Ex post consequential harm makes liquidated damages clauses hard to enforce in diamond deals.

Evidence

In a diamond transaction, it would be particularly difficult to draft a liquidated damages clause that a court would view as a “good faith” attempt to preestimate damages. Often, at the time of contracting, the parties themselves are unable to accurately preestimate damages since the actual harm suffered by the promisee in the event of breach depends largely on business decisions made after entering into the contract. For example, even if at the time of contracting nonpayment would neither have bankrupted the promisee nor caused him to default on other obligations, if he subsequently made a large financial commitment in reliance on being paid and then was not, he might suffer tremendous financial and reputational harm, particularly if forced to go to court to obtain a judgment. Since at the time of contracting the magnitude of this harm could not have been predicted, liquidated damages clauses designed to compensate the promisee for this type of harm would run a serious risk of being invalidated as penalties. — Lisa Bernestein, Opting out of the Legal System, 160

Categorization

• DEFINE: Clarifies the penalty-versus-liquidated-damages distinction and why ex ante harm estimation is genuinely impossible for reliance-based consequential losses.
• XREF: Connects to the efficiency/transaction-cost critique in classical contract-law scholarship (e.g., the costs that drive parties to self-help and private ordering rather than courts). — connects to: Transaction costs do not explain the diamond trade’s extralegal contracts. — Lisa Bernestein, Opting out of the Legal System, 137; Expectation damages as enforced in practice fail to deter breach. — Lisa Bernestein, Opting out of the Legal System, 148; Tight cash-flow margins make reliance harms exceed simple owed amounts in the diamond trade — Lisa Bernestein, Opting out of the Legal System, 191 (+3 more)

Related

• Liquidated damages clauses fail when post-contract reliance makes harm unpredictable. (similarity 0.92)
• Expectation damages as enforced in practice fail to deter breach. (similarity 0.87)
• Tight cash-flow margins make reliance harms exceed simple owed amounts in the diamond trade (similarity 0.84)
• Transaction costs do not explain the diamond trade’s extralegal contracts. (similarity 0.83)
• Judicially enforced expectation damages fail to make promisees whole or deter breach. (similarity 0.78)

Broader Connections

• Tight cash-flow margins make reliance harms exceed simple owed amounts in the diamond trade #expands (0.82) — Lisa Bernestein, Opting out of the Legal System, 191
• Private arbitration can impose punitive damages to deter breach where courts cannot. #complicates (0.78)
• Without legal enforcement or reputation audiences, some bargains become impossible #expands (0.75) — Thomas C. Schelling, The Strategy of Conflict, 115