Liquidating damages

Generally, contracts that involve the exchange of money or the promise of performance have a liquidated damages stipulation. The purpose of this stipulation is to establish a predetermined sum that must be paid if a party fails to perform as promised. Damages can be liquidated in a contract only if (1) the injury is either "uncertain" or "difficult to quantify"; (2) the amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and (3) the damages are structured to function as damages, not as a penalty. A penalty is a sum that is disproportionate to the actual harm. "One View Too Many." Boston Bar Journal 34 (April).If these criteria are not met, a liquidated damages clause will be void. It serves as a punishment or as a deterrent against the breach of a contract. The American Law Reports annotation on liquidated damages states, "Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual harm caused by the breach. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty" (12 A. Penalties are granted when it is found that the stipulations of a contract have not been met. For example, a builder who does not meet his or her schedule may have to pay a penalty. The principle of requiring payments to represent damages rather than penalties goes back to the deals with the difference between a valid liquidated damages clause and an invalid penalty clause.

However, courts sitting in equity will seek to achieve a fair result and will not enforce a term that will lead to the unjust enrichment of the enforcing party.

an amount of money agreed upon by both parties to a contract which one will pay to the other upon breaching (breaking or backing out of) the agreement or if a lawsuit arises due to the breach.

Sometimes the liquidated damages are the amount of a deposit or a down payment, or are based on a formula (such as 10% of the contract amount).

Damages can be liquidated in a contract only if (1) the injury is either "uncertain" or "difficult to quantify"; (2) the amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and (3) the damages are structured to function as damages, not as a penalty. A penalty is a sum that is disproportionate to the actual harm.

If these criteria are not met, a liquidated damages clause will be void. It serves as a punishment or as a deterrent against the breach of a contract. "One View Too Many." Boston Bar Journal 34 (April).n.

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