What Is a Liquidated Damages Clause in a Contract?
One of the most confusing aspects of commercial litigation today has to do with the validity of a liquidated damages clause listed in your business contracts. The term liquidated damages refers to agreements between contracted parties to put forth a strict monetary remedy in the event that one party breaches the contract. The parties to a contract would then thereby stipulate at the outset of their relationship about the amount that a breaching party would otherwise owe to a non-breaching party.
Does This Clause Really Work?
In the best case scenario, liquidated damages clauses can allow for parties to avoid extensive legal disputes about the amount of financial damages suffered when one party breaches the agreement. Unfortunately, however, liquidated damages are frequently misunderstood and often incorrectly applied.
In the worst case scenario, liquidated damages clauses can become the center of their own legal dispute ultimately leading to a scenario that is far more expensive and different than what the parties initially intended by drafting these clauses in the first place.
Questions in Breach of Contract Suits
There are two primary questions in every lawsuit regarding a breach of contract. The first is whether or not one party is liable to another for monetary damages, and if so, how much money is owed. In the first question, the complaining party will seek to prove that the other party is responsible for an omission or action like a breach of contract. In the damages phase, the individual who has proven liability must be able to quantify the amount that he or she is eligible to cover as a result of the other party’s conduct.
What to Do if You’re Considering a Liquidated Damages Clause
Having a liquidated damages clause can help to add some clarity to what the breaching party is eligible to receive in a lawsuit. With the high level of risk that any individual or business might face in commercial litigation, it’s essential to consult with an attorney first about whether or not such a clause is a good idea. It is important that such a clause be written properly by an experienced attorney so as to increase the chances of being seen as valid and legally enforceable. If you are engaged in a commercial dispute in Arizona, it is imperative to work with a knowledgeable commercial litigation attorney. Do not hesitate to get legal advice sooner rather than later.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Liquidated Damages Clause, or any other litigation matters, please feel free to contact Roger C. Decker at 480.461.5343, log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.