If liquidated damages stated in a contract are too low, inefficient breaches will be profitable, and if damages are too high, efficient breaches will not occur.

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Quizplus · Accepted Answer

This statement is true. If the liquidated damages stated in a contract are too low, then a party can breach the contract and pay the damages without suffering a significant financial loss. This makes inefficient breaches profitable. On the other hand, if the liquidated damages are set too high, then breaching the contract would be financially disadvantageous even if it would be efficient. This would discourage efficient breaches. Therefore, it is important to set liquidated damages at a reasonable level to balance the risk for both parties.

If Liquidated Damages Stated in a Contract Are Too Low