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The Enforceability of a Liquidated Damages Provision

Business and Commercial Disputes By Harvey Binnall PLLC - 2020/05/15 at 09:27am

Experienced Alexandria Commercial Litigation Lawyer  

If you are involved in a breach of contract dispute in which the relevant agreement contains a liquidated damages provision, then you may be confused as to whether the provision is actually enforceable under the law.

Depending on your position in litigation, the enforcement of the provision (which essentially establishes a “flat fee” damages amount to be paid out in the event of a contract breach) could be favorable or unfavorable to your interests.  As such, it’s important to determine the likelihood of a court enforcing the provision so that you can secure a positive outcome. A skilled Alexandria commercial litigation lawyer can help.

Assessing the Provision — Enforceability

In determining whether a liquidated damages provision is enforceable, courts may consider a number of different factors.

These factors include: a) the ability of the parties to accurately project the damages; b) whether the damage award in the event of a contract breach is reasonable; and c) the relative bargaining power of the parties who entered into the agreement containing the liquidated damages provision.

Let’s take a closer look.

Ease of Projecting Damages

Generally speaking, courts find liquidated damages provisions most applicable in situations where the actual damages are not easy to project.  Where the breach may have led to a chain of losses (including lost profits) that require significant and potentially inaccurate damage estimations, the court is much more likely to deem the liquidated damages provision enforceable — in these circumstances, the “flat fee” nature of the provision is arguably more just.

Reasonableness

Reasonable liquidated damages provisions are enforceable — and reasonable in most cases is a reference to the damages being “reasonably proportionate.”  Courts therefore evaluate such provisions with an eye for whether the damages award is disproportionate to the actual conduct (breach of contract).  If it is sufficiently disproportionate to qualify as a “penalty,” then the court will likely find that the liquidated damages provision is unenforceable by law.

Relative Bargaining Power

Liquidated damages clauses may be deemed unenforceable if the parties had a significant difference in bargaining power when they entered into the agreement.  When evaluating relative bargaining power, the court will generally consider the reasonableness of the liquidated damages provision simultaneously.

For example, suppose that the liquidated damages provision is somewhat unfairly biased towards a large corporate entity.  The opposing party is a solo contractor and has just started in the industry.  Under these circumstances, the court may find that the difference in bargaining power — when combined with the slight unreasonableness of the liquidated damages provision — make the provision unenforceable.

Contact an Alexandria Commercial Litigation Lawyer for Legal Assistance

Harvey & Binnall, PLLC is a boutique commercial litigation firm in Alexandria, VA, serving clients located throughout the DC metro region.  Our attorneys have decades of experience advocating on behalf of those who are involved in challenging commercial disputes, including contract breach disputes in which the conflict is centered on the enforceability of a liquidated damages provision.

We are a fundamentally client-focused firm.  From beginning-to-end, we engage closely with our clients to ensure that we have sufficient information and insight to provide truly personalized representation.  This commitment enables us to represent their interests more effectively in negotiations and courtroom litigation alike.

Ready to speak to a skilled Alexandria commercial litigation lawyer about your contract dispute?  Call us at (703) 888-1943 or send us a message online to request a consultation with an attorney at Harvey & Binnall, PLLC today.