Zenia contracts with Yvonne for a supply of specialized computer components worth $6,000, which she needs to meet a contract to supply Wendy with 60 laptop computers, a contract which is worth $65,000 to Zenia. Zenia makes it clear to Yvonne that her contract with Wendy is vital to let her get established in the market and that it is imperative that Yvonne meet the deadline. "If you can't," she says, "I'll take the business to someone who can." Yvonne wants the business badly, so, against her better judgment, she agrees to a clause in the contract which says that, for every day delivery is late, she will pay Zenia $10,000.
A) This is a liquidated damages clause and it will be enforceable against Yvonne.
B) Because liquidated damages clauses are against public policy, Zenia will not be able to enforce this clause if Yvonne is late performing.
C) Although the court would not normally enforce this clause, since Yvonne was aware of the vital importance in this case of prompt delivery, the court will uphold the clause if she is late delivering.
D) This is a penalty clause and the court will refuse to enforce it.
E) Since Yvonne was under duress to sign this contract, the court will not enforce the clause, although under normal circumstances they would.

Question

Quizplus · Accepted Answer

This is considered a penalty clause because the amount ($10,000 per day) is excessively disproportionate to the actual damages Zenia would likely incur from a late delivery, making it punitive rather than compensatory. Courts typically enforce liquidated damages clauses when they are a reasonable forecast of just compensation for loss, but not when they function as penalties to coerce performance.

Zenia Contracts with Yvonne for a Supply of Specialized Computer