Consider Liquidated Damages In Your Next Business Agreement
When entering into a contract, it’s always a good idea to look at the future, and ask yourself what would happen if your contract was breached. Likely, you would be able to file a lawsuit to collect your contractual damages; but what exactly are those damages, and how can you ensure that you recover the loss experienced by the breach of the agreement?
When Damages Aren’t Clear
In many cases, it’s easy to see what your damages are from your contract. If, for example, someone agrees to pay you for landscaping services, and you do the work, and no payment is made, your damages are the amount the other person agreed to pay you. That amount is usually specifically stated in your contract.
But in many cases, damages may not be quantifiable. In other words, the breach causes damage, but we can’t really calculate them. Some examples may be:
- A non-compete clause, where a former employee is doing business against your company in violation of the agreement. However, there is no way of knowing how much business he’s doing, or the exact amount his actions are costing your business.
- Items with sentimental or historical value. If someone agrees to fix a car that’s been in your family for 70 years, and ruins the car, the value of the car itself may not be representative of what it means to you, or of its replacement value.
- Someone steals from you and uses your copyrighted or trademarked information, or trade secrets. You know it’s damaging your brand, but there’s no way to really count in dollars how much the damage to your reputation has cost you.
Florida law does provide a mechanism for contracting parties to ensure they obtain damages, even in situations where the damages may be impossible to ascertain.
Liquidated Damage Clauses
Florida law allows parties to agree upon a damage amount in the contract. These are called liquidated damages clauses. When there is a liquidated damage clause, and there is a breach of the contract, the only issue in dispute is whether the contract has been breached. If it has, the damages are already fixed by the liquidated damage clause in the agreement. This may save litigation time and costs later on, as the amount of damages does not need to be litigated.
If your agreement is breached, you are entitled to the amount in the liquidated damages clause, even if your actual damages turn out to be less than what’s in the clause.
Liquidated damages clauses are only allowable where the actual damages upon breach would be difficult or impossible to ascertain. Additionally, the amount cannot be punitive—in other words, it has to be a rough estimate of damages, but not an exorbitantly high amount set just to punish the breaching party, or deter a breach.
Thus, if you are relying on a liquidated damages clause, you should have an attorney review it for enforceability, and make sure that your damage amount bears some relationship to the damages you believe but can’t prove would be suffered.
Don’t leave your business agreements to chance, or guess at what the correct language should be to accomplish your goals and protect your interests. Contact Tampa business attorney David Toback to discuss your needs and review documents your business relies upon to survive.