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Get Out the Magnifying Glass to Read the Fine Print

Posted February 25, 2016
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Read the fine print.  Everyone has heard that saying. I know it takes time, and who has time these days? Liquidated damages provisions are some of the fine print you should definitely be aware of in your business contracts, because they can come back to bite you.  These clauses define in advance, at the time the parties enter into an agreement, the amount of damages one party has to pay the other party in the event of a breach of the contract.  These are typical in service contracts, sales of goods contracts and construction contracts, I bet your business has signed many agreements containing liquidated damages provisions.  They usually read like this:

"If the seller breaches its obligations to deliver goods in accordance with this agreement, Buyer shall recover, as liquidated damages, and not as a penalty, $50.00 per day for each day of delay." 

Language like this means the buyer does not need to prove damages. The amount can be a fixed dollar amount, or a percentage. Three things must exist for a court to enforce a clause like this: (1) damages from a breach are uncertain in amount or difficult to prove; (2) the parties intended to liquidate the damages in advance and (3) the stipulated amount is reasonable, meaning not "greatly disproportionate to the damages the innocent party might sustain."

The Uniform Commercial Code, which governs sales of certain goods, has a specific section on this topic.  Section 2-718(1). Almost every state, including Connecticut, has the same law.

We see these provisions often in agreements that restaurant owners enter into with suppliers of linens, aprons, napkins etc.  And restaurant owners are surprised when they cancel the agreement and receive a bill for liquidated damages.  We've seen claims seeking 35% of the average weekly billings for a certain period, multiplied by the remaining term on the agreement.  This could reach into the tens of thousands of dollars. That's a lot of money for a small business.

One recent Connecticut case, you can read it here, upheld a liquidated damages clause in a real estate contract for the sale of a house.  The buyer put down a $30,000 deposit on a $716,000 house, and waived a mortgage contingency.  When he couldn't get financing, he backed out of the deal.  The court allowed the seller to keep the $30,000 as liquidated damages even though the seller sold the house for more!  The buyer didn't prove, like he had to, that the seller didn't suffer actual damages.

These clauses are defensible, and you can usually negotiate a settlement reflecting a large discount on the amount of liquidated damages.  Try to look for these provisions in agreements before your business enters into them and try to negotiate something that eliminates the liquidated damages provision.  It's not easy, but worth a shot. 

About the Author

Business Litigation Attorney Anthony Minchella

Tony represents Fortune 50 financial services companies, retail giants, and small and large specialty products companies in employment litigation, trade secret and non-competition litigation, and unfair trade practice issues. When acting as local counsel, Tony, an adjunct professor of law on Connecticut Civil Procedure at Quinnipiac Law School, helps lead counsel navigate the nuances of Connecticut state and federal court practice. Tony graduated magna cum laude from Quinnipiac University School of Law. He passed the New Jersey, New York and Connecticut bar exams and then moved on to careers with large and small firms which led to his boutique litigation practice.