Liquidated Damages Can Help if You Can’t Determine Actual Damages
When you draw up a contract, one of the things that you will think about is what your damages would be, when or if the contract is violated. There is an assumption that if the contract is breached, you will have tangible evidence of what you lost and that a court will award you what you lost as a result of a breach.
When Damages Are Not Obvious
But there are many situations where it is not clear what your damages would be if a contract was violated. Take for example the following situations:
-An employee breaches a noncompete clause, and is doing business in your business market or geographic area. It may be very difficult to exactly ascertain how much business the ex-employee is doing, or how much your company is being damaged by the employee’s breach;
-Someone uses (steals) your copyrighted information, or information that took you years and thousands of dollars to develop. That information by itself has little value, but to your company, the information is invaluable;
-You use a contractor who performs a vital function to your business. If that contractor does not do the job, you may lose customer goodwill, and your good reputation in the community—things that are invaluable, but do not have an exact way of being calculated.
Liquidated Damages Clauses
There is a way to protect yourselves in these situations. Liquidated damages clauses in contracts establish a predetermined amount of damages in the event of a breach. If the contract is breached, there is no need to prove damages—the damage amount in the contract sets the amount of damages the breach has caused you.
Restrictions on Liquidated Damages
You cannot always use liquidated damages, or put them in every business contract. Liquidated damages are only allowable where the amount of your damages is truly incalculable, vague, or incapable of being quantified (such as in the examples above).
Additionally liquidated damages clauses cannot be punitive. In other words, they cannot be set so high that they are merely a way to punish the other party. Thus, your liquidated damages clause must be reasonable. Microsoft’s reasonable damages in the event of a breach of its confidentiality agreements will be much more than a small, local company’s damages.
Sometimes a court will look to see if the liquidated damages amount bears some relationship to what the actual damages could be. For example, if your company has never earned $10 million in its entire existence, it’s unlikely that a single employee’s breach of a noncompete agreement would result in $10 million worth of damages.
Despite these restrictions, liquidated damages can be a deterrent to anyone thinking of breaching your agreements, and can save you some time litigating the amount of your damages later on, especially when the amount of damages may be impossible to ever determine.
Consult with our West Palm Beach commercial litigation attorneys with questions, or if you have a breach of contract case. Let our lawyers at Pike & Lustig, LLP, help you. Call us at 561-291-8298 to get a consultation.