 loan-commitment payment held liquidated damages).
• Kentucky. Louisville & Jefferson Cnty. Metro. Sewer Dist. v. T+C Contracting, Inc., 570 S.W.3d 551 (Ky. 2018), applying Mattingly Bridge Co. v. Holloway & Son Constr. Co., 694 S.W.2d 702 (Ky. 1985).
• Louisiana. La. Civ. Code arts. 2005 to 2012 (stipulated damages; a court may modify them only if "so manifestly unreasonable as to be contrary to public policy").
• Maine. We did not verify a Maine Law Court decision on liquidated damages in our October 2026 review. Check the Maine reports before relying on any authority.
• Maryland. Bd. of Educ. of Talbot Cnty. v. Heister, 392 Md. 140, 896 A.2d 342 (2006) (forfeiture of accrued salary in public school teacher contracts held a valid liquidated damages clause).
• Massachusetts. Kelly v. Marx, 428 Mass. 877 (1999); NPS, LLC v. Minihane, 451 Mass. 417 (2008); Cummings Props., LLC v. Hines, 492 Mass. 867 (2023).
• Michigan. St. Clair Med., P.C. v. Borgiel, 270 Mich. App. 260 (2006) (a $40,000 clause in a physician's covenant not to compete enforced).
• Minnesota. Gorco Constr. Co. v. Stein, 256 Minn. 476, 99 N.W.2d 69 (1959) (a 15 percent cancellation clause held a penalty; follows Restatement of Contracts § 339).
• Mississippi. Maxey v. Glindmeyer, 379 So. 2d 297 (Miss. 1980) (forfeiture of a $75,000 down payment limited to the seller's actual damages). We read the opinion on the Caselaw Access Project.
• Missouri. Grand Bissell Towers, Inc. v. Joan Gagnon Enters., Inc., 657 S.W.2d 378 (Mo. Ct. App. 1983) (a clause is not triggered unless the claimant shows some actual harm).
• Montana. Mont. Code Ann. § 28-2-721; Morgen & Oswood Constr. Co. v. Big Sky of Mont., Inc., 171 Mont. 268, 557 P.2d 1017 (1976) ($500-a-day delay clause upheld).
• Nebraska. Growney v. C M H Real Estate Co., 195 Neb. 398, 238 N.W.2d 240 (1976) (judgment for the buyer reversed; the court stated that a down payment that is not excessive, where actual damages were not calculable in advance, is ordinarily regarded as liquidated damages).
• Nevada. Joseph F. Sanson Inv. Co. v. 268 Ltd., 106 Nev. 429, 795 P.2d 493 (1990) (a liquidated damages clause is prima facie valid unless the challenger proves its application is a penalty).
• New Hampshire. Orr v. Goodwin, 157 N.H. 511 (2008) (a deposit clause titled "Liquidated Damages" held valid; summary judgment for the buyers affirmed).
• New Jersey. Wasserman's Inc. v. Twp. of Middletown, 137 N.J. 238, 645 A.2d 100 (1994), and MetLife Capital Fin. Corp. v. Washington Ave. Assocs. L.P., 159 N.J. 484, 732 A.2d 493 (1999) (applying the reasonableness standard to a late charge and default rate on a commercial loan).
• New Mexico. Gruschus v. C.R. Davis Contracting Co., 75 N.M. 649, 409 P.2d 500 (1965) (delay recovery limited to the contract's daily clause).
• New York. N.Y. U.C.C. § 2-718(1) for goods; Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977), for other contracts (enforced if the sum bears a reasonable proportion to the probable loss and the loss is incapable or difficult of precise estimation); 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass'n, 24 N.Y.3d 528 (2014); JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373 (2005) (burden on the challenger).
• North Carolina. Knutton v. Cofield, 273 N.C. 355 (1968) (a damages formula in an agreement to place a coin-operated phonograph in a restaurant held to be liquidated damages, not a penalty).
• North Dakota. N.D. Cent. Code § 9-08-04.
• Ohio. Lake Ridge Acad. v. Carney, 66 Ohio St. 3d 376 (1993) (full tuition under a school contract enforced as stipulated damages).
• Oklahoma. 15 Okla. Stat. §§ 213 and 215; Sun Ridge Investors, Ltd. v. Parker, 956 P.2d 876 (Okla. 1998).
• Oregon. Illingworth v. Bushong, 297 Or. 675, 688 P.2d 379 (1984) (a forfeiture clause in a $490,000 ranch earnest money agreement held not valid liquidated damages).
• Pennsylvania. Commonwealth, Dep't of Transp. v. Mitchell, 517 Pa. 203, 535 A.2d 581 (1987) (liquidated damages only where the amount is reasonable and the harm is hard to assess).
• Rhode Island. Psaty & Fuhrman, Inc. v. Housing Authority, 76 R.I. 87 (1949) ($250-a-day delay damages enforced).
• South Carolina. Tate v. LeMaster, 231 S.C. 429, 99 S.E.2d 39 (1957) (a land-sale deposit; the court could not rule as a matter of law that it was liquidated damages).
• South Dakota. S.D. Codified Laws § 53-9-5.
• Tennessee. Guiliano v. Cleo, Inc., 995 S.W.2d 88 (Tenn. 1999) (salary-continuation clause in an employment contract held liquidated damages; actual damages immaterial).
• Texas. Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991), and Atrium Med. Ctr., LP v. Houston Red C LLC, 595 S.W.3d 188 (Tex. 2020).
• Utah. Reliance Ins. Co. v. Utah Dep't of Transp., 858 P.2d 1363 (Utah 1993).
• Vermont. Highgate Assocs., Ltd. v. Merryfield, 157 Vt. 313, 597 A.2d 1280 (1991) (three-criteria test under a totality-of-circumstances standard; a lease late charge held a penalty).
• Virginia. Brooks v. Bankson, 248 Va. 197 (1994) (a 10 percent real-estate clause held enforceable liquidated damages).
• Washington. Watson v. Ingram, 124 Wash. 2d 845 (1994) (clause tested as of the date of contract formation).
• West Virginia. Wheeling Clinic v. Van Pelt, 192 W. Va. 620, 453 S.E.2d 603 (1994) (a partnership clause equal to a departing physician's earnings for a year held liquidated damages, not a penalty).
• Wisconsin. Wassenaar v. Panos, 111 Wis. 2d 518, 331 N.W.2d 357 (1983) (upheld a clause paying a discharged hotel manager his salary for the unexpired term, and held that his later earnings did not reduce the award).
• Wyoming. Marcam Mortgage Corp. v. Black, 686 P.2d 575 (Wyo. 1984) (applies § 356; sellers could keep all payments on an installment land contract as liquidated damages).
• District of Columbia. Proulx v. 1400 Pa. Ave., SE, LLC, 199 A.3d 667 (D.C. 2019) (a $150,000 deposit on a commercial property sale held valid; the party challenging the clause bears the burden).

Common drafting failures

Four failure modes recur in the opinions cited above.

A number with no link to the loss. The cure is a number you can tie to a forecast. Lake River shows the problem at its plainest: at the 55 percent mark the formula added $241,000 to a $19,000 profit.

One sum for every kind of breach. A vendor agreement that applies the same amount to a missed milestone, a confidentiality leak and total non-performance invites the Lake River and Kalenka argument. Different breaches cause different damage, so the clause should say so.

No explanation of why the damage is hard to estimate. A recital is not required (XCO), but it gives a court the reasoning when it asks. Keep it specific to the breach.

An option to claim actual damages as well. In Florida a clause that lets the creditor take the stipulated sum or sue for actual damages is a penalty (Lefemine), because the creditor loses nothing if actual damages turn out larger. Georgia reads a clause that leaves room for actual damages as a penalty when the intent to liquidate is unclear (Southeastern Land Fund). Louisiana lets an obligee demand both the stipulated damages and performance only where the damages were stipulated for mere delay (La. Civ. Code art. 2007).

The drafting checklist

1. Tie the amount to a harm that is hard to prove. Name the breach the clause covers and say why the damage is hard to calculate: lost use of a facility, lender carrying costs on a delayed project, lost goodwill. "Damages from any breach of this Agreement" does not do that.
2. Say how you got the number. A short recital that gives the reasoning helps, though it is not required and it will not save a clause that works as a penalty.
3. Match the amount to the breach. Different breaches can carry different amounts, which avoids the single-sum problem in Lake River.
4. Compare the amount with the loss, not the contract price. A clause above the contract value needs a documented reason, and one below it can still be a penalty.
5. Do not give the creditor a second route. Avoid wording that lets one side take the stipulated sum or sue for actual damages. Decide which remedy applies and say so.
6. Check the statute. In California, find which subdivision of § 1671 applies. In Connecticut consumer contracts, add the boldface acknowledgment. In North Dakota, South Dakota and Montana, the damage must be impracticable or extremely difficult to fix.

How that plays out in three hypothetical deals follows. The numbers are invented for illustration.

SaaS vendor agreement. Late delivery of a milestone carries $5,000 per business day, tied to the customer's documented lost deployment time. A data breach carries $50,000 per incident, tied to documented investigation and notification costs. Total non-performance returns the fees for the breached service tier plus a 20 percent premium for transition costs. In California the commercial clause is judged under § 1671(b), valid unless the challenger shows it was unreasonable when made. A version for household customers would fall under § 1671(d) instead.

Construction subcontract. The recital documents extended general conditions of $3,200 per day and lost use of the facility of $4,000 per day, so $7,200 in all, and the clause sets $5,000 per day. A rate below the documented harm is easy to defend as a reasonable estimate. Compare Reliance v. UDOT, where Utah upheld $600 a day against the owner's overhead.

Custom goods under UCC § 2-718. A 20 percent clause for a buyer's wrongful rejection of custom goods is judged on the three factors in § 2-718(1): anticipated or actual harm, difficulty of proof, and the inconvenience of obtaining another remedy. A recital helps, but it does not decide the question, and § 2-718(2) separately lets the buyer recover payments above the clause amount.

FAQ

Are liquidated damages clauses enforceable in every state? Generally yes. Courts in the states we reviewed enforce a clause that is a reasonable estimate of the harm and refuse one that works as a penalty. Statutes change the details: in North Dakota, South Dakota and Montana the clause is void unless damage would be impracticable or extremely difficult to fix, and Connecticut adds a boldface acknowledgment for consumer contracts.

What is the test for liquidated damages? Under Restatement (Second) of Contracts § 356(1) the amount must be reasonable in light of the anticipated or actual loss and the difficulties of proof of loss. Courts such as New Jersey's and Wisconsin's treat difficulty of proof as a factor that moves the line. Others, such as Texas and Utah, state a two-part test that asks both whether the harm was hard to estimate and whether the amount was a reasonable forecast.

What is the difference between liquidated damages and a penalty? Liquidated damages estimate a loss that is hard to measure. A penalty punishes the breach or pressures performance. In Lake River, the formula would have given Lake River a gain of about two and a half times the profit it expected at the 55 percent mark, and it did not track the seriousness of the breach, so the Seventh Circuit held it a penalty and left Lake River to its ordinary damages.

Which states look at actual harm after a breach? Courts are divided. Massachusetts, Washington, Tennessee, Utah and Florida test the clause as of contracting. Texas, Kentucky, Missouri, New York, New Jersey, Wisconsin, Hawaii and Mississippi let actual harm into the analysis in some form. Check your forum's authority before assuming a single look.

Are liquidated damages enforceable in California? Yes, but the rule depends on the contract. Under Cal. Civ. Code § 1671(b) a clause is valid unless the challenger shows it was unreasonable when the contract was made. Under § 1671(d), for retail consumer purchases or rentals and dwelling leases, the clause is void unless damages were impracticable or extremely difficult to fix and the parties agreed on an amount.

Can you recover liquidated damages and actual damages for the same breach? Usually the stipulated sum replaces actual damages for the same loss. In Florida a clause that lets the creditor take either is a penalty (Lefemine), Georgia construes such a clause against enforcement (Southeastern Land Fund), and in Connecticut a seller may not keep a stipulated sum and also recover actual damages (Hanson). Louisiana lets an obligee demand both stipulated damages and performance only where the damages were stipulated for mere delay.

How do you draft a liquidated damages clause that holds up? Tie the number to a specific harm that is hard to measure, set the amount by reference to likely loss and not the contract price, use different amounts for different breaches, avoid giving the creditor a second route to actual damages, and check any statute that applies, such as Cal. Civ. Code § 1671, Conn. Gen. Stat. § 42-150u or N.D. Cent. Code § 9-08-04. A short recital of how the number was set is useful evidence but is not required.

For related state-by-state coverage, see Indemnification Caps by State: How 50 Jurisdictions Read the Same Clause, Jury Trial Waiver by State: Are They Enforceable? (2026), Attorneys' Fees Provisions by State: When Contractual Fee-Shifting Survives, and Choice-of-Law Clauses That Quietly Fail: A State-by-State Breakdown. All sit in our all-50-states legal reference series.

For the US statutes, regulations and court rules these laws sit in, see the US primary law API.

Arshita Anand

Co-Founder & CEO · Attorney

Arshita leads product and strategy at Vaquill AI, the US primary law data API. As an attorney, she decides which law we carry, how each section is sourced and cited, and what legal AI and compliance teams need from the data.