In Part 1 of our article we discussed the benefits of a liquidated damages clause and ways liquidated damages are determined. In this article, we will cover what makes the clause enforceable and unenforceable.
The Clause is Not a Penalty
When drafting this clause into a contract, parties must understand that an estimation of damages is not a penalty for the breaching party. If the liquidation clause in the contract is used by the non-breaching party as a means to punish the breaching party, the contract will be considered void and unenforceable in a court of law. An example of what would look like a penalty would be using language that shows an increasing monetary penalty for the same infraction over a period of time. Remember, liquidated damages can become complex and depends on each contract. Get legal counsel if you feel liquidated damages are being used as a penalty against you.
What Voids the Clause
The courts will determine if the amounts estimated were reasonable when parties entered into the contract and will also look at the amount of the damages sustained when the breach occurred. The courts will then determined if the liquidated damage amount should be enforced.
If an amount is deemed shocking in the court of law, it will be unenforceable as in the case of Hook v. Bomar, 320 F.2d 536 (5th Cir. 1968).
Keys to an Enforceable Clause
The key to a clause’s enforceability is to show that potential damages are difficult to quantify, the amounts are reasonable, the amounts are agreed upon in advance, and the amounts are not accessed as a means to punish the breaching party. It is also important to keep records throughout the course of the project due to the courts methods of evaluating the liquidated damage clause. A Tallahassee construction lawyer is an invaluable asset for drafting a legally sound contract that will be upheld in a court of law.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.