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Let's say you write a contract with someone, and you want to make sure they don't breach it. You could just have them covenant certain things, but then they'd only be liable for whatever damages you could actually prove in court.

Let's say you instead wrote that they'd pay you one trillion dollars if they breached the contract. This would mean that they would instantly be insolvent, allowing you to seize all their assets.

  1. What's the advisable way to do this? Is there a legally valid way of stating "all the money you have, and then some", other than just writing a ludicrously large sum of money? What if the value of the dollar goes down?
  2. Would this be enforceable, or would the contract risk being set aside for undue hardship?

I am asking for the context of a software license.

bdb484
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Michael
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    There would still be the question if the underlying contract had been broken before anyone could collect anything. Few people go around and say "sure, I'm breaking the contract, what are you going to do about it?" It would always be "you broke it first, I'm no longer bound by this." So the insane damage appears pointless. – o.m. Feb 14 '21 at 17:11
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    This sounds like a penalty clause which is unenforceable. However, you might like to read about the related concept of liquidated damages. – Nate Eldredge Feb 14 '21 at 17:26
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    My bank charges 0.1% for money transfers. Please send me the full transfer fee before I send the trillion dollars :-) – gnasher729 Feb 14 '21 at 21:10
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    I'll waive 1% of the trillion, in writing, if you send the 990 billion immediately. – Jasen Feb 15 '21 at 07:01
  • If you do that, they are not going to sign it unless they are fools. – stackoverblown Feb 15 '21 at 15:04
  • Depends what the contract is for. If you talking about the prime contract for something like the F-35 program, then yes it might be reasonable. (Lifetime cost for the F-35 program is currently expected to sit at ~$1.5 trillion dollars) – user1937198 Feb 15 '21 at 15:45
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    Hrm, wonder if "trillion" is sufficiently well defined everywhere in the world. Pretty sure there's reasonable understanding in the US and the UK that it's 10^12, but I think some folks still use the long-scale 10^18 reckoning (i.e. "a million million million --> 3 millions --> TRIllion") – A C Feb 15 '21 at 16:53
  • Which country is this in? – Stilez Feb 15 '21 at 21:32
  • You haven't given a jurisdiction (or even class of jurisdictions). French law is significantly different from English etc.

    Some jurisdictions will enforce contractual obligations rather than just ordering the payment of damages. Eg, English law will in some cases grant an order of "specific performance" or even an injunction ordering the covenant to be performed. If damages are not a sufficient remedy (which sounds like your situation) that makes those sorts of orders more likely.

     – Francis Davey Feb 15 '21 at 22:24
  • @stackoverblown Seing how it's about a software license, maybe OP is trying to get away with showing it as a 72 page EULA and hope no one will read it... – pipe Feb 15 '21 at 23:42
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    Just to nitpick, "valid" (in the title) has a different meaning to "enforceable" (in the body). A contract is valid if it satisfies the formalities (agreement, consideration, intention, any other requirements specific to the type of contract). Enforceability usually refers to each clause individually rather than the contract as a whole, and depends on the (sometimes complex) law for the subject matter of the clause. You can have a valid contract which is (partly or wholly) unenforceable, but not vice versa - you generally cannot enforce an invalid contract. – JBentley Feb 16 '21 at 09:10
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    @AC Well considering we're talking dollars here, rather than pounds or euros, it's not unreasonable to assume we're talking about the US. Sure, it could be Canadian dollars or Australian dollars, but I'm pretty sure the long-scale is going out of fashion in those places as well. – Darrel Hoffman Feb 16 '21 at 13:41
  • @AC Unfortunately, yes. The Dutch 'Triljoen' still uses 10^18. I've considered using teradollars and teraeuros with exadollars and exaeuros, but unfortunately people don't understand that either. – Mast Feb 17 '21 at 17:29
  • For small players, they might might be "in terror" of trigering the liability. The clause might be considered invalid. On a global scale, a trillion dollars might be 1 warship and there may be a genuine meeting of minds or at least appear to be to a reasonable observer. – mckenzm Feb 17 '21 at 17:31

4 Answers4

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What you're talking about is a liquidated-damages clause, where the contract explicitly spells out the damages to be awarded in the event of a breach.

The law will vary some from state to state, but these clauses are generally enforceable. Some courts limit their use to cases where calculating the damages resulting from the breach would be impossible or impractical.

But in the United States, along with all other common law jurisdictions, courts generally agree that if the liquidated-damages clause appears to penalize the breach instead of simply compensating for it, it is not enforceable. See, e.g., Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal.4th 970, 977 (Cal. 1998) (“A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under section 1671(b), if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach.”)

The trillion-dollar damages clause "bears no reasonable relationship" to the damages that would actually result from a breach of a software license, so you can safely expect a court to refuse to enforce it, and limit you to whatever damages you could actually prove in court.

Even if you were to drastically reduce it to "all the money you have, and then some," "all the money you have," "half the money you have," or even " "1 percent of all the money you have," the language still makes clear that the contract is not aimed at compensating for the breach, but rather penalizing the breaching party.

In the end, what you're talking about isn't going to work, because contract law is generally less concerned with penalizing people than with making them whole.

Dale M
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bdb484
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  • Actually when going to court for a trillion, arent court fees not a percentage of the sum (I think where I am it is), so lets say a low 1%, which is 10 billion. So if the plaintiff loses it will cost them 10 billion, isnt it? What if they win and the defendent cannot even pay the court fees, does the plaintiff have to step in? – lalala Feb 15 '21 at 15:39
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    In the United States, at least, this is not the case. – bdb484 Feb 16 '21 at 02:05
  • Sometimes lawyer's fees can be based on a proportion of your winnings, though. – nick012000 Feb 16 '21 at 10:34
  • What if you have this "trillion dollar damage" contract with party A, then scheme with party B to write a contract where party B "would pay you a trillion dollars" and then set it up in a way so that you breach party B's contract because of A's contract breach, thus party A owing you for the trillion you lost from party B's contract? – personjerry Feb 17 '21 at 22:08
  • @personjerry No dice. Courts generally won't award damages that weren't foreseeable. Hadley v. Baxendale, 9 Exch. 341 (1854) – bdb484 Feb 17 '21 at 22:12
  • @bdb484 So does that mean party A has to know about your other contracts (i.e. if you wrote the contract with party B first) and then hopefully they wouldn't be so stupid as to agree after seeing that? – personjerry Feb 17 '21 at 22:18
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    @personjerry The trillion-dollar contract doesn't need to be known to A; it just needs to be foreseeable to him. For instance, if wedding venue A has to cancel a Saturday event because B breached its contract to repair the air conditioning, plumbing, or whatever by Friday, B could be held liable for the venue's lost revenue. Even if B didn't know A had a contract to rent the space that weekend, it's foreseeable that a wedding venue would have a wedding scheduled on a weekend. – bdb484 Feb 18 '21 at 01:01
  • Also, you never actually expected B to pay you a trillion dollars, so you probably never formed a binding contract to begin with. And if you aren't bound to pay B, you haven't incurred damages you could pass on to A. Beyond that, there are defenses of fraud, unclean hands, impossibility, unconscionability, and so on. Contract law is thousands of years old, so it's already figured out how to deal with almost any bad-faith conduct you can imagine. – bdb484 Feb 18 '21 at 01:11
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Such a clause would not generally be enforceable. Penalty clauses are generally not enforceable in common-law jurisdictions, although in some continental law jurisdictions they are (this article gives a civil law vs common law comparison). Given the number you're talking about, this doesn't correspond to a reasonable estimate of actual damages for breach of contract. Late fees and the like are allowed when they are reasonable estimates of the damage that is caused by one party's breach. In an alternative universe, Virgin Terraforming might be liable for a late performance on a failed terraforming job, which caused ginormous losses for Bezos Colonies, in case that figure is reasonably related to the actual damages that Bezos suffered and which are is unreasonably onerous or impossible to precisely quantify.

user6726
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A $1 trillion liquidated damages clause would be held invalid as unconscionable and as clearly intending to punish rather than compensate... unless you can show that $1 trillion is somehow plausible, which does not seem to be what the question is asking about.

Patrick87
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  • While I see where you're coming from with that answer, it would still be considered valid if both parties agree to the set damages, however, no single person (to my knowledge) has access to $1tn in assets at the personal level, so it would be likely they are considered judgment proof. – Display Name Feb 15 '21 at 02:37
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    FWIW, in a contract say, between Apple, Inc. and General Motors to commence a joint venture to produce millions of electric cars, a $1,000,000,000,000 liquidated damages clause might be enforceable, if it was a fair ex ante estimate of actual damages from non-performance. – ohwilleke Feb 15 '21 at 23:34
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    @HarrisonMayotte "it would still be considered valid if both parties agree to the set damages" - do you have a citation for that? This answer is good law in most common law jurisdictions as far as I am aware. The principle of "contract is king" doesn't really exist anywhere - there are always limitations. – JBentley Feb 16 '21 at 10:09
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    @ohwilleke True, but in the context of this question that isn't a scenario being considered. OP's aim is to select a figure which represents the entire net worth of the contracting party, regardless of what that might be at the material time. $1tn was chosen as an arbitrarily large figure to ensure the objective is met. You'll be hard pressed to argue that this amounts to compensation rather than penalty. $1tn might work for Apple if the number is based on predicted damages, but chosing a figure based Apple's market cap + some arbitrary amount is a different story. – JBentley Feb 16 '21 at 10:16
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In civil law jurisdictions, for example under French law, the drafter of the contract has a choice between labelling that 1 trillion clause either as a contractual penalty, or as liquidated damages. If they are secretly certain they'd never want to actually collect the penalty, they'll write whichever they think will make a stronger impression on the other party to try to stay in compliance. If they expect that taking the clause to the court might be necessary, they will probably formulate it as liquidated damages. Labelling it as a contractual penalty would read as an invitation for the court to assess its "adequacy", potentially reducing the amount to a merely symbolic level, even below any factual damages (assuming sub-trillion damage was caused by the non-compliance but not claimed).

The court can intervene and reduce the amount awarded even if they are enforcing liquidated damages, on the doctrine of "unfairness". But it's still easier for the court to enforce the agreed upon amount without much scrutiny, unless its disproportionality is glaringly obvious even to a layman in the subject of the dispute.

"All the money that you have, and then some" would be a really weird way to draft the contract. The drafter would have to be very certain that they would never need a court to enforce the contract. Such an amount is vague, and the court couldn't too easily enforce it even if it was bribed to want to. It's much preferable to have the other party's signature under a specific amount owed if you mean your threat. And it helps if it is not obvious that the amount was intended to be absurdly disproportional to the hypothetical and actual consequences of the breach and to the value of the contract.

Your goal in the negotiations should be that no matter what the other party does, and no matter what circumstances beyond their control arise, you'll be better off having this contract in hand than otherwise. You don't really need their trillions for anything, and you won't win their cooperation by requesting those.

Trying to ensure that they won't oversleep or underdeliver, that they will keep their tongue shut and keep out of accidentally signing something else that you don't want them to sign, would make your position more fragile than preparing for yourself some graceful exits from the contingencies you can think of.

In extreme cases it may be safest not to enter a contract which would be beneficial to you if it went as agreed to, but is more likely to expose you to a catastrophe if the other party reneges on their promises or is unable to meet them.

Jirka Hanika
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  • In my experience, the vast majority of "civil law" tags are likely used by people thinking about the distinction between civil and criminal law, rather than civil-law and common-law jurisdictions. Not a useful way to use the tags, in my opinion, but a reality of lay taxonomization. – bdb484 Feb 16 '21 at 17:07