Should You Have Liquidated Damages Clauses In Your Contracts?

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In all likelihood, you’ve agreed to a contract that includes a clause to the effect of “In the event of a breach by Party A, the parties agree that Party B shall be entitled to damages in the amount of $10,000”. This is what is known as a liquidated damages clause. Liquidated damages are a dollar figure or formula for calculating in damages agreed to in advance by the parties in the event of a breach of the agreement. Liquidated damages are used where it may be difficult or even impossible, or time- and resource-consuming, to calculate actual damages in the event of a breach. The idea of liquidated damages is to achieve cost-containment in litigation and to promote judicial economy, which is why courts often enforce liquidated damages Generally speaking, courts will enforce liquidated damages clauses only where the calculation of actual damages is too difficult, and where the liquidated damages are reasonable — excessive liquidated damages may be considered penalties, which are disfavored and almost always unenforceable under contract law. So should you have a liquidated damages clause in your agreements? Certainly if damages from a breach of your agreement would be difficult to calculate — liquidated damages can reduce the costs of recovery. But what if damages are more readily calculable? Technically speaking, liquidated damages are only supposed to be used and upheld where calculating actual damages is impractical. However, some courts seem to be favoring the use of liquidated damages as a means of achieving judicial economy — courts do not need to hold trials on the issue of damages where a liquidated damages clause exists (although it may leads to motions for parties who want to get out of the clause). Having a liquidated damages clause can save you time and resources in the event of a lawsuit following a breach. Courts also seem to be looking more and more favorably upon liquidated damages clauses. However, it is important to be cognizant that liquidated damages must be reasonable; therefore, if actual damages are readily calculable and out of proportion to the liquidated damages, it becomes more likely that a court will refuse to enforce the clause.