Liquidation Damages - Essay Example

This paper will look at how liquidation damages for Lake River Corp. v. Carborundum Co. were calculated and provide a critical view of the calculation used. Carborundum is a company that manufactures Ferro Carbo. It had entered into a contract with Lake River Company.  In the contract, Lake River Company would receive Ferro Carbo in bulk from Carborundum’s, put it in bags and ship it to Carborundum’s customers. Carborundum insisted that Lake River install a new bagging system to take care of the contract in an efficient manner, which costs $89000.

In order to cover the cost and make a twenty percent profit, Lake River insisted on a minimum guarantee clause that ensured that if the full least quantity was shipped the Lake River would make $533000. However, Carborundum only shipped 12,000 of the 22500 tons of the Ferro Carbo at the time when the contract expired. Carborundum had paid for the amount billed and bagged.  The clause left Carborundum Company owing $241000. That is $533000 (ferro shipped) less what Carborundum had paid. On the other hand, Lake retained 500 tons of bagged Ferro.

As such, the issue was whether the formulae in the minimum guarantee clause inflicts a penalty for breach of contract or whether it was just a deliberate attempt to liquidate damages (Whitney,1985). In this case, the district judge gave a judgment where Carborundum ended up with approximately $42,000. This amount was reached by making use of the following formulae; $269000 +$31000 -$241000-$17000. The last figure represented the prejudgment interest on the Lake river damages (Whitney, 1985). Here the damage formulae were designed in such a way that it will assure the Lake River Company receives more than the actual damages it incurs.

This makes it a penalty. It was noted that, since Lake River did not do much work, they were not