Private Law Theory

I use Judge Posner’s opinion in Lake River Corp v Carborundum Co to teach liquidated damages and penalties. It’s a typical Judge Posner opinion. He provides policy arguments for and against the enforcement of liquidated damages provisions, even if they impose a penalty on the breaching party. Judge Posner makes the compelling freedom of contract/anti-paternalist arguments in favor of enforcement of penalties, assuming relative sophistication and comparable bargaining power. Against these arguments, he offers the theory that deterring opportunistic breach prevents efficient breaches that produce better outcomes for most of the parties involved and do not produce worse outcomes for any of them (assuming no transactions costs). He then heaves a sigh, says, ‘Illinois, ya basic!’ and applies the applicable state law prohibiting the enforcement of penalties … (more)

[Jeremy Telman, ContractsProf Blog, 2 May 2024]