Would a contract to pay a trillion dollars in damages be valid?

Question

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.

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.