Making Your Liquidated Damages Clause Legal and Enforceable

If you’re drafting a contract, there is always the uncertainty of, if the other side breaches the agreement, what your damages will be. In some cases, it’s clear, but in other cases, it’s not so clear.

In fact, there are some scenarios where you know that you would be financially harmed in the event of a breach, but you just don’t know how much harm you’d suffer, or the amount of harm, from a dollar figure standpoint, isn’t quantifiable.

Hard to Calculate

There are some losses that come from a breach of contract or from some other wrong, where the monetary damage is hard to calculate or measure.

Imagine losing your trade secrets, or something that could affect your business’ goodwill with the public. Imagine losing something in your business that doesn’t have a direct value to it, such as losing (or having stolen) a list of your customers.

Using Liquidated Damages

In these kinds of cases, a liquidated damages clause may be in order. A liquidated damages clause is a part of a contract that sets what your damages will be, in advance of any breach. In other words, if there is a breach (which still would have to be proven in court), then there is no argument about damages; they are set in stone, there and agreed to by the parties.

Why Use Liquidated Damages

Liquidated damages can be helpful to both sides of a contract, because they can eliminate uncertainty; both sides know what the penalties will be in the event that the contract is not followed through. Parties that are concerned that their damages are not quantifiable, such as in the situations named above, don’t have to worry about how they will demonstrate to a court what their damages are.

When Liquidated Damages are Legal

You can include liquidated damages in your contracts, so long as the agreed to amount has some reasonable relationship to the expected losses in the event of a breach.

In other words, the liquidated damages amount cannot be completely arbitrary, nor can they be intended just to punish the party breaching the agreement. In fact, saying that the liquidated damages amount is punitive, is one of the main defenses to a liquidated damages clause. That’s not to say you can’t have a large punitive damages amount — you can, so long as it is reasonable compared to what you would estimate your damages in the event of a breach would be.

To justify the enforceability of your liquidated damages clause, you also will have to show a court that your damages cannot be calculated in any traditional way — that is, that it is difficult if not impossible to get a definite calculation of your damages, in the event of a breach.

Include Terms in Your Agreement

Often, you can overcome having to prove these things to a court, by including it in your contract.

You can, for example, have the other side to the contract agree that your liquidated damages amount is reasonable, or that it would be impossible to calculate damages, to save you the burden of having to prove those things to a court.

Call our West Palm Beach commercial litigation attorneys at Pike & Lustig to help you review and draft your business agreements.

Source:

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