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What are liquidated damages?

On Behalf of | Jun 14, 2023 | Firm News

When someone breaches their obligations to you under a contract, it can cause you and your business significant damages.

This is why it is important to include a liquidated damages clause in your contracts. It is often difficult to estimate the exact cost of damages that someone will incur from a breach of contract.

What do liquidated damages do?

Liquidated damages are meant to be an estimate of these vague or intangible damages that occur when a contract is breached. They should represent a fair representation of the losses that a party is expected to suffer if the contract is breached.

The purpose of liquidated damages is to cover you for your losses, not to punish the other party for breaching the contract. Many times, a breach of contract happens through no direct fault of the other party, but from an event or occurrence out of their control.

Another purpose of liquidated damages is to make a fair estimate of losses in cases where an exact calculation of damages is nearly impossible. A common example is if one party reveals the trade secrets of another party.

If you are the party whose trade secrets were breached, there is a strong chance that you will now lose out on revenue from your product. However, you will not be able to calculate the specific amount you lose out on. This is where the liquidated damages clause in your contract will come in handy.

Can I get out of a liquidated damages clause?

Once a liquidated damages clause is in place, it can be difficult to get out of it. If you are asked to pay liquidated damages because you breached the contract, you must prove to a court that the number of liquidated damages was unreasonable under the existing circumstances when you made the contract.

The best way to handle a liquidated damages clause is to have your contracts drafted and reviewed by a professional before you sign them.