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Contracts • Remedies for Unexcused Non-Performance
K#165
Legal Definition
If (1) damages are difficult to estimate at the time of contract formation, and (2) the liquidated damages term is a reasonable forecast of compensatory damages, then a liquidated damages clause constitutes and appropriate measure of damages. It may never act as a penalty.
Plain English Explanation
Damages can be hard to calculate. Sometimes there are too many factors to consider. In such cases, it is common for parties to predetermine the damages that would occur and agree to those damages ahead of time in the case of a breach. These types of predetermined damages are called liquidated damages. Their purpose is to make calculating damages more efficient and easier, not to punish a party.
Hypothetical
Hypo 1: Sam is trying to do market research for his taco cart business. He hires Bob as a consultant to do research for him and prepare a report. Sam knows that this report will be vital to his business succeeding, but he doesn't quite know the exact amount of value it will bring. As best as he can figure it out, if he can't get his report on time, he'll likely miss out on some trade shows, potential sales, and the need to look elsewhere for another report. He calculates it at costing him at least $5,000 in total. Thus, in the contract, Sam includes a liquidated damages clause of $5,000. Result: If Bob breaches the agreement, Sam can sue for the $5,000 simply because they previously agreed to it in the contract and it does not serve as a punishment.
Visual Aids
Related Concepts
Are damages recoverable when uncertain?
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