At common law, courts will not enforce liquidated damages clauses unless the stipulated sum bears a reasonable relation to either the anticipated or actual losses that result from breach. Penalty clauses, intended to compel performance, are per se unenforceable. Commentators have set forth arguments both for and against this common-law rule on the basis of efficiency.
One of the main principles of Austrian economics is the subjective theory of value, the idea that value is subjective to each individual and cannot be objectively measured. It follows logically from the theory of value subjectivism that interpersonal and inter-temporal utility comparisons cannot be made. This Comment employs the principles of Austrian economics to demonstrate that efficiency based arguments are ill suited for choosing among alternative legal rules and informing the judicial decision-making process. It also uses Austrian welfare economics to disprove the necessity of paternalistic judicial interventions that inevitably attend the enforcement of the current law. Finally, this Comment proposes an alternative legal rule, based on the title-transfer theory of contracts, which allows for the enforcement of liquidated damages provisions irrespective of reasonableness.
Part II reviews the current law of liquidated damages, discusses a number of efficiency-based arguments for and against enforcement of liquidated damages provisions, and provides a succinct overview of Austrian economic principles that are relevant to this discussion. Part III discusses the problems with efficiency-based considerations and the current law of liquidated damages, provides an alternative legal framework from which an all-enforcement rule may be derived, and discusses the application of the all-enforcement rule with reference to real-world examples.