Liquidated damages: Under common law, they are enforceable if at the time of contract the damages would be difficult to foresee, the forecast is reasonable, and the remedy is not punitive.

• A. At the time of contract, with a reasonable forecast and nonpunitive
• B. At the time of breach, with a reasonable forecast
• C. Only if the contract specifies a fixed amount
• D. Never for service contracts

Answer: (A)

Liquidated damages are enforceable only when three conditions are met: at the time the contract is formed, the potential damages would be difficult to foresee; the amount fixed is a reasonable forecast of the actual damages likely to occur; and the remedy is not punitive. This captures why the correct choice is the one describing damages as determined at contract formation, with a reasonable forecast, and nonpunitive. If you try to apply these criteria at the time of breach, or if the amount isn’t a reasonable forecast of actual damages, or if the clause is a penalty, the clause generally won’t be enforceable. The rule doesn’t turn on the contract being a service contract or on simply having a fixed amount; the key ideas are foreseeability at formation, reasonableness of the forecast, and nonpunitive character.