Document Type

Working Paper

Publication Date

2007

Center/Program

Center for Law and Economic Studies

Center/Program

Center for Contract and Economic Organization

Abstract

A casebook favorite for exploring the liquidated damage-penalty clause distinction is Lake River v. Carborundum in which Judge Posner found a minimum quantity clause to be an unenforceable penalty clause. In this paper I argue that the case was framed improperly. Had the litigators recognized that the contract afforded one party an option, the result should have been different. The contract was for the provision of a service - setting aside capacity - which was valuable to the buyer and costly to provide for the seller. The primary purpose of the minimum quantity clause was the pricing of that service. The case raised indirectly a significant damages issue: if there is an anticipatory repudiation of a contract that is take-or-pay or has a stipulated damage clause, should the promisee's ability to mitigate be taken into account when reckoning damages?

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