Sunset Trails, Inc., provides private recreational facilities, entertainment, and catering for large corporate groups, conventions, and other private parties. On March 25, 1996, Nortex Drug Distributors, Inc., signed a contract reserving Sunset Trails' facilities and catering for a company picnic on July 7, 1996. The contract provided for a minimum of 400 persons at $17.50 per person, for a total of $7,000. The contract contained the following cancellation damages provision:
Due to the exclusive nature of the CIRCLE R RANCH for group bookings only, the Client will be responsible for payment of the full contract . in the event that this function is cancelled.
On July 2, 1996, five days before the scheduled event, Nortex informed Sunset Trails that it was canceling the picnic. Because of the late notice, Sunset Trails was unable to rebook the facilities for July 7. Sunset Trails sent Nortex a bill for $7,000. Nortex refused to pay the bill and contended that the cancellation provision in the contract was an unlawful penalty provision. Sunset Trails argued that the provision was a valid liquidated damages provision. How should the court rule, and why?