The court ruled that the stipulation resolved the claims in dispute in pending litigation, that the defendant did not admit liability in the underlying claims, nor did they admit the amount of damages caused by the underlying breach. In summary, the court ruled that the stipulation could not be deemed a discount. In California, it is possible to enforce a liquidated damages clause. The amount agreed to at the time that you and the other party sign the contract must be a reasonable estimate of losses that may be suffered should they fail to perform.
If you insist on an amount that aims to punish the other party for falling short of the expected standards, the clause will be considered a penalty and unenforceable. A liquidated damages clause is considered void in cases in which a party is selling personal property or services intended to benefit themselves, their family, or their household.
However, the clause can be enforced in cases in which it is impossible or very difficult to resolve or repair the damage done and the estimate of the latter is reasonable. There is no way to keep a liquidated damages dispute out of court. Even if the vendor you hired signed a contract that contains one, they may challenge your right to enforce it.
The standards of such enforcement are interpreted by the courts and arbitrators. If you must go through this process, you will need the help of an attorney that specializes in the issue.
The court will review the language of the clause in the context of the entire contract. They will also take into account your business relationship with the other party of the circumstances of your agreement and interactions. Hiring an experienced attorney is the best way to enforce the liquidated damages clause that is in your contract.
You should be diligent and informed in determining the estimate of damages that you will incur in the event of a breach. The judge, however, noted that, on the correct construction, the aim of the clause was to provide the supplier with an annual revenue stream and not to threaten the customer into performing.
The obligation was not a secondary one, triggered by a breach, but was instead a primary obligation given in exchange for a promise by the supplier "…and as such cannot be a penalty". This involved a "take or pay" clause in an agreement for the supply of dispersants. The buyer was obliged to pay for minimum quantities of the materials even if it had not ordered them.
One of several points which the court had to decide was whether this clause constituted a penalty. Counsel could find no direct authority on this, so the judge was obliged to decide it de novo. He commented that the clause was "not the ordinary candidate for such rule", but the law on penalties could potentially apply.
Following Makdessi however, the general view is that take or pay clauses are likely to be analysed as primary obligations, therefore falling outside the scope of the rule on penalties. As always, when applying the penalty rule, the court will look at the substance of the clause in question rather than its form or how it is labelled by the parties.
The overall fairness of the deal will not be relevant. However, in Makdessi , the Supreme Court pointed out that context can sometimes be relevant and, in particular, in a "negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach".
Comment : These decisions show the flexibility of LD clauses as a potential remedy in many commercial contexts. Although the rule against penalties remains the biggest risk to the enforceability of these clauses, lawyers can be reassured by the courts' continuing reluctance to intervene in contractual relationships between experienced commercial parties unless absolutely necessary. The focus on "legitimate interest" is worth bearing in mind, however, and it may be sensible to identify this in the contract itself.
In fact, in Makdessi , the contract expressly recognised that the restrictive covenants in question had been included specifically to protect the extremely valuable goodwill in the business being sold. It is also worth noting the courts' increasing awareness of the commercial background and justification underlying LD clauses and the context in which they were agreed and it may be sensible for parties to keep written notes of the background and reasons for choosing the sums they did.
We bring together lawyers of the highest calibre with the technical knowledge, industry experience and regional know-how to provide the incisive advice our clients need. Sign up to receive the latest legal developments, insights and news from Ashurst.
By signing up, you agree to receive commercial messages from us. You may unsubscribe at any time. The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.
We use cookies to improve your experience on our website. By continuing to use our website, we understand that you are happy for us to do this. For more information on how we use cookies, or how to change your browser settings, please see our Cookie Policy. A virtual library of regularly posted insights and legal updates based on your selected preferences.
Legal Updates. The PDF server is offline. Please try after sometime. This guide explains the critical steps to take in making sure liquidated damages clauses are enforceable. Liquidated damages clause Including a liquidated damages LD clause in a commercial contract is a popular way of dealing with the possibility of breach.
LD clauses: a practical remedy with numerous advantages LD clauses have much to recommend them in the commercial context. Identifying a genuine LD clause As mentioned above, the essence of a liquidated damages clause is that the sum which the breaching party must pay on a breach is fixed in advance and written into the contract.
Distinguish the following: Indemnities: Commercial contracts often provide for the breaching party to indemnify the non-breaching party in respect of any loss it suffers as a result of the breach. However, unlike a true liquidated damages clause, the sum payable is not known until the breach has occurred and the loss has crystallised. If this amount comes out to be less than expected, you can walk away from the deal, obligation free. With that said, once contingencies are removed or if no contingencies are agreed upon in the initial contract, if you do need to get out of the deal and the clause above is signed, will have to pay liquidated damages.
The liquidated damages clause above only applies to the buyers, and so if the seller defaults both the buyer and seller will have to come to an agreement with mediation or arbitration if they want to avoid going to court. It is situations like these when the arbitration clause becomes increasingly important.
You can read more about that here. Please note: The information contained within this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, legal or financial advice from a professional accountant or lawyer.
We're connecting to the santa cruz market through meaningful and relevant topics and themes. Want to know more about this blog post? Have something you'd like us to explore? Assuming you get over the hurdles related to enforceability, liquidated damages clauses have certain benefits. They establish some predictability and can act as a type of insurance against the cost of a breach.
Both parties have the advantage of being able to weigh the cost of performance against the cost of breach. In addition, the nondefaulting party never has to prove actual damages, which can be a time consuming and difficult task. Done properly, deciding on damages at the outset gives both parties the opportunity to settle on an amount that they think is fair instead of leaving this decision to the courts.
Besides the uncertainty of litigation, it is also time-consuming and costly. As discussed above, liquidated damages provisions are enforceable only if the damages are difficult to estimate, which makes it challenging to set an amount in the contract.
Each party should make an effort to provide a rough estimate of how much money a breach would cost their business and negotiate an amount that is fair to both parties. If your contract concerns a long-term project, such as a construction contract, consider a liquidation provision that sets a fee for each day the completion of a project is past due.
Be sure that the amounts you select are reasonable and not punitive. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site. The attorney listings on this site are paid attorney advertising. In some states, the information on this website may be considered a lawyer referral service.
Please reference the Terms of Use and the Supplemental Terms for specific information related to your state. Grow Your Legal Practice. Meet the Editors.
0コメント