What is a Liquidated Damages Clause?

A liquidated damages clause ensures that you are compensated if the party you hired fails to do the duty they were required to do. It should include a clause that sets out the specific amount of damages you are to receive if a specific type of breach happens. This amount will need to be negotiated with the contracted party, but it should represent an estimate of the damages you will sustain if they do not perform to a certain standard.

This specificity is required to prevent the case from going to court and having a judge decide the amount of money owed by the other party, which can be costly for both you and your contractor.

Examples of Liquidated Damages Clause 

There has been a great deal of dispute over the enforceability of liquid damages clauses. Few vendors believe they give too much power to one party in a contract and that they undermine the right of due process that every individual and business is entitled to.

California’s Fourth District Court of Appeals has not long ago clarified the factors that courts will take into account when determining whether a contract with a liquidated damage clause can be enforced. An example of this is Vitatech International, Inc. versus Sporn, which was a breach of contract lawsuit settled just before it was set to go to trial. The defendant agreed to pay Vitatech $75,000 and executed a stipulation for entry of judgment against them for the full amount Vitatech pursued—around $300,000—if the defendant did not pay the $75,000 on time.

The court decided that the stipulation determined to the claims in dispute in unresolved litigation, that the defendant did not admit liability in the implicit claims, nor did they admit the amount of damages caused by the underlying breach. In a few words, the court decided that the stipulation could not be deemed a discount. The court also came to the decision that the $300,000 claim was in excess of the anticipated damages Vitatech might suffer if they did not receive the $75,000 and that it was an unenforceable penalty.

Is Your Liquidated Damages Clause Lawful in California?

It is possible to enforce a liquidated damages clause in the state of California. The amount agreed to at the time that you and the other party sign the contract must be a reasonable estimate of losses that may be agonized should they fail to perform. In the event if you insist on an amount that aims to punish the other party for falling short of the expected quality of standards, the clause will be considered a penalty and unenforceable to initiate..

A liquidated damages clause is considered void in cases in which a party is selling personal property or services intended to benefit themselves, their family, or their household. However, the clause can be enforced in cases in which it is impossible or very difficult to resolve or repair the damage done and the estimate of the latter is reasonable.

California Liquidated Damages Contract Law

There is no way to keep a liquidated damages dispute out of court. Even if the vendor you employed signed a contract that contains one, they may challenge your right to enforce it. The standards of such enforcement are explained by the courts and arbitrators. In the event that you must go through this experiment, you will need the help of an attorney that specializes in the matter. The judges  will review the language of the clause in the context of the entire agreement. They will also take into account your business relationship with the other party of the conditions of your agreement and interactions. When you hire an experienced attorney they can enforce the liquidated damages clause that is in your agreement.

Determining the Reasonable Estimate of Damages

It is imperative to be diligent and informed when determining the estimate of damages that you will incur in the event of a breach. Considering the same factors as the court will if the clause is ever disputed. Here are a few of the questions you should ask yourself when determining your matter:

• Did the legal team of the other party participate in the drafting of the contract?
• Is the liquidated damages clause clear in the contract?
• Is the amount you are asking for reasonable given how much the prospective damage may cost you?
• How hard would it be to prove that the other party breached the contract?
  
  You must be aware of the fact that you may not know the events and conditions that will surround the enforcement of such a provision—if you ever need to enforce it. You must take great care to come up with enforcement language and a sum of money that will not be disproved by a court many years later.