A liquidated damages clause may be included in some contracts. It is basically a contractual provision which determines in advance the amount of damages to be paid if a party breaches the contract. That is, the parties agree upon the damages figure beforehand when negotiating the contract.
Liquidated damages clauses are generally enforceable, so long as the amount stated is reasonable in light of the contract’s subject matter. Such clauses are used when the parties have difficulties calculating the exact measure of damages in the instance of a breach.
Liquidated damages clauses are commonly used for contracts where an uncertain amount of late fees must be applied. For example, a contract for a university dorm rental may state:
“Students who cancel their dormitory housing agreement after moving into their room shall pay liquidated damages amounting to $5.00/day for the remainder of the rental term (not to exceed $500.00).”
In this example of a liquidated damages clause, the damages are difficult to calculate because the university can’t really predict when a student might default on their dorm agreement. A court will likely uphold such a clause if the $5.00/day charge is considered reasonable according to market value calculations.
Liquidated damages clauses are not allowed if:
- The damages being requested are for an unconscionable amount (for example, if the liquidated damages stated are disproportionate to the loss, or if the sum greatly exceeds a reasonable estimate of the actual damages)
- The liquidated damages are intended to punish a breaching party rather than compensate the non-breaching party for losses
- The default was simply a mere delay in payment
Thus, even if the jurisdiction allows for liquidated damages clauses, the parties need to ensure that the clause follows the various requirements under contract laws. As with any contract clause or agreement, liquidated damages clauses should be drafted and reviewed by a competent contracts lawyer who is familiar with the rules in the area.
Liquidated damage clauses can sometimes be necessary for certain types of contractual agreements. They allow the parties to recover losses in situations where it may be difficult to calculate the damages. It’s in your best interests to hire a qualified business lawyer for assistance with liquidated damages clauses. Your attorney can help you draft and review the clause for accuracy. Your lawyer can also represent you in court if you need to file a lawsuit due to a violation of a liquidated damages clause.