If you write a bad one, your liquidated damages clause can leave you at an increased risk of facing litigation. After all, consider the important role that these clauses play in business contracts. Buyers and sellers enter into agreements to avoid any disputes over the amount of damages or mitigation. While business owners often understand the value of including these clauses in business contracts, liquidated damages clauses are also commonly disputed. The following will review some strategies that you can follow to limit the chances that your liquidated damages clause ends up in dispute.
Make Sure the Liquidated Damages are Not Optional
One of the most common ways that parties challenge liquidated damages clauses is by arguing that the terms are optional and not mandatory. With few exceptions, courts tend to take the perspective that optional liquidated damage clauses are unenforceable. Courts have found that enforcing optional clauses would mean that parties would only exercise them when they are to their advantage. Consequently, companies are best off avoiding the use of optional damage clauses altogether.
Specify the Amount of Damages
Parties to a contract often fail to give adequate consideration to the type or amount of damages that will be liquidated. When fully considering the damages that might result, parties often decide to include frequently overlooked damages like reputational harm. Your business lawyer can help ensure you do not omit damages that you should be sure to include.
Include the Clause’s Rationale
Michigan courts have a long history of enforcing liquidated damage clauses. In one case from the early 1900s, the Michigan Supreme Court stated: “In cases, where it is difficult to accurately determine the damages which one party may suffer by the failure of the other to perform his contract, the parties themselves may agree upon such sum as in their judgment and will be ample consideration for the breach.”
Breaching parties often argue that the terms of the contract were not satisfied, which is why including the rationale for a liquidated damages clause in a contract can be a powerful strategy. While these statements will not ensure that a clause is found enforceable, these statements do have the ability to establish that a clause was not reasonable at the time of contracting.
Consider including What Events Trigger the Clause
In liquidated damage clauses, it is common for parties to argue that trigger events have not occurred. The strongest liquidated damage clauses often specify exactly when they will apply. In clarifying the events that both will and will not trigger the clause, it is possible to greatly reduce disputes about whether the liquidated damage clauses should be found to apply to any given situation.
Speak with an Experienced Corporate Law Attorney Today
Writing a strong liquidated damages clause is just one of many ways to ensure successful business contracts. No matter your corporate law question, however, a knowledgeable lawyer at Resnick Law PC can help. Contact us today for assistance.