June 2009 Vol. 107 No. 8 THE REVIEW

Stipulated Damages, Super-Strict Liability, and Mitigation in Contract Law

Saul Levmore

The remedy of expectancy damages in contract law is conventionally described as strict liability for breach. Parties sometimes stipulate damages in advance, and may agree that the damages they stipulate shall be the exclusive remedy for breach. They may do so because of their conviction that they can, even in advance, assess damages with greater accuracy than courts, and they may be wary of litigation costs associated with the postbreach determination of expectancy damages. This Article advances two claims. First, that the familiar expectation remedy is correctly understood to involve elements of fault. There is litigation over the question of fault with respect to the mitigation of damages. Stipulation, on the other hand, makes contract liability stricter because it takes the mitigation question away from courts. It allows less room for courts to modulate the remedy on the basis of the parties’ relative fault. Stipulation often encourages mitigation by one party, but then, to make up for the strict liability character, the parties may stipulate in a more detailed manner to encourage bilateral mitigation. Mitigation considerations should change the way we think about many stipulated remedies. Second, while law is generally described as being suspicious of, or even hostile to, stipulation—in large part because courts refuse to enforce “penalty” clauses—in fact, law encourages stipulation. It does this by sometimes declining to award expectancy damages, often in the very situations where stipulation seems sensible, and also by providing expectancy damages where the award of stipulated damages is regarded as a penalty. These two claims illuminate cases on such diverse matters as residential leases, construction contracts, product warranties, service contracts with liability waivers, and no-show customers and their service providers.

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