If a contract contains a liquidated damages clause that fixes damages at 10,000 for breach, but actual damages amount to 20,000, what is the payable amount?

• A. 30,000
• B. 20,000
• C. 10,000
• D. 5,000

Answer: (B)

The key idea here is distinguishing a valid liquidated damages clause from a penalty. A liquidated damages clause sets a pre-agreed sum that is meant to reasonably forecast the harm from breach and is typically enforceable as the damages due. But if that fixed amount is more like a punishment to deter breach (a penalty) and not a fair pre-estimate, it can be unenforceable, allowing the non-breaching party to recover actual damages instead.

In this case, the fixed amount of 10,000 is treated as a penalty or otherwise unenforceable, so the party can recover the actual damages caused by the breach, which total 20,000. Therefore, the payable amount is 20,000.

The other amounts would only apply if the liquidated damages clause were enforceable as a genuine pre-estimate of harm and not a penalty.