When entering into a contract, the parties may choose to include a liquidated damages provision that predetermines the amount of damages for which the breaching party will be liable in the event of a future breach. Such provisions are considered useful in those instances where it otherwise would be difficult to determine at the time the contract is formed the amount of damages that will be suffered as a result of a future breach, and New York courts have held them to be enforceable in such situations so long as, at the time the contract is made, the liquidated damages are reasonably proportionate to the expected probable loss from a breach. Otherwise, where the liquidated damages are disproportionately high to the anticipated loss, the provision will be deemed to be an unenforceable penalty.

Unsurprisingly, it is quite common for a breaching party to challenge the validity of liquidated damages provisions when faced with a claim thereunder. A party challenging the validity of a liquidated damages clause thus must prove either that: (1) the amount of anticipated damages was easily ascertainable at the time the contract was formed, or (2) at the time the contract was formed, the liquidated damages amount was grossly disproportionate to the anticipated damages that would be incurred in the event of a breach.

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