Liquidating damages clause
For example, the pre-set liquidated damages amount must be a estimation of the damages that would occur in the event of a breach.If the stipulated amount is not reasonably related to the potential damages, then it will be considered a penalty, and it will be unenforceable. Even if both parties agree to include the clause in their contract, it may not be enforceable.It is intended to give you a broad overview of very limited issues; it is not intended to apply to every situation or to address every circumstance that may arise.As liquidated damages clauses are essential to compensate principals to construction contracts, it is important that they are drafted with proper consideration and are ultimately enforceable.Relevantly, the Court considered that liquidated damages would not be triggered on the occurrence of minor or trivial matters, such as a defective lightbulb.Rather, liquidated damages would be triggered as a result of a failure to achieve completion, which was dependent on the failure to achieve a singular obligation - the obligation to reach practical completion by the date of practical completion.The contract stated that the liquidated damages rate increased incrementally based on the length of the delay.
This information is provided for informational purposes only and does not constitute legal advice.
While the freedom to bargain for and agree upon terms is a bedrock of contract negotiations, the law of liquidated damages puts some limits on this freedom. Despite the parties’ apparent agreement to include a liquidated damages clause in their contract – after all, it was in their contract -- the party seeking to enforce the clause could not offer a reasonable explanation of the liquidated damages amount was calculated.
On this basis, the court rejected the provision, saying it was not reasonable and calling it a penalty. Remember, whether the liquidated damages are reasonable is not affected by the amount of actual damages incurred because the analysis is based on the circumstances existing at the time the parties enter the contract.
It is important when drafting a liquidated damages clause to limit the extent to which it might be interpreted as a penalty.
This all comes down to the drafting and the underlying methodology for valuing the liquidated damages rate in the contract. A clause will be construed as a penalty where the sum payable (i.e.
Should you include a liquidated damages provision in your contract?