We've been talking about remedies and about the role of expectation damages. Expectation damages is the award that the parties get in the event that they breach and the contract doesn't say anything about what happens in the event of a breach. Expectation damages are the default remedy for contract. But actually the parties themselves have the ability to contract around the default role of expectation damages. Most of us had been party to tonnes of contracts in which in the event of a breach, we know that the amount we would have to pay or the amount that we would get paid is a stipulated figure on amount that's been stipulated upfront. Years ago when I got my first cell phone, the rule was you had to sign up for two years with the company that I was signing up with. If you breach that contract, which is to say if you decide to leave your cell phone provider and go to another provider, you had to pay a flat fee of 200 dollars. The name for that is liquidated damages, that's when the parties stipulate or liquidate the damages amount and include it as a term in the contract. Now, liquidated damages are pretty interesting area of law because on the one hand, typically, contract law is pretty deferential to the party's preferences. People can contract around a whole bunch of default roles in contract. On the other hand, the remedies in the event of a breach and what happens if the party with a contract falls apart of remedies questions, have historically been reserved for the courts. In courts are a little protective of this area, especially with liquidated damages. In part because they're worried about the parties trying to put into the contract something that's really not so much a liquidation of the true estimate of damages but rather a penalty. I think they're worried about specifically for employees actually. You can imagine the following situation in which I really need a job and the job that I find it's a job where I am going to be a receptionist, and the contract that I signed with the firm or who am going to do the receptionist services, says in the event that I quit, I have to pay the firm $20,000. Now, what is going to be the function of that term? It's probably going to mean that I don't quit the job. But it's also probably going to be the situation where I'm not really able to bargain upfront for a different liquidated damages clause because I need the job and I don't think I'm going to breach it later on. I think this is not that big of a deal, I am willing to agree to this and event of a breach and then turns out later, things are more complicated and now I have this enormous penalty facing me. Historically, what courts have done and in modern law, what courts are doing is drawing a line between a valid liquidated damages clause on the one hand and the penalty clause on the other. Parties are not allowed to decide that breach will result in a punishment. What breach can result in is a damages award that the parties estimate when they draft the contract in order to make things feel more certain or more negotiated. The actual rule which is embodying the restatement 356 is a compromise basically between advocates of freedom of contract and then critics of liquidated damages is being often one-sided. Here's how the rule goes. Courts will enforce liquidated damages clause if they are reasonable in light of the loss in the difficulties of proof. Liquidated damages are unenforceable if they're unreasonably high. What courts are looking for is a fit between the amount of the parties estimate that the damages will be and the actual losses suffered when the breach happens. But they are going to give parties more leeway if the actual losses are hard to prove, so the harder it is to figure out what the real losses are. Because, for example, the losses are largely reputational losses or the losses are largely speculative profits. The more likely the court is going to be to permit a liquidated damages provision, to enforce liquidated damages provision, even if the court views the provision as being somewhat off. Let me give an example, a case here where we can think about how a court wants to think about liquidated damages. Here's a case where it's not even obvious that there are any losses at all, so the case is a case of a high profile collegiate football coach named DiNardo. Coach DiNardo was the coach of the Vanderbilt football team in the 1990s. He resigned as the head coach of Vanderbilt in order to take a job at LSU. The LSU job, Louisiana State University is a much bigger, more high profile job. Vanderbilt sued for breach because he had a 5 year employment contract. So he was sued for breach, said you've left before the 5 years are up that is for sure true. They said, we don't have to prove our losses here because there's a liquidated damages provision in our deal. What that provision says is, that if we breach we Vanderbilt or you breach you hurt DiNardo, the breaching party has to pay the non-breaching party the remainder of the coaching salary for the contract term. Basically what they were saying was coach DiNardo you are going to work for us for another I don't know year, year and a half, something like that. You have to pay us the salary we were going to pay you for that time. That's a weird liquidated damages clause, I think. Because it's unlikely that the actual cost to Vanderbilt of coach DiNardo leading for LSU would be sensibly measured by his own salary. Like you can think of all kinds of things that he's doing for Vanderbilt. He's making the team better. He's making the continuity is really good, keeping stability, that maybe brings in alumni donations and makes the university higher profile. Those things are all true, but those wouldn't necessarily be related to his salary number. The court said, this number on the one hand does not seem to be particularly well tailored to the situation, but it seems like the parties intention here was to create some stability in this role, and there are costs to instability. Indeed, his resignation is going to be a loss for Vanderbilt in the amount of money if the salary is not an outrageous amount of money. Now of course, it also made the matters that typically in these cases, the poaching school also pay out that liquidated damages number. That's one case where the court is looking at unusual liquidated damages number and decides to defer to the party's preferences basically because the number doesn't look that high and it really is hard to figure out what the true losses are. How do you estimate the losses to a college whose football coach quits, there's just so many factors going on there. We're going to consider this case of liquidated damages in the next segment is arguably is a more familiar set of employment situations, but with a court that's really focused on what does it mean to estimate the losses in the event of a breach.
