What Are Liquidated Damages?

Holly Kimmel |

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If you are a business owner, you probably enter into contracts with multiple individuals and business entities all the time. Whether you are signing a lease or signing a contract to sell your unique products, the hope is that each party abides by the terms of the contract and that everything will run smoothly. Sometimes, though, things go wrong and someone fails to live up to their end of the agreement. One way to be prepared for this ‘just in case’ situation is to include a liquidated damages provision in your contract to avoid an extended battle and possible lawsuit down the road.

What is a liquidated damages provision and why should I include it in a contract?

A liquidated damages provision in a contract specifies the amount of money owed by a party in the event a contract is breached. The amount of liquidated damages is typically negotiated by the parties at the time the contract is executed and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement.

Is a Liquidated Damages Provision Enforceable?

In general, the liquidated damages provision will be enforceable so long as the amount of liquidated damages is reasonable in proportion to the probable loss, and the amount of actual loss is incapable or difficult of precise estimation. Parties to a contract are entitled to agree to such provision and include it in the contract so long as the provision is not unconscionable or contrary to public policy.

When are liquidated damages clauses unenforceable?

If the agreed-upon amount of damages is manifestly disproportionate to the actual harm suffered, the clause will be likely unenforceable on the grounds that it is a penalty instead of an estimate of actual damages. The parties to a contract are free to agree to include such a provision in their contract so long as the provision is not somehow unfair or against public policy.

If you’re a Florida business owner and you are about to enter into a contract, call The Quattro Firm before signing anything. We know what to include in your contract, and what to delete, and most importantly, we know how to protect your interests and your money. Don’t wait until you are faced with a lawsuit to call us, instead work with The Quattro Firm now to prevent a lawsuit in the future.