Testing the validity of liquidated damages clauses: measuring the application preference and consistency of the intent test as applied by the United States court system
Abstract:Although the general principles for ascertaining the validity of a liquidated damages clause are well understood, the courts seem inconsistent in their interpretation of whether a clause is valid or not. Judicial opinions dating from 1858 to 1991 formalize the study population. Retrieval of judicial opinions are from official and unofficial legal reporters for the United States. Of the 223 selected appellate court cases, 175 met the population parameters. Data derived from these judicial opinions were tested statistically by: (a) the chi-square test for binomial data, and (b) the Stuart-Cox sign test for trend analysis. The chi-square tests reveal that, at present, the courts demonstrate a preferred pattern of movement away from applying the intent test when construing the validity of a liquidated damages clause. Based on the Stuart-Cox sign test, however, the current pattern of application preference does not display the presence of a statistical trend for future application preference. Additionally, when the courts do apply the intent test, the application preference is at the time of contract formation. Further, there is no statistical trend that indicates that this will be the preferred application in the future.
Document Type: Research Article
Publication date: May 1, 1998