CCP § 1671(b) asks whether the clause was reasonable at the time of contracting, not whether it matches actual post-breach damages. Retrospective analysis (comparing clause amount to what actually happened) is impermissible. Many litigants don't know this and waste their briefs on irrelevant post-breach comparisons. The Gormley six-factor framework gives structure for the correct analysis.

California's LD Clause Test Is Backward-Looking -- and Most Litigants Brief It Wrong

Your client's commercial contract has a liquidated damages clause. The other side breached. Now you're in court -- and opposing counsel is spending most of their brief explaining what the damages actually turned out to be. They've just told the court they don't understand the test.

The Clause

What the Law Requires

California Civil Code § 1671(b) states: "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."

The operative phrase is "at the time the contract was made." The test is backward-looking. Courts assess whether the clause represented a reasonable estimate of what a breach would cost at the moment the parties signed -- not what damages actually materialized after the breach occurred. Retrospective analysis of post-breach damages is impermissible. Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970.

Courts evaluate the clause through the six Gormley factors. Gormley v. Gonzalez (2022) 84 Cal.App.5th 72, 81:

The relationship between the clause amount and the range of harm reasonably anticipated at the time of contracting
The relative equality of bargaining power between the parties
Whether the parties were represented by lawyers
Whether the parties anticipated that proof of actual damages would be costly or inconvenient
The difficulty of proving causation and foreseeability of harm
Whether the LD provision appears in a form contract (adhesion)

The burden falls on the party challenging the clause. The clause is presumptively valid; the challenger must affirmatively show it was unreasonable at contracting.

What the Corpus Shows

California trial courts are actively applying the Gormley framework. In May 2026, the Los Angeles Superior Court (Dept. 732) struck down a 1%/day late payment fee on a settlement sum -- a 365% annual equivalent -- as bearing "no reasonable relationship to the range of actual damages the parties could have anticipated would flow from a breach," citing Gormley. In the same month, the Orange County Superior Court (Dept. C25) found a triable issue under § 1671(b) on an 18% fee assessed against all identified tax credits for a 14-day information delay -- the court called the provision "arguably unreasonable," and the case survived summary judgment.

Both cases turned on the first Gormley factor: the ratio between the clause amount and what the parties could have reasonably anticipated the breach would actually cost.

What Counsel Does

If you are the enforcing party:

Lead with the statutory presumption. The clause is valid; the burden is on the challenger to prove otherwise. Frame every motion and brief from this starting position.
Brief the six Gormley factors affirmatively for your clause. Show that at contracting, the parties understood: (a) what a breach would cost in lost opportunities, reputational harm, and downstream transaction costs; (b) that proving those costs with precision would require expensive litigation; and (c) that the clause amount fell within the reasonable range.
Attach contracting-time evidence: market conditions at signing, deal size relative to clause amount, industry norms for comparable clauses, the sophistication of the parties, and whether counsel was involved.
Do not make retrospective arguments. What actually happened after the breach is legally irrelevant under § 1671(b). Presenting retrospective damages comparisons -- even favorable ones -- signals unfamiliarity with the framework and may undermine your credibility on the factors that matter.

If you are the challenging party:

Understand that this is an evidentiary exercise. Argument alone will not overcome the § 1671(b) presumption. You need evidence on the Gormley factors, not just a brief asserting the clause is "too large."
Focus on the first and sixth factors. The most powerful attack is a large ratio between the clause amount and what the parties could have anticipated from the specific type of breach at issue -- combined with evidence of adhesion or unequal bargaining power. Both weaken the reasonable-estimate argument.
Build your record at contracting. What was the range of possible harm from the specific breach that occurred? Was the clause amount within that range or wildly outside it? Expert evidence on anticipated harm is common in these disputes.
Avoid the retrospective trap even in your favor. Your argument is that the clause was unreasonable at contracting -- not that actual damages turned out to be smaller. Courts will look past the post-breach numbers; anchor your challenge to what the parties should have known at signing.

This article is for educational purposes only and is not legal advice. All frameworks and sample language should be reviewed by a licensed attorney and adapted to your particular client, case, and situation.