When you enter a contract with another party, you can include a clause that designates an amount of money agreed between yourselves that the injured party will receive in case of a breach. These pre-designated amounts are known as liquidated damages and are intended to cover specific losses incurred due to a breach of contract.
Liquidated damages serve two main purposes in a contract. First, they provide a measure of certainty for the contracting parties in the event of a breach. When you agree on a predetermined amount, you can save a lot of time and resources that would have otherwise gone into determining compensatory damages for a breach. Liquidated damages also act as a deterrent against potential breaches, given that all parties are aware of the financial consequences.
Are liquidated damages enforceable in court?
As with other clauses of a legally binding agreement, liquidated damages clauses in a contract are generally enforceable. However, the amount in question must be a reasonable estimate of the actual damages likely to result from a breach. Remember, liquidated damages are not intended to penalize the breaching party.
Additionally, the loss suffered by the injured party should be uncertain or difficult to quantify when entering the contract. A court may not enforce liquidated damages clauses if the losses arising from the breach can be easily ascertained.
Get a tailored solution for your contractual needs
Including liquidated damages clauses in a contract can be a valuable tool in protecting your business strategy. That said, due diligence in crafting and evaluating these clauses is crucial. You do not want provisions in your business contract that are unenforceable or overly one-sided. It can expose your business to unexpected losses or lengthy disputes.
Reaching out for legal guidance when drafting a contract can help ensure you do everything right and mitigate the risks of a potential breach.