Next Generation Bar Exam Quiz
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CONTRACTS
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A state statute provides:
'A liquidated damages clause in an employment contract is enforceable only if, at the time the contract was made, (1) the harm caused by a breach was difficult to estimate and (2) the amount fixed was a reasonable forecast of the harm likely to result from the breach. A clause that provides for an amount unreasonably disproportionate to the probable loss is void as a penalty.'
Dr. Chen signed a three-year employment contract with a rural clinic. The contract stated:
'If Physician resigns without the Clinic's consent before the end of the Term, Physician shall pay the Clinic $50,000 as liquidated damages. The Parties acknowledge that the costs of recruiting and credentialing a replacement physician and the revenue lost during any vacancy are difficult to estimate accurately when this contract is signed, and they agree that $50,000 is a reasonable forecast of those likely costs.'
At the time of signing, the Clinic's historical data showed that replacing a physician typically cost $45,000 in recruiting and credentialing costs and that an unfilled position typically caused about $20,000 in lost revenue over a three-month vacancy. After one year, Dr. Chen gave six months' notice and stopped working at the end of that period. The Clinic did not consent to his early departure, but it filled the position before he left, incurring only $12,000 in recruiting costs and losing no revenue. The Clinic sued Dr. Chen for $50,000.
Is the liquidated damages provision enforceable?
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