The Unconscionability of a Liquidated Damage Clause: A Practical Application of Behavioral Decision Theory.

Abstract

A liquidated damage clause, if it provides for an amount that is subtantially less than actual damages, can operate to exculpate liability. If a liquidated damage clause can be shown to result from overreaching and operates to create unfair surprise, the result suggests the presence of uncosncionability. In this article I explore the issue within the context of Behavioral Decision Theory and conclude that research in cognitive psychology suggests that people can be manipulated into accepting a contract term and unwittingly disreguarding the consequences of that decision. The example detailed in the article involves contracts routinely used in the emergency response industry. People who contract for such services are asked to accept a liquidated damage clause fixing damages at no more than $250. The advertsing used in connection with this type of service creates the impression that the service provider is a professional who can be trusted to perform without limitation. I propose that if it can be shown that the advertising manipulates the consumer by appealing to biases and heuristics creating cognitive distortions resulting in acceptance of the declaration of trust and further encourages the consumer to dispense with reading the details of the pre-printed standard form contract provided by the service provider, care should be taken to determine if the liquidated damage clause is tainted by unconscionability.

Keywords: Bahvioral Decision Theory, insufficient liquidated damage clause, personal service contracts, emergency response industry, procedural unconscionability, substantive unconscionability, cognitive distortion, cognitive baises and heuristics

JEL Classification: D1, K12, K19