CIV § 1671

Liquidated damages valid unless unreasonable - CIV § 1671

CIV § 1671: Liquidated damages valid unless unreasonable, but void for consumer purchases and residential leases unless impracticable to fix damages.

Official text CIV § 1671 — California
  • (a) This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.
  • (b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.
  • (c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either:
  • (1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party’s personal, family, or household purposes; or (2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.
  • (d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

Text as published in the 2026 snapshot of the code.

Source: Vaquill Open US Law, compiled from official state publishers (huggingface.co), reproduced under license CC BY 4.0.

Read this provision at the official source →

What it actually says

Section 1671 sets two different rules for liquidated damages depending on who the contract is with, and the difference is the whole point of the section. Subdivision (b) states the commercial rule: a provision liquidating the damages for breach is valid unless the party seeking to invalidate it establishes that it was unreasonable under the circumstances existing at the time the contract was made. The presumption favours the clause, the burden is on the party attacking it, and the test looks at the moment of contracting rather than at the actual loss.

Subdivision (c) then removes two categories from that rule. Where the liquidated damages are sought from a party to a contract for the retail purchase or rental of personal property or services primarily for personal, family or household purposes, or from a party to a lease of real property used as a dwelling by that party or their dependants, validity is determined under subdivision (d) instead. And subdivision (d) reverses the presumption: in those cases the provision is void, except that the parties may agree on an amount presumed to be the damage where, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

So a fixed cancellation charge in a consumer or residential context starts from void and has to be justified by the impracticability of measuring the real loss; the same clause between two businesses starts from valid and has to be attacked as unreasonable. Subdivision (a) disapplies the whole section where another statute expressly prescribes the rules for the contract in question. Which limb your contract falls under, and whether a particular charge can be defended, is a question to put to a lawyer.

When it applies

  • A gym or service contract charging a fixed sum for cancelling early
  • A lease clause imposing a set penalty for leaving before the end of the term
  • A deposit that the supplier says is forfeited whatever the circumstances
  • A commercial contract with a fixed sum payable on late delivery
  • A wedding or event contract with a rising cancellation scale
  • A charge that bears no relation to what the other side actually lost

What this section does not say

  • It does not make every cancellation charge void. Between businesses, subdivision (b) presumes such a clause valid and puts the burden on the party attacking it.
  • It does not cover a genuine payment for something received. The section addresses provisions liquidating damages for breach, not the price of what was actually supplied.
  • It does not look at the actual loss. Subdivision (b) tests reasonableness by reference to the circumstances existing when the contract was made.
  • It does not apply where a specific statute governs. Subdivision (a) stands the section down where another statute expressly prescribes rules for that contract, as several consumer statutes do.
  • It is not the unconscionability doctrine. A clause that survives this section may still be attacked under § 1670.5 on a different test.

Worked examples

Invented situations, written to show how the wording bites. They are not real cases, not judgments and not precedent, and nothing here predicts what would happen in yours.

Illustrative example

A couple book a venue and cancel eleven months before the date. The contract requires the full balance on any cancellation, and the venue rebooks the date within a fortnight.

How the wording applies

In a consumer contract subdivision (d) presumes a liquidated damages provision void unless it was impracticable or extremely difficult to fix the actual damage. The fact the answer turns on is what was foreseeable when the contract was made rather than the later rebooking, though a term that takes the whole price regardless of a resale is hard to justify as an advance estimate of loss.

How the parties settled it

The venue retains the deposit and a fixed administrative charge and refunds the balance, and the couple release any claim on the booking.

Illustrative example

A supplier and a manufacturer agree a fixed daily sum for late delivery of a component. Delivery slips by a week and the manufacturer deducts the sum, which turns out to be several times what the delay actually cost.

How the wording applies

Between businesses subdivision (b) presumes the clause valid and puts the burden on the party attacking it, tested by the circumstances existing when the contract was made. It hinges on what the parties could reasonably have anticipated then: a daily rate set with a production line's downtime in mind is reasonable even if this particular delay happened to be absorbed cheaply.

How the parties settled it

The deduction stands for the first few days and is waived for the remainder, and the clause is capped by written amendment for future orders.

How courts have read it

Decisions construing this provision. The question and the summary are ours; the quoted sentence is the court's own words, taken from the published opinion. These are the decisions in our corpus, not every decision there is, and nothing here predicts any other case. Reported 1991 to 2017.

Krechuniak v. Noorzoy, 11 Cal. App. 5th 713 (2017)

Court of Appeal

What the court had to decide

What standard of review applies to a trial court's determination of whether a liquidated damages provision is valid under Civil Code section 1671, subdivision (b)?

What it held

When the facts are undisputed and lead to only one reasonable conclusion, appellate review is de novo; otherwise, the trial court's factual findings are reviewed for substantial evidence.

In the court's words
It is appropriate for an appellate court to independently review the validity of a contractual provision under section 1671, subdivision (b) only when the facts are undisputed and lead to one reasonable conclusion.

Jade Fashion & Co. v. Harkham Industries, Inc., 229 Cal. App. 4th 635 (2014)

Court of Appeal

What the court had to decide

Whether the $17,500 discount provision in the settlement agreement was an unenforceable penalty or forfeiture under Civil Code section 1671.

What it held

The court held that the trial court properly granted summary judgment on the breach of contract claims, and thus the $17,500 discount provision was not an unenforceable penalty or forfeiture.

In the court's words
We conclude that the trial court properly granted summary judgment on the breach of contract claims.

McGuire v. More-Gas Invistment, LLC, 220 Cal. App. 4th 512 (2013)

Court of Appeal

What the court had to decide

Whether the payment provisions in the contracts were unenforceable penalty provisions or valid provisions for alternative performance.

What it held

The trial court erred in granting summary adjudication because More-Gas's motion failed to eliminate the possibility that the contractual provisions were valid provisions for alternative performance rather than unenforceable penalties.

In the court's words
we conclude the trial court erred because More-Gas’s motion for summary adjudication failed to eliminate the possibility that the contractual provisions in question were instead valid provisions for alternative performance.

Greentree Financial Group, Inc. v. Execute Sports, Inc., 163 Cal. App. 4th 495 (2008)

Court of Appeal

What the court had to decide

Whether the stipulated judgment amount in a settlement agreement constitutes a valid liquidated damages provision or an unenforceable penalty under Civil Code section 1671.

What it held

The stipulated judgment is an unenforceable penalty because it bears no reasonable relationship to the range of actual damages the parties could have anticipated from a breach of the settlement agreement.

In the court's words
Under consistent authority, the judgment constitutes an unenforceable penalty because it bears no reasonable relationship to the range of actual damages the parties could have anticipated would flow from a breach of their settlement agreement.

Utility Consumers' Action Network, Inc. v. AT&T Broadband of Southern Cal., Inc., 135 Cal. App. 4th 1023 (2006)

Court of Appeal

What the court had to decide

Is a liquidated damages provision in a consumer services contract invalid because it was unilaterally set by the business without individual negotiation?

What it held

No, the provision is valid if the business made a reasonable endeavor to estimate actual damages, even if not individually negotiated.

In the court's words
We agree that the trial court correctly interpreted the law applicable to liquidated damages provisions in this type of consumer contract.

Morris v. Redwood Empire Bancorp, 128 Cal. App. 4th 1305 (2005)

Court of Appeal

What the court had to decide

Whether the $150 termination fee in a credit card merchant agreement constituted a liquidated damages provision under Civil Code section 1671.

What it held

The termination fee is not a liquidated damages provision because it is triggered by the merchant's voluntary termination, which is not a breach of contract, but rather an alternative to performance.

In the court's words
Because the agreement expressly allows the merchant to terminate at any time, imposition of the fee is not dependent upon any breach of contract and is therefore not a liquidated damage.

Source: Caselaw Access Project, CC0 1.0 Universal (public domain dedication).

Related sections

CIV § 1670.5 Courts May Refuse Unconscionable Contracts - CIV § 1670.5 CIV § 1668 Contracts exempting liability for fraud: CIV § 1668 CIV § 3301 Lost profits must be clearly ascertainable - CIV § 3301

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We copy this text from the official publisher and re-check it against that source on every page load, but we cannot guarantee it is complete, current or free of error, and we accept no liability for any reliance on it. An amendment can take effect before a consolidation catches up. The publisher's own copy is linked below; where the two differ, it is the official one that counts.

This page reproduces the text of CIV § 1671 in force at the date shown and explains it in general terms. It is not legal advice and takes no account of the circumstances of your case, which can change the answer completely. For a live dispute, for limitation periods, and before taking any step in court, consult a qualified lawyer in California.

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