Contract liquidation minutes or the liquidated damages clause is the provision to pay a predetermined amount of damages if a party breaches a contract.

When one of the parties in a contract fails to perform its part, it amounts to a breach of contract. The non-breaching party is usually entitled to claim damages for the breach. The traditional approach is to sue for actual damages caused by the breach.

Liquidated Damages Clause

Contract law and recoverable damages vary with the state. For instance, in Georgia, you can recover damages that arise naturally and in the normal course of things contemplated by the parties at the time of entering into the contract, as the likely result of the breach. In other words, the suing party must establish the actual damages.

For example, if an event planner cancels a meeting promised to an hotelier, the actual economic impact of such cancellation on the hotel must be computed. The plaintiff must first assign a monetary value to the damage caused by the breach. This can get complicated since neither party actually knows the financial consequences of a breach until the breach actually takes place. Hence, liquidated damages clause is commonly used in meeting industry contracts.

Liquidated damages are the consequences of breach, predetermined by the contracting parties at the time of forming the contract. The liquidated damages clause gives an opportunity to the parties to identify and agree to fair and reasonable damages for breach of a contract, rather than arguing over the actual amount of damages after the breach occurs.

Most of the meeting contracts nowadays include a liquidated damages clause. This helps the parties avoid unnecessary litigation over computation of damages at a later stage.

Unless deemed to be unenforceable, the liquidation damages clause is binding on all the parties.

Liquidation Damages vs. Penalty

You should draft the liquidated damages clause in such a manner that it does not amount to penalty. A payment can take the form of a penalty if the breaching party is required to pay more than the likely damages arising from the breach.

Breach of contract should, in a way, offer a choice to the parties. If a party does not want to perform its part, it shouldn't be compelled to. If the non-breaching party is compensated in a manner that it ends up being in the same financial position as it would be in if the contract had been performed without any breach, there shouldn't be any problem. However, if a contract requires a party to pay 200 percent of likely damages resulting from the breach, it would amount to a penalty.

When the damages arising from a breach of contract can be measured with reasonable certainty or when the agreed amount of compensation blatantly exceeds the amount of actual damages, courts usually consider such agreements as being in the nature of an unenforceable penalty.

Agreeing to a liquidated damages clause does not prevent the parties from litigating their validity at a later point in time. The party questioning the liquidated damages clause must either prove that the damages arising from the breach can be accurately measured or that the agreed damages are blatantly in excess of the actual damages. On proving either of these elements, courts treat the liquidated damages clause as an unenforceable penalty.

Liquidation Damages Clause and Mitigation

Generally, the victim of a breach has a legal obligation to mitigate the damages caused by a breach. In the context of meetings, the hotel or the facility is expected to take reasonable steps to resell the meeting space. However, if the contract includes a liquidation damages clause, no such duty exists to mitigate the damages and hence, the facility need not make any efforts to resell the space.

When Is a Liquidated Damages Clause Allowed?

Liquidated damages are allowed only in the following situations:

  • The loss or damage arising from a breach of contract is uncertain.
  • Considering the anticipated harm, the amount of liquidated damages is fair and reasonable.
  • It's difficult to prove the amount of loss or damages.
  • No other remedy is available to cover the damages.
  • The damages are intended to serve as a protection against the breach, rather than as a penalty for the breach.

Courts do not allow liquidated damages clauses in the following situations:

  • The agreed damages are for an amount extremely disproportionate to the loss.
  • The agreed damages are intended to punish the breaching party.
  • The breach is just a delay in payment.
  • The amount of damages can be easily estimated.

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