Can a Liquidated Damages Clause in Your Contract Help You?

When you draft and enter into a contract, especially one related to construction, you want to have an eye towards your damages—that is, what would you get in the event the other party to the contract didn’t fulfill their contractual obligations.

Sometimes the measure of your damages in the event of a breach, is easy to calculate. But sometimes it isn’t.

For example, imagine these scenarios:

• If a breach of a construction contract caused your business to lose parking spaces, it may be hard to measure how much business you may have lost
• If a breach of an agreement affects your business reputation, it can be hard to measure your damages in dollars and cents
• If a breach of a contract or agreement exposes your private trade secrets or something that gives you a competitive advantage over others, damages or losses can be hard to measure

Use of Liquidated Damages

To avoid having to prove damages in court in the event of a breach of a contract, you can agree, in advance, to the amount of damages that you would sustain, in the event there is a breach of contract. This is called a liquidated damage clause.

The good thing about liquidated damages, is that both parties know what their liability or financial exposure would be, in the event of a breach of contract. Litigation over a breach of contract becomes quicker and cheaper, because you don’t have to argue about the damages—they are already established in the contract itself.

Are They Allowed?

Liquidated damages clauses are legal—but they cannot be punitive. For example you couldn’t just arbitrarily say that you get a million dollars if the contract is breached, if that is far above any reasonable estimation of losses in the event of a breach. Not every large liquidated damages is automatically considered an illegal penalty; every liquidated damages will be evaluated in light of the contract itself.

To be considered legitimate liquidated damages, and not just an arbitrary punishment, the estimated damage amount must be reasonable, in light of the breach. There must be some rational or reasonable connection between the liquidated damages amount and the anticipated losses in the event of a breach of contract.

Liquidated damages can only be used, if it really can’t be determined what the damages from a breach of contract actually are or would be (such as in any one of the examples used above).

More Defenses?

Of course, using a liquidated damages clause can be helpful for the reasons mentioned above—but they also provide the breaching party an avenue to defend the breach of contract, by arguing the liquidated damages clause is just a penalty, or by arguing that it is unnecessary, because damages can be accurately proven.

Are you involved in a breach of contract case or do you have a construction law question? Call our Fort Lauderdale construction law lawyers at Sweeney Law P.A. at 954-440-3993 today.

Sources:

content.next.westlaw.com/practical-law/document/Ic7f341fab03511e398db8b09b4f043e0/General-Contract-Clauses-Liquidated-Damages-FL?viewType=FullText&transitionType=Default&contextData=(sc.Default)

leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0672/Sections/0672.718.html