When we put a business contract in place, we hope that everything works out as it should. We hope that the other party upholds their end of the bargain and that things proceed smoothly. Unfortunately, this is not always the case. Breaches not only occur in business contracts, but they are also not uncommon. This can lead to costly and time-consuming headaches for business owners to sort through, especially if litigation ensues. To help manage the potential crisis that can follow in the wake of a business contract breach, parties should consider including a liquidated damages clause in the contract itself.
Business Contract Liquidated Damages Clause
A liquidated damages clause is a contract provision that requires a party in breach of the contract to pay the other party a pre-determined sum in order to compensate them for the breaching party’s failure to comply with a specific obligation or duty as set forth in the contract. In other words, the liquidated damages clause sets forth the amount of payment a breaching party must pay to compensate the other party for said breach. The liquidated damages, therefore, act as reimbursement for the other party a specific amount for losses sustained in connection with a contract breach.
The purpose of a liquidated damages clause is not to penalize the breaching party. In reality, liquidated damages are intended to compensate the other party a reasonable estimation of the actual damages such a breach would cause them to sustain. In fact, the reasonableness of a liquidated damages provision will be critical to its enforceability. If enforceability of a liquidated damages provision is in question, the court will look to the reasonableness of the provision itself in light of a number of different factors, such as the relative bargaining powers of the parties to the contract.
In general, a liquidated damages provision will only be enforceable in a situation where a breach would result in damages that would be difficult to estimate. This, of course, means that setting the number of liquidated damages can be difficult. Each party to the contract should make efforts to provide a sound estimate of how costly a breach would be for their business and start negotiations there. Parties should strive to ensure that the liquidated damages amount is not punitive, but is reasonable under the circumstances.
Liquidated damages clauses can be extremely helpful in the event of a breach. After all, they are used in situations where it would be otherwise difficult to quantify damages sustained due to another party’s breach. This means that, without a liquidated damages provision, the parties are likely to go through extensive and expensive litigation just to arrive at a damages award. If there is a liquidated damages provision already in place, there is already an amount of damages that all parties have agreed upon in the event of a breach occurring.
Business Law Attorneys
Crafting sound business contracts that plan not just for the best, but also for the worst, can be a critical component in ensuring the continued growth and success of your business. At Jones, Gregg, Creehan & Gerace we use the legal tools at our disposal to create solid contracts for your business. Contact us today.