Liquidating damages clause

Real estate contracts often contain "liquidated damages" provisions because damages for breach of contract can be difficult and costly to ascertain, and because these provisions can provide the parties added incentive to perform.

In deciding whether to use a liquidated damages provision and in drafting one, care should be taken so that a court, potentially years later, does not find that the provision is a penalty and, therefore, unenforceable.

This article reviews the controlling authority governing the drafting and enforcement of liquidated damages provisions in California.

Historically, liquidated damages provisions were disfavored because courts considered them penalty clauses and, frequently, refused to enforce them.

The Ridgley Court considered whether the provision should be viewed as a valid charge for a prepayment of the loan principal or as an unenforceable penalty for delinquency in a monthly interest payment. Kim, the court invalidated a liquidated damages provision in a commercial lease which the parties had designated a “deferred rent provision.” The “deferred rent provision” was a conditional waiver which provided for double rent in the event of breach; the landlord would waive the penalty and charge half that rent amount in the absence of a breach.

Generally, contractual charges for prepayment of loan principal are valid provisions rather than penalties or liquidated damages for breach. The court held that this provision could not be defended as a reasonable attempt to anticipate damages, stating that a contrary conclusion would allow unreasonable late charges or other penalties to escape legal scrutiny through simple rephrasing as a conditional waiver.

are a means of compensation for the breach of a contract.

Often, liquidated damages clauses are found in real estate transactions and other contracts where a specific dollar amount can be hard to determine because of changing circumstances.

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For example, if Ann and John make a contract to do business, one provision of that contract may stipulate that if either of the two breaches the contract and doesn't fulfill the promise, that person will have to pay the other

For example, if Ann and John make a contract to do business, one provision of that contract may stipulate that if either of the two breaches the contract and doesn't fulfill the promise, that person will have to pay the other $1,000.

A liquidated damages provision is not invalid merely because it is intended to encourage a party to perform, so long as it represents a reasonable attempt to anticipate the losses to be suffered. Despite the parties’ reference to the provision as a “penalty” and evidence indicating the provision was intended to make it difficult for a partner who left the firm to take the firm’s clients, the court enforced the provision because it demonstrated a reasonable estimate of the harm that might be anticipated from the loss of the firm’s clients.

However, if the sole purpose of a liquidated damages provision is to coerce compliance with the contract, and not to compensate the “innocent” party for damages resulting from the breach, the provision is a penalty and unenforceable. Topa Thrift and Loan Association, the provision at issue allowed a lender to waive prepayment charges equal to six months' interest if the borrower made no late payments and was not in default under the note.

Use a maximum amount or a maximum period for assessing liquidated damages if these limits reflect the maximum probable damage to the Government.

Also, the contracting officer may use more than one liquidated damages rate when the contracting officer expects the probable damage to the Government to change over the contract period of performance.

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For example, if Ann and John make a contract to do business, one provision of that contract may stipulate that if either of the two breaches the contract and doesn't fulfill the promise, that person will have to pay the other $1,000.A liquidated damages provision is not invalid merely because it is intended to encourage a party to perform, so long as it represents a reasonable attempt to anticipate the losses to be suffered. Despite the parties’ reference to the provision as a “penalty” and evidence indicating the provision was intended to make it difficult for a partner who left the firm to take the firm’s clients, the court enforced the provision because it demonstrated a reasonable estimate of the harm that might be anticipated from the loss of the firm’s clients.However, if the sole purpose of a liquidated damages provision is to coerce compliance with the contract, and not to compensate the “innocent” party for damages resulting from the breach, the provision is a penalty and unenforceable. Topa Thrift and Loan Association, the provision at issue allowed a lender to waive prepayment charges equal to six months' interest if the borrower made no late payments and was not in default under the note.Use a maximum amount or a maximum period for assessing liquidated damages if these limits reflect the maximum probable damage to the Government.Also, the contracting officer may use more than one liquidated damages rate when the contracting officer expects the probable damage to the Government to change over the contract period of performance.

,000.

A liquidated damages provision is not invalid merely because it is intended to encourage a party to perform, so long as it represents a reasonable attempt to anticipate the losses to be suffered. Despite the parties’ reference to the provision as a “penalty” and evidence indicating the provision was intended to make it difficult for a partner who left the firm to take the firm’s clients, the court enforced the provision because it demonstrated a reasonable estimate of the harm that might be anticipated from the loss of the firm’s clients.

However, if the sole purpose of a liquidated damages provision is to coerce compliance with the contract, and not to compensate the “innocent” party for damages resulting from the breach, the provision is a penalty and unenforceable. Topa Thrift and Loan Association, the provision at issue allowed a lender to waive prepayment charges equal to six months' interest if the borrower made no late payments and was not in default under the note.

Use a maximum amount or a maximum period for assessing liquidated damages if these limits reflect the maximum probable damage to the Government.

Also, the contracting officer may use more than one liquidated damages rate when the contracting officer expects the probable damage to the Government to change over the contract period of performance.

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