Liquidated Damages In New Jersey

In New Jersey, liquidated damages, such as late fees, default interest rates, and prepayment premiums, are subject to the test of reasonableness, that is, whether the stipulated damage clause is reasonable under the totality of the circumstances. MetLife v. Washington Ave. Assocs., L.P., 159 N.J. 484, 493-95 (1999); Westmark Commercial Mortgage Fund IV v. Teenform Associates, L.P., 362 N.J.Super. 336, 341 (App.Div.2003). See also Norwest Bank Minnesota v. Blair Road Associates, L.P., 252 F.Supp.2d 86, 93-94 (D.N.J.2003) (evaluating default interest rate in a commercial contract using reasonableness standard). Within the analysis is the settled principle stated in Westmount Country Club v. Kameny, 82 N.J.Super. 200, 205 (App.Div.1964), that "[p]arties to a contract may not fix a penalty for its breach .... such a contract is unlawful."

Because stipulated damages "may constitute an oppressive penalty," "[h]istorically, courts have...