This post and the next will look at some of the frequent nagging questions and issues you’re likely to have involving liquidated damages, including: What Are Liquidated Damages?
Usually they apply to some specific type of breach of the contract, not any breach of any promise anywhere in the contract.
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.
Why would you include a liquidated damages provision in your contract?Moreover they also know how much they have at risk. This makes proving damages from late substantial completion very hard in most cases.For example, imagine the project is a new auto dealership.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.