The issue is whether the stipulated damage clause (SDC) between United Way (UW) and John

Dudley (JD) is enforceable.

Generally, the common law employs a two-part test to see whether a stipulated damages clause is

enforceable. First, is the damage difficult to quantity? Second, did parties genuinely attempt to

forecast damages from breach at time of certainty?

Here, the court will likely find that the damages were not difficult to quantify, because the

damages from breach is JD’s contract price, for the remainder of the three-year term that he was

supposed to be paid for during his three year remainder. There is no other indication that the

contract was entered for a sentimental reason or that he would be paid for any other emotional

damages.

The contention is whether the parties genuinely attempted to forecast damages from breach at

time of contracting. Here, the court would likely find that the parties did not attempt to forecast

damages because the DSC states that “with or without cause”, before the three year period is up,

UW would have to pay JD for the remainder of his three-year salary without differentiating

between different types of reasons for breach, how far into the contract there was a breach, etc.

At present, since UW must pay three years worth of salary instead of one year, regardless of the

reason for breach, the clause was probably meant to spur performance and act as a penalty for

breach, rather than a reflection of reasonable calculation for damages from breach.

Regardless, JD will likely argue that the SDC is not a penalty because the clause specifically

contains the language “not as a penalty”. However, regardless of the language, previous courts

have found that an SDC will be unenforceable if the SDC acts as a penalty, even if the two

pronged test is met. If the courts find that the purpose of the SDC is to spur performance, then

the courts will not enforce it. JD may also claim the parties should have the freedom to make
their own contracts, and even if it acts like a penalty, the court should enforce it if the two parties

freely contracted for it. The modern trend of courts is to recognize this argument, especially

because it allows parties to reply on the contract, prevents litigation expenses, and most

importantly it protects interests that otherwise may not be protectable by law. Here, JD entered

into a contract for a special position as the CEO of a company. The position of CEO is an

extremely rare opportunity and it is possible that JD may not easily be able to find a comparable

and substantially similar position at a different company with a similar salary. Given such, the

damages do not seem exceptionally disproportionate because JD has suddenly lost his chance to

earn salary due to UW’s breach.

In response, UW may say that JD being allowed to receive 3 years worth of compensation for 1

year is being overcompensated. However, JD is not being overcompensated for his services, but

he is reasonably being recovered for the damages that he suffered due to UW’s breach. If UW

did not breach the contract, then UW would have received three years worth of services in return

for paying three years worth of salary. Since UW has breached the contract, they have lost the

benefit of the bargain and are being bound to their promise to pay the remainder of the contract

price for the three year term. UW may also argued that since they are being forced to pay the

unpaid contract price for the remainder of the three year term, the contract fails to differentiate

among different kinds of breaches and damages that may flow and only fixes one damage.

Regardless of whether JD has worked for one year or for two years, UW will have to pay three

years worth of contract price overall if it breaches. Yet, this argument does not hold because

while UW will have to pay three years worth of contract price overall, it will not have to pay

them in damages fees if it does not breach the contract at all. They would just be paid out as

salary to compensate JD’s services. Only if the contract is broken will UW start to accrue fees in
damages payable to JD. Since UW is simply paying for the unpaid contract price for the three

year term, it is unlikely to be considered as a fixed lump sum.

Therefore, the court, in accordance to Restatement 356 willl likely find that the SDC is

enforceable on grounds of public policy.