An Omaha technology vendor signs a service contract with a clause that reads clean and confident: if the customer cancels early, the customer owes a flat $45,000. Two years in, the customer walks. The vendor sues for the full amount and expects a quick judgment on the contract language. Instead, the Nebraska court throws the clause out. The evidence shows the vendor’s real losses were roughly half that figure, and the contract was structured so the vendor may have come out ahead on the early exit. The number was not a genuine estimate of harm. It was a club, and a Nebraska court will not swing it.
That result tracks a real Nebraska Court of Appeals decision, and it captures the central lesson of this area of law. A liquidated damages clause is a powerful tool for a Nebraska business, but only when it is written as a reasonable forecast of harm rather than a threat designed to punish a breach. Get the distinction wrong and the clause protects nothing.
What Is a Liquidated Damages Clause?
A liquidated damages clause fixes, in advance, the sum one party will pay the other if it breaches the contract. Parties use these clauses when actual damages from a breach would be hard to calculate after the fact, and both sides prefer the certainty of a set figure to the cost and risk of litigating losses later. A well-drawn clause saves everyone the expense of proving damages and lets each party price the risk of the deal at the outset.
Nebraska law respects that bargain. The Nebraska Supreme Court has consistently upheld the right of contracting parties to privately agree on the amount of damages payable for a breach, provided the stipulated sum is reasonable in light of the circumstances. The word doing the work in that sentence is reasonable. A clause that crosses from reasonable estimate into punishment stops being a liquidated damages provision and becomes an unenforceable penalty, and Nebraska courts will not enforce a penalty no matter how clearly the contract spells it out.
Is a Liquidated Damages Clause Enforceable in Nebraska?
Yes, when it passes the state’s two-part test. Nebraska has no single statute that governs every liquidated damages clause. For most contracts, the rule comes from the Nebraska Supreme Court’s common law. For contracts involving the sale of goods, a specific Uniform Commercial Code provision applies, discussed below. Both bodies of law ask the same underlying question: does the fixed number bear a reasonable relationship to the harm a breach would actually cause?
The label the parties put on the clause does not decide the issue. Calling a sum liquidated damages does not make it enforceable, and calling it a penalty does not necessarily make it void. A Nebraska court looks past the caption to the substance of the provision and the circumstances that existed when the contract was signed.
The Two-Part Nebraska Test
The controlling standard comes from Kozlik v. Emelco, Inc., 240 Neb. 525, 483 N.W.2d 114 (1992). Under Kozlik, a stipulated sum is treated as liquidated damages only where two conditions are met. First, the damages the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty. Second, the amount stipulated is either a reasonable estimate of the damages that would probably be caused by a breach, or is reasonably proportionate to the damages that have actually been caused by the breach.
Both prongs must be satisfied. A clause that fixes a sum for damages that were easy to calculate all along fails the first prong. A clause that sets a figure wildly out of line with any realistic harm fails the second. When either prong fails, the clause is a penalty. As the Kozlik framework puts it, if the damages may be easily and readily ascertained, and if the amount stipulated is more than sufficient to compensate for the breach, it will be regarded as a penalty rather than liquidated damages.
The practical takeaway for any Omaha business is that a liquidated damages clause has to be built on a real problem. If the harm from a breach is genuinely hard to pin down, and the number reflects an honest attempt to estimate it, the clause has a strong claim to enforcement. If the harm is easy to measure, or the number was chosen to scare the other side into performing, the clause is exposed.
When Does a Clause Become an Unenforceable Penalty?
Nebraska courts strike liquidated damages clauses when the fixed figure is disproportionate to the loss. The Nebraska Court of Appeals confronted exactly that situation in Computer Support Services, Inc. v. Vaccination Services of America, Inc. (Neb. Ct. App. 2017), a dispute between an Omaha-area technology vendor and its customer. The service agreement carried an automatic renewal and required advance notice to cancel without penalty. When the customer terminated early, the vendor sued for $45,500 in liquidated damages.
The court held the clause was an unenforceable penalty. The vendor’s own evidence showed actual damages of roughly $21,000, less than half the amount it sought to collect. Worse for the vendor, the record suggested its costs under the arrangement exceeded its revenue, meaning the early termination may have spared it money rather than causing loss. A liquidated damages clause is not meant to hand the non-breaching party a windfall. It is meant to compensate for harm that is difficult to measure. A figure more than double the proven loss, in a deal the vendor arguably benefited from ending, was compensation for nothing. It was a penalty.
That decision draws the line clearly. Nebraska courts have found a liquidated damages provision unenforceable when actual damages amounted to less than half the stipulated sum. Disproportion of that scale signals that the clause was never a forecast of harm. It suggests the number was set to punish, and punishment is what Nebraska law forbids in a private contract.
What “Difficult to Ascertain” Really Means
The first prong of the Kozlik test is where many clauses live or die, so it deserves a closer look. The difficulty of ascertaining damages is judged as of the time the contract was made, not with hindsight after the breach. The question is whether, at signing, the parties would have had a hard time predicting what a breach would cost.
Some categories of harm are notoriously hard to quantify in advance, and Nebraska courts recognize that. Lost profits, missed business opportunities, and reputational harm are examples where a court is more willing to accept a reasonable fixed sum, because proving those losses precisely after a breach is often impractical. A construction delay is another common example. The downstream cost of a project finishing late, in lost use, financing, and knock-on scheduling, is genuinely difficult to calculate at the front end, which is one reason liquidated damages clauses are standard in Nebraska construction contracts and are frequently enforced there.
By contrast, where the damages from a breach are straightforward to compute, a liquidated damages clause has a weaker footing. If a contract’s only foreseeable breach is the failure to pay a defined sum, the actual damages are simply that sum plus interest, and a court will see little reason to substitute a different, larger figure. The clause has to solve a real measurement problem to justify displacing the ordinary rule that a party recovers its proven losses.
Liquidated Damages in Contracts for the Sale of Goods
When the contract is one for the sale of goods, a separate rule governs. Nebraska’s version of Uniform Commercial Code section 2-718(1) provides that damages for breach may be liquidated in the agreement, but only at an amount that is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. The statute then states the limit in plain terms: a term fixing unreasonably large liquidated damages is void as a penalty.
The UCC standard and the common-law Kozlik test point in the same direction. Both tie enforceability to reasonableness measured against real harm, and both void an oversized figure as a penalty. For an Omaha business selling products, the safest course is to treat the sale-of-goods clause the same way you would any other liquidated damages provision: anchor the number to a defensible estimate of loss and be ready to explain how you got there.
How to Draft a Liquidated Damages Clause That Holds Up
The drafting goal in Nebraska is a clause that reads as a good-faith estimate rather than a threat. Start by identifying the specific harm the clause is meant to cover and confirming that the harm would in fact be hard to measure after a breach. If the loss is easy to calculate, a liquidated damages clause is the wrong tool and invites a challenge.
Tie the amount to that harm with a rationale you can produce later. A sum that reflects documented cost inputs, projected lost margin, or a per-day delay figure grounded in real project economics stands up far better than a round number chosen for its deterrent effect. Avoid a single flat figure that applies to every conceivable breach regardless of timing or severity, since a one-size number rarely stays proportionate across different breaches. Where it fits, a graduated formula tied to the extent of the breach tracks actual harm more closely and reads as an estimate rather than a penalty. Because a Nebraska court weighs reasonableness as of the signing date, keeping notes on how the figure was calculated can matter as much as the clause itself if the provision is later tested in complex litigation.
Frequently Asked Questions
Is a liquidated damages clause enforceable in Nebraska?
Yes, if it satisfies the two-part test from Kozlik v. Emelco, Inc., 240 Neb. 525 (1992). The anticipated damages must have been difficult to ascertain when the contract was signed, and the stipulated amount must be a reasonable estimate of, or reasonably proportionate to, the actual harm. A clause that fails either prong is an unenforceable penalty.
What makes a liquidated damages clause an unenforceable penalty in Nebraska?
A clause becomes a penalty when the fixed sum is out of proportion to the real loss, or when the damages were easy to calculate and the number simply exceeds them. Nebraska courts have voided provisions where the actual damages were less than half the stipulated amount, treating the excess as punishment rather than compensation.
Are liquidated damages treated differently for the sale of goods?
Contracts for the sale of goods are governed by Nebraska’s UCC section 2-718(1), which allows liquidated damages only in an amount reasonable in light of the anticipated or actual harm and the difficulty of proving loss. An unreasonably large amount is void as a penalty, so the standard mirrors the common-law rule.
Can a Nebraska court reduce a liquidated damages figure it finds too high?
Nebraska courts generally do not rewrite the number to a reasonable level. If the clause is an unenforceable penalty, it fails, and the non-breaching party is left to prove its actual damages under the ordinary rules. That all-or-nothing exposure is why the clause has to be drafted defensibly from the start.
Should an Omaha business have a liquidated damages clause reviewed before signing?
Yes. Because enforceability is judged on the language and the circumstances at signing, the time to get the clause right is before the contract is executed, not after a breach. A review that ties the figure to a genuine estimate of hard-to-measure harm is the reliable way to end up with a provision a Nebraska court will enforce.
Talk to an Omaha Contract Attorney
A liquidated damages clause either gives your Nebraska business certainty or gives you nothing, and the outcome is fixed by how the clause is drafted and the facts at signing. Horgan Law LLC drafts, reviews, and litigates liquidated damages provisions and the contract and business law disputes that follow when one is challenged. Contact us at 402-965-0652 or visit horganlawfirm.com/contact-us.
This article discusses general principles of Nebraska law and does not constitute legal advice or create an attorney-client relationship. Every agreement turns on its own facts.